Managing Human Capital in an Age of Uncertainty

This year’s HR Conference will address the array of pressures coming to bear on HR departments

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In gauging the upheaval that China’s economy has gone through over the past few decades, there can be few worse measures than the unemployment rate. Since 2002, despite the enormous generation of wealth, mass migrations of workers and the wholesale upgrading of skills, the unemployment rate has never strayed far from its average of 4.1 percent. Even now, as companies adjust to slower economic growth, the rate is unlikely to reveal much about the turmoil facing human resources (HR) departments as they struggle to adapt to a storm of change.

“Winter is coming,” said Smilla Yuan, China Managing Consultant at Towers Watson. “HR people will have to learn to change themselves, as they have many challenges in cost-efficiency management, building new organization models and internal capability building.”

There are a number of factors coming to bear on HR departments. Workforce growth has slowed to a trickle, which is good for the unemployment figures but bad for those looking to hire. The talent entering the labor market is changing rapidly, with young workers more educated, connected and ambitious than before. Local companies are capitalizing on this entrepreneurial spirit by disrupting the market for talent and competing head-on for the best brains with foreign multinationals. And of course the economic slowdown itself presents several challenges, but the nature of economic change, with a shift to consumption and services, also offers some bright spots for those managing their companies’ human capital. But it will take a change in mindset of the HR professionals to realize the potential quickly enough.

“There’s a new urgency,” said Kitty Vorisek, Chairman of AmCham China’s Human Resources Forum. “As American multinationals operating in China, some of the things that are happening are predictable, but some things are not so predictable any more. This increases the challenges of managing your people at a strategic rather than just a transactional level.”

It is these challenges that inspired the theme for the chamber’s 16th Annual Human Resources Conference: “Navigating the Change – Human Capital Management in an Age of Uncertainty.” Topics under discussion at the all-day conference will include encouraging entrepreneurship, helping employees understand and embrace change, engaging new generations and the global development of Chinese leaders.

Focus on cost

While business headlines often focus on laws and economics, companies are suffering from a people problem. For multinationals operating in China, finding people and keeping them has been a perennial headache. In each of the past three years, human-resource issues have comprised three of the top five challenges for AmCham China members, with labor costs topping the charts each time in the Business Climate Survey. But with some companies engaging in layoffs and others restructuring in response to increased economic uncertainty, the next survey is likely to look quite different.

Top of many companies’ minds is the slowing economy. With growth slowing and the traditional powerhouses of exports and investment running out of steam, the economy is clearly in transition, although into what is not yet clear. Increasing numbers of companies are downgrading China to just one of many possible investment destinations, and the focus has shifted from expansion and market share at any cost to belt-tightening and watching the pennies. For a generation of workers and HR professionals used to breakneck growth, this is the first time they’ve had to adapt their expectations to a less hospitable marketplace for talent.

Yuan said that companies have become much more conservative about employee numbers, pointing as an example to Alibaba’s recent decision to scale back its recruitment of college graduates next year from the originally planned 3,000.

“HR departments have to show the value, by helping the company use fewer people to do more things and deliver more results,” she said. “Previously companies asked HR to focus on recruitment for quick expansion, but now they’re asking them to help reshape the structure of the organization to add resources where they’re needed and cut them where efficiency will be low.”

Nowhere is this more true than in the oil industry. While the origins of the problems currently facing oil companies are global rather than local, their experience in having to deal with a severe downturn last year puts them ahead of the game when it comes to understanding how to deal with China’s rebalancing. Lydia Zhou, HR General Manager at ConocoPhillips and an HR Forum co-chair, said that while there was a downturn in 2009, it was brief compared to the two-to-three years of low oil prices her company is expecting now. The result is a major shift in the company’s priorities.

“With the dramatic drop in the price of oil, the focus for most energy companies has shifted to cost management as the key priority,” Zhou said. "This shift in focus is a major challenge for the HR function, as we help our employees deal with the impact that this changing priority has on their career, their goals, and their strategies for succeeding in their jobs.”

Culture eats management for breakfast

Zhou’s focus reflects the maxim, often attributed to management guru Peter Drucker, that “culture eats strategy for breakfast.” Indeed, “culture and engagement” was rated as the most important issue for HR leaders both in China and globally in Deloitte’s 2015 Global Human Capital Trends. It is also one of the areas with the greatest capability gap, reflecting the concern among companies that they aren’t as ready as they should be for challenges in engagement and retention.

Deloitte attributes this to the increasing transparency of company cultures and practices that in effect transfers power from the company to the employee. When workers can more easily share their experiences of working at a company with peers via websites or social media, corporate culture comes under even greater scrutiny. It also suggests that the increasing complexity of the workplace, with longer hours and always-on connectivity, is influencing not just cultures but also individual motivations, making it even harder for companies to build consistently strong relationships with their workers.

Nevertheless, a great deal is at stake. According to Great Place to Work, those companies that focus on maintaining healthy corporate cultures enjoy lower turnover and better financial performance than competitors. The challenge is for leaders to ensure the culture is developing in a desirable way, no matter the company is growing or consolidating.

“Communication is the No. 1 priority during change,” said Zhou. “A lot of things will be uncertain, but we still need to communicate what we know, as well as being frank about what isn’t clear, and when it will get clearer. The key is keeping the employees’ spirit, helping them understand what the changes are and what the future organization will look like.”

Just as the economy reaches an inflection point, so does the workforce. The working-age population is this year likely to begin contracting, and the pool of excess labor that fueled the factory-based export boom is exhausted. While this will keep a lid on unemployment rates during a downturn, it is also increasing the pressure on those entering the workforce to be productive.

Cummins HR Director George Li, one of the speakers at the conference, said current demographic trends were creating a contradiction that didn’t necessarily work well for companies. The aging population will obviously crimp the supply of available labor, but he forecast the university graduation rates would continue to raise, and these newcomers to the workforce would likely struggle to find jobs.

“We don’t have a high request in terms of quantity, but we will definitely have high demands in terms of quality,” Li said. “But the quality isn’t there. When we go to universities looking for graduates, we have a lot of candidates, but it’s very hard to find the quality we need.”

As a result, Li forecasts that the economic slowdown will do little to relieve the upward pressure on compensation, although the nature of compensation may change. He gave the example of healthcare, which he said employees were becoming increasingly interested in. “It’s about security. Pollution, traffic and so on is creating concerns about accidents and illness, and companies are under pressure to cover the increasing costs of healthcare,” he said.

For some tech companies, however, those entering the workforce today are already bringing with them many of the skills they’ll need on the job. At IBM, the average age of employees is decreasing each year as they hire increasing numbers of graduates to refresh their workforce.

Horst Gallo, Vice President of HR for Greater China at IBM, said that technological advances mean that even young people with few resources still had access to the kinds of technology they could use in the workplace, reducing the need for training.

“The mentality of having a mobile phone, doing social, using the cloud –it’s much more in their DNA,” said Gallo, who is also a co-chair of AmCham’s HR Forum. “On the other hand, they think they have everything already, and while it’s clear that they have a lot of positive attributes, they are still missing a lot of content.”

 

Source: Deloitte Global Human Capital Trends 2015

Compensating for increasing competition

While these economic, demographic and social factors impact all companies, there are also shifting dynamics between foreign multinational corporations (MNCs) and local companies. In this year’s Business Climate Survey, two-thirds of respondents said American companies were more attractive than domestic competitors, but the rise of wildly successful home-grown entrepreneurs such as Jack Ma could be inspiring the newer generations to take more risks with their careers.

Vivian Liu, Head of HR at Amazon Web Service, says that while MNCs until recently could easily draw new graduates, they are increasingly staying only a few years before moving to a local startup, or even going straight to local companies from university. “New graduates have many more choices these days, so they are more confident that they can command a higher market value on their own,” she said. “It used to be they resigned only when they got the next offer, but now at exit interviews we find they don’t have a new job yet but are confident of finding something quickly.”

A survey conducted late last year by Robert Walters found that over 70 percent of Chinese professionals were looking for a new job, and more than half expected a bump in salary of at least 30 percent for any job switch (although just 10 percent acknowledged feeling underpaid in their current jobs). Liu said that the increasing importance of local companies in the market for high-end talent was muddying the waters in terms of salary forecasts.

“Local companies don’t follow the norms of the market; they don’t join the salary surveys, so they create a black hole in terms of data, which creates a lot of challenges,” Liu said. “So our company’s business leaders may challenge us over the competitiveness of our salaries, or question us over why we have to make such an aggressive offer when we don’t have the data to support it.”

The silver lining

But where there is adversity, there's also opportunity. Restructurings can help companies weed out week performers and refocus priorities. The economic transition itself could create situations where flexible and proactive companies can get ahead.

Diana Yang, Partner at Aon Hewitt, said that in the short-term, HR department were struggling with VUCA – a term originating with the military that has gained some currency in business circles to describe situations exhibiting volatility, uncertainty, complexity and ambiguity. “But in the long-term, this could be positive for human resources,” Yang said. “China is moving toward a service-oriented economy, and service is basically a people business. We used to say that HR supports the business, but if HR can attract and motivate the right talent, it can drive the business.”

Even at engine-maker Cummins, which could be considered in a rather traditional product-based industry, they are also thinking about the future opportunities of a more consumer-based economy. “The real strategist will think about what we need to do right now to take advantage of the economy when it takes off again,” Li said. “When the economy comes back, what will be the different requirements of people?”

Li said that in particular, companies will need to understand more about the end-market, no matter in fast-moving consumer goods or making engines. Engineers, as well as marketers and salespeople, will need to get closer to the end-user to build better products. “We’re in a transition to a situation where everything moves much faster – from formal to informal, from laptop culture to WeChat culture – and this will require better connectivity and responsiveness, no matter with the customer or within the company,” Li said.

Focusing on capability-building during VUCA times could be easier said than done. In Deloitte’s survey, “learning and development” shot up the rankings of importance over the past year from eighth to third, and is now the second most important issue for companies in China.

In this year’s Business Climate Survey, leadership was the No. 1 skill that companies said needed to be improved, followed by communication skills and critical thinking. Indeed, when asked what training they would like AmCham China to help arrange, these types of soft skills were most cited. The chamber’s training program draws on the skills of its member companies in the training world and repackages them in the most cost-effective way for its members.

In the area of capability building, Yuan at Towers Watson believes that MNCs maintain an edge. Whereas local companies were still looking to buy in talent with the skills they needed, MNCs were already building up corporate universities and investing in internal coaching programs. “The cost efficiency of attracting new talent isn’t great, so it’s best to build the capabilities of the people you already have,” she said. “Local companies remain driven by the short term, which is dangerous – capability building doesn’t happen overnight.”

In the short-term, however, Yuan remains concerned about the ability of HR departments to move with the times, adapting to rapidly changing nature of enterprises and the human capital supporting them. HR professionals will need to become more engaged in the corporate strategy.

“Even senior HR people don’t always understanding how their companies make money. So they’re still talking about people, not business,” she said. “They need to get involved in business discussions.”

Graham Norris is AmCham China’s Senior Director of Communications.