A Companies Can Improve Earnings Nearly 15% by Improving Talent Management Function
By excelling in talent management, the average Fortune 500 company can generate a nearly 15% improvement in Earnings Before Interest,Depreciation, and Amortization (EBITDA), netting almost $400 million annually, according to new Book of Numbers research from The Hackett Group, a strategic advisory firm and an Answerthink company.
Hackett’s research demonstrates the bottom line impact of more effectively managing human assets, and provides strong evidence to executives, investors and HR leadership of the value of developing intangible assets such as a company’s workforce. The research also provides 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. But like many areas of HR, it’s been exceptionally difficult to measure the real impact of improvements,” said Hackett Chief Research Officer Michel Janssen. “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.”
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. As a result, they are more competitive in the marketplace, and this is reflected in improved 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 comprehensive Human Resources benchmarks performed by the firm over the past three years. Using Hackett’s proprietary 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 – involves identifying the skills critical to a company’s operation and how those needs match up against those of the existing workforce;
staffing services – recruitment, staffing, and exit management;
workforce development services such as training and career planning;
overall organizational effectiveness – including labour 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%, versus 14.1% for typical companies. This gap netted a typical Fortune 500 company (based on $19 billion revenue) an additional $399 million annually in improved EBITDA. On average, top talent management performers also generated $247 million annually via a 22% improvement in net profit margin, $992 million annually through a 49% improvement in return on assets and $340 million annually via 27% 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% 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% 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% more likely to link their learning and development strategy to their company’s strategic plan.
More Information about “Talent Management: Buzzword or Holy Grail?” and The Hackett Group can be found at www.thehackettgroup.com