Improve Earnings by Improving Talent Management

Typical Fortune 500 companies net nearly $400 million annually by improving strategic workforce planning and other key talent management functions, Hackett finds

Atlanta — July 27, 2007 — By excelling in talent management, the average Fortune 500 company can generate a nearly 15 percent improvement in earnings before interest, depreciation and amortization (EBITDA), netting almost $400 million annually, according to new research from strategic advisory firm The Hackett Group.

Hackett said its "Book of Numbers" research demonstrates the bottom line impact of more effectively managing human assets and provides evidence of the value of developing such intangible assets as a company's workforce. The research also provides human resources (HR) organizations with a new way to demonstrate the effect of their efforts on productivity, customer satisfaction and employee commitment — and, by extension, on sales, profits and shareholder value.

"Certainly it makes intuitive sense that attracting, developing and retaining a talented workforce can enhance a company's performance," said Hackett Chief Research Officer Michel Janssen. "But like many areas of HR, it's been exceptionally difficult to measure the real impact of improvements."

Achieving Excellence in Talent Management

Janssen said that achieving excellence in talent management is not something that happens overnight, since changing how a company strategically addresses talent takes time and often requires a real cultural shift. "But Hackett's research for the first time quantifies the potential returns and demonstrates why talent management is a worthwhile investment," Janssen added.

According to Hackett HR Practice Leader Stephen Joyce, the best companies treat employees the same way they treat their business lines, as something to be carefully analyzed and strategically developed in support of their business goals.

"They determine the skills, competencies and experiences needed to run their company over the next few years, quantify the gap between their needs and their current resources, then acquire the expertise they need through a combination of staff development and hiring," Joyce explained. "As a result, they are more competitive in the marketplace, and this is reflected in improved earnings."

Better Talent, Better Earnings

Hackett's analysis, which is being issued as part of its new Book of Numbers research volume, "Talent Management: Buzzword or Holy Grail?", was based on the results from more than 125 human resources benchmarks performed by the firm over the past three years. Using Hackett's methodology for determining top performers, metrics were chosen to reflect a balance between talent management efficiency and effectiveness.

Hackett's research found a strong correlation between improved financial performance and top-quartile performance in four key talent management areas: strategic workforce planning, which involves identifying the skills critical to a company's operation and how those needs match up against those of the existing workforce; staffing services, including recruitment, staffing and exit management; workforce development services, such as training and career planning; and overall organizational effectiveness, including labor and employee relations, performance management and organizational design and measurement.

Companies with top-quartile talent management outperformed typical companies across four standard financial metrics. They generated EBITDA of 16.2 percent, versus 14.1 percent for typical companies. This gap netted a typical Fortune 500 company (based on $19 billion revenue) an additional $399 million annually in improved EBITDA.

The Strategic HR Plan

On average, top talent management performers also generated $247 million annually via a 22 percent improvement in net profit margin, $992 million annually through a 49 percent improvement in return on assets, and $340 million annually via 27 percent improvement in return on equity.

Hackett's research also found that top performers in talent management operate very differently than their peers. They spend 6 percent less on HR overall than typical companies, driven by dramatically lower costs in key areas such as total rewards administration, payroll and data management and also lower employee lifecycle costs.

These savings enable them to invest more in talent management processes. Top performers in talent management are also 57 percent more likely than their peers to have a formal HR strategic plan in place, more than twice as likely to facilitate strategic workforce planning discussions with senior management, and 50 percent more likely to link their learning and development strategy to their company's strategic plan.

Supply Chain Staffing Strategies

Companies' staffing and talent strategies can have a direct impact on the effectiveness of their supply chain organizations, too, according to past research from Hackett. In findings released last year, Hackett reported that world-class procurement executives build organizations that have a much more strategic staffing mix than typical companies, with 63 percent fewer clerical staff and 31 percent more professionals.

As a result, these world-class procurement organizations have fully-loaded wage rates that are 41 percent higher than typical companies, Hackett reported. These higher wage rates enable world-class procurement organizations to attract the professional skills required to operate the function as a strategic investment rather than a cost center, the advisory firm said. See the article "World-Class Procurement Organizations Staff More Strategically" for more information on this study.