Needed: Another People's Revolution

The breakneck economic growth experienced by India and China may run out of steam, or, more precisely, talent, if nothing is done to address some imminent human resource challenges.

The pace of change in business has accelerated dramatically in recent decades. One consequence of these changes is that people have become more important than ever to the success of companies. Their importance will only grow in the future.

Organisations that are able to harness the power of human resources by creating what can be called a “people advantage” — the ability to gain competitive advantage through people strategies — race ahead of their competitors.

 

A few months ago Boston Consulting Group (BCG) completed a survey where it interviewed human resource (HR) managers and chief executive officers (CEOs) around the world on a range of issues they are faced with in creating the people advantage. Almost 5,000 executives from 80 countries responded and more than 200 were personally interviewed. Collectively, the executives identified the critical issues that they were grappling with. A deeper look at the data for India and China revealed that some topics such as managing talent and leadership development were similar for both of these markets. However, an even more fascinating aspect was the differences between the two (see exhibit 1).

Given the interest of the world and Asia in the findings of this study, BCG launched a more detailed and specific exploration of what it takes to create people advantage in the rapidly developing economies (RDE) of India and China.

Unlike any other
BCG’s work uncovered that several factors make human resource (HR) challenges in India and China unprecedented. First, some macro-level factors.

There has been a lot of discussion on the demographic dividend of India and China. In India, more than 65 per cent of the population is less than 35 years of age. China will begin to age shortly but still has a huge share of its population in the productive category. This would seem like good news, but it really isn’t.

In India, the demographic dividend can be a boon or bane depending on what the country does in the next few years. One often talks about an ever-increasing pool of talented and educated people in India. In other discussions, one hears about an intense talent shortage in the country. What, then, is the truth? BCG investigated this issue, and what emerges is frightening on both counts — India will have a surplus that it won’t need and a deficit that it won’t be able to fulfil. Over the next five years, India will need about 90 million people to join the work force. The country will have a 1.3 million surplus of untrained and under-educated people (vis-à-vis the demand).

On superimposing the issue of employability, the real talent shortfall emerges, showing a gap of 5.3 million skilled people in the economy. In simple terms, this means that on the one hand, India will have a surplus of under-educated and less-employable people; on the other, it will have a deficit of skilled people. The country may well be sitting on a socio-economic time-bomb (see exhibit 2).

China has its own set of challenges. As a consequence of the Cultural Revolution — a nation-wide campaign launched by Chairman Mao Zedong in 1969, that mobilised China’s youth —less than two per cent of people above 40 have university education. A whole generation of people is missing who could have been working as middle managers today, propelling a growing economy. Also, the demographic effects of the one-child policy are likely to leave China grappling with an ageing population much like the occident.

These challenges are accentuated by the rapid growth of these economies placing additional demand for talent. A misaligned and weak educational system in these countries is hard-pressed to produce adequate numbers of high-quality people in line with what is required.

Companies in RDEs are looking to grow at rates not common in developed economies. Managing this growth places significant leadership challenges to these companies. Many of these companies are also going global and becoming global challengers for the first time. In a recent BCG study of global attackers coming from RDEs, 21 were from India and about 40 were from China.

The real issue
As demonstrated by the data earlier, there is no shortage of unskilled labour in either India or China. The issue here is managing the labour rather than finding and hiring them.

However, the picture is very different as we look at skilled manpower and entry-level management. There is an acute shortage of skilled manpower. This is due to the lack of adequate quality or supply of vocational schools.

In India, the numerical shortage at the entry-management level is accentuated by the low employability of emerging graduates from country’s many graduate schools.

Employability estimates vary from 20 per cent to 60 per cent depending on the sector. Of course, there are some schools that produce world-class graduates, but they are few and far between. The middle-management level is significantly stretched both in India and China.

While all companies in these economies are investing in leadership development, few are able to do it as quickly as is needed. In RDEs, the real challenge is to find a way to systematically compress the time one takes in creating a world-class leader.

So, are all the companies in the same boat and facing the same situation, or are there differences in the challenges they face? BCG found four profiles of companies in India and China that face these challenges. There is a fifth profile too: Companies that are emerging as benchmarks for others, such as Indian IT companies and some progressive private sector players in both India and China. But they form a small (and visible) minority; accounting for less than 5 per cent of the entire base.

Distinct profiles
The first of the four profiles BCG found in India is characterised by its charismatic leaders. Typically, a male or a female member of the founding family leads this type of company who is a visionary and has an instinct for success. However, these lone and charismatic leaders are being overstretched by the rapid pace at which their companies are expanding globally in scale and scope. Most of these companies don’t have a bench-strength of professionals who have the same calibre or charisma as that of their leaders.

The second profile is that of public sector units (PSUs) that now stand exposed to global competition. They have to fight with hands tied behind their backs, as they cannot use many of the traditional HR levers to motivate and manage their workforces. Then there are the talent-starved new companies that operate in the “hot” sectors of the economy, for example, retail, insurance, telecom and construction, and so on. These companies face a big shortage of talent.

The fourth comprises old economy players. These are the companies present in the established manufacturing-based sectors like cement, steel, engineering, etc. Many of these companies are now being heavily poached on for talent by companies emerging in the newer, “cooler” sectors of the economy. The old-economy players also face great challenges in attracting and retaining talent, especially at the entry and mid-levels, due to tough competition from newer sectors.

In China, four profiles stand out. The first one is characterised by the proverbial glass ceiling present in some multinationals where top management positions are retained only for expats. This leads to disenfranchisement among the local talent.

The second profile comprises companies that have a tenure-based culture. This leads to “late-joiners” feeling ill-compensated in comparison. This factor makes these companies less attractive to top talent.

The third one consists of companies which are still being led by the first-generation entrepreneurs. They usually have inadequate succession planning as they are caught up in building their businesses.

And the fourth profile constitutes those that are looking to move away from the coastal areas to more inland locations in order to access lower cost labour and talent. But they are finding that their managers are not keen to move with them. They face high attrition and significant talent shortage in these new locations.

The starting point
Given these issues, the task of creating the people advantage looks daunting. So where should a company start? What should be its priorities? BCG’s analysis of best practices and the synthesis of its experience with clients revealed the following key interventions that are critical to creating the people advantage.

 

Meritocracy as a culture : Of all the various interventions, meritocracy is the foundation of a system that creates people advantage. The key differentiator between companies that have an effective meritocracy and those that don’t is culture. Some companies still struggle to explain to their leaders why this matters, while for others, they would not have it any other way.

 

Recruiting and onboarding : A client in the building materials industry needed to hire about 5,000 people in three to four years to sustain its growth. The industry had no bench-strength of talent. They undertook a systematic study of their recruitment needs and classified the various roles under the following heads: critical, specific, volume and generic. What emerged was a specific strategy for each of the roles, based on their particular demand and supply characteristics. For example, some roles had a high-volume-and-low-supply complexity. For these, one can build a well-oiled recruiting engine. For critical roles with supply constraints, on the other hand, one needs to have a targeted, cherry-picking approach. While recruiting has its complexities, the challenges of onboarding are accentuated by low employability levels across industries. Onboarding is about making people — who often come under-prepared and under-qualified — fully productive in the minimum possible time.

 

Leadership development: Many companies from India and China are becoming global challengers for the first time. Companies are also facing unexpected market turmoil. It is no longer adequate to take 20 or more years to develop top leadership capabilities. What is needed is to reduce this development time for an employee, in spite of all complexities, to less than 15 years.

 

Delivering employee value proposition : BCG identified that defining an employee value proposition is a key element of the process of recruiting. Organisations need to go beyond tweaking of the basic structure to add token changes like flexitime, etc. A leading company took a holistic approach to delivering this proposition. They took the employees’ age, rank and career aspirations into account. With this in sight, they systematically looked at their organisational structure, job content, job expectations, promotion timelines, career paths and compensation structures to decide what they had to offer to their employees. Since then, the attrition rate has come down sharply and employee productivity has gone up significantly.

 

Alternative talent pools: In both India and China, there are several pools of talent beyond the conventional and heavily tapped sources. These include those of returning expats, women, people from armed forces and the government, as well as people from new geographies. Tapping these pools requires more than providing physical facilities for women or orientation programmes, for instance. It is about fundamentally understanding what it takes to help people from diverse backgrounds succeed in a particular organisation.

 

Always-on productivity: Earlier, it was felt that given the low labour-cost arbitrage available in RDEs, driving productivity improvement was not too critical at the time. However, as labour prices increase and competition from locals and MNCs becomes intense, productivity is set to become a key differentiator.

HR as strategic partner
Addressing the six-point agenda requires a deep and fundamental change in the role of HR within companies. Yes, the head of HR typically is a part of the leadership team but what really matters is: whether she is seen as a business head or not. HR needs to set the agenda on people issues and get a voice in the key decisions of the business, including strategy.

Having set a concrete action plan for the creation of people advantage, the companies need to align it with the goals of the top management team. Once the organisation sees this as a goal and the leadership is onboard, the process of creating people advantage is set in motion.

Vikram Bhalla is partner and director, and Rahool Panandikar project leader, at BCG India