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Workforce in motion: Putting the right people in the right places

Workforce in motion: Putting the rightpeople in the right places

1Mercer Human Resource Consulting

When it comes to deploying theirworkforces, companies face an

unprecedented array of choices andchallenges. Is it better to put head-quarters in Chicago or Seattle? Open aregional office in Shanghai or Sydney?Build manufacturing plants in easternEurope or Asia? What are the people-related benefits and risks of operatinga call center in Bangalore as opposedto Austin or Swindon?

These choices are made possiblebecause trade and economic barriershave fallen and demographic shifts,combined with technologicaladvances, have opened up vast newlabor markets around the world. Theexpansion of workforce deploymentoptions now provides attractive newbusiness opportunities – not just forreducing labor costs, but also forimproving productivity, enhancingquality, boosting customer responsive-ness, entering new markets, andstrengthening talent and capabilities.But a company that makes the wrongchoice about where to locate couldundermine its competitiveness.

One large European consumer prod-ucts company that we worked withrecently decided against combiningtwo of its US divisions at a single site,even though the consolidation wouldhave lowered costs. Analysis revealedthat the move would have caused theloss of key employees with deepknowledge of and strong relationshipswith key retailers, ultimately resultingin revenue losses that would havemore than offset the cost savings. Ifthe company had based its decision oncost alone, it could have done signifi-cant damage to its businesses.

Moreover, the two divisions had verydifferent cultures, and merging themwould likely have eroded their abilityto innovate.

Companies have long had to grapplewith dispersed operations, making dif-ficult decisions about situating plantsand offices in distant locales and shift-ing employees among various coun-tries and continents. What’s differentis that the scope and impact of thosedecisions have been magnified dra-matically in recent years. Indeed, thevery idea of a “home country” is dis-solving for many companies; theirorganizations, like their markets, arebecoming truly global.

Rather than relying on expatriates tostaff overseas operations, companiestoday can draw on many sources oflabor around the world. At the sametime, we are seeing the emergence of a small number of highly skilled “citi-zens of the world” who are happy torelocate wherever their rewards will begreatest. Optimizing the global work-force has become a major challengefor senior management and requires:

■ knowledge of the new labor land-scape, underpinning

■ a clear understanding of how globalworkforce deployment best servesyour business model, leading to

■ a smart, pragmatic approach tomaking specific decisions aboutwhere to locate key processes andpeople, supported by

■ practical actions on the ground consistent with local practice tocapture the benefits and create sustainable value.

2 Workforce in motion: Putting the right people in the right places

The changed landscape of global laborGlobal labor deployment is a subjectthat often generates heated debate.Outsourcing in-house activities to ven-dors has raised fears in some quartersof irreversible job losses and economicdecline. But for most companies, thatdebate obscures a larger truth: Howthey allocate their own employeesaround the world is more importantthan how subcontractors deploy theirpeople.

Thus, the terms offshoring (relocatingbusiness processes, including produc-tion and manufacturing, to a countryother than your own) and nearshoring(relocating business processes withinclose geographical proximity) refer tothe set of decisions that companiesneed to make about where to allocatetheir own workforce. The goal is to distribute people in such a way as tomaximize the overall performance ofthe organization over both the longand short term.

Companies have many reasons to consider whether to move activities or processes to other areas of theworld. Lower costs and higher laborproductivity have received the mostattention, but they are not always theprimary drivers today. Some compa-nies move functions offshore toenhance product and service quality.Others look to tap into new productdiscoveries or capitalize on the open-ing of new markets. Still others use offshoring to tap into new pools of talent and capabilities. A recent DukeUniversity survey of almost 100 largeUS companies showed that although97% had considered offshoring to savelabor costs, 73% were considering

offshoring as a growth strategy and70% cited access to a qualified work-force. Other firms seek to improve theirresponsiveness to key current or targetcustomers who live in different timezones. And some aim to reduce risk orachieve greater operational flexibilitywith round-the-clock coverage.Consider the variety of motivationsbehind recent workforce deploymentmoves:

■ Industrial construction firm Fluorestablished architectural studios in the Philippines and Poland to bemore responsive to its worldwideclientele.

■ Software giant Microsoft offshored aresearch laboratory to India to capi-talize on the supply of high-calibersoftware engineering talent there.

■ Travel company Sabre Holdingsopened a new regional Asia-Pacificheadquarters in Shanghai to gainbetter access to its fastest-growingmarket.

■ Global manufacturer Siemens shift-ed 2,000 factory jobs from Germanyto Hungary, not just for the lowerwage rates but also for the greateragility provided by more flexiblework rules.

The functions and processes that can be candidates for offshoring have proliferated over the past decade as aresult of advances in computing andcommunications infrastructure. Inaddition, a series of demographic,sociopolitical, educational and regula-tory changes have expanded thepotential locations for deploying labor.Decades ago, offshoring was primarily


Canada

Mexico

GuatemalaCosta Rica

Jamaica

Brazil

Ghana

Mauritius

Slovenia

Ireland

Spain

Morocco

South Africa

Egypt

RomaniaHungary

Czech Republic Slovakia

Poland

Estonia

LithuaniaLatvia Russia

India

China South Korea

Australia

New Zealand

Fiji

Sri LankaBangladesh

Philippines

Indonesia

Malaysia

Vietnam

Thailand

Dominant countriesMid-tierSmaller/emergingThe next markets?

Offshoring

Israel

Exhibit 1

restricted to manufacturing processesas companies sought to capitalize onlower-cost labor for basic fabricationand assembly. With the rise of theInternet, routine customer serviceactivities such as telephone support,online support, and numerous IT func-tions – from application developmentto maintenance to help-desk support –have become candidates for remotedeployment (Exhibit 1).

As the supply of new labor marketshas grown, so too has demand forthem. Developed countries in NorthAmerica, Europe and the Pacific Rimwith relatively low birth rates andaging internal workforces face growinglabor shortages. Meanwhile, theInternational Labour Organization estimates that China and India willaccount for 40% of the world’s work-force by 2010.

Such imbalances in supply anddemand create huge discrepancies in labor costs, making labor arbitrage

between different regions an attractiveproposition for companies and coun-tries on both sides of the divide(Exhibit 2). While some generalizationscan be made about this labor move-ment, different industries have movedat different speeds in responding tothe new opportunities and pressures.Companies in financial services andinformation technology have beenaggressive. Many in utilities, retailingand travel have been more cautious.In the U.K., financial services institu-tions and technology firms currentlyaccount for 30% and 15%, respectively,of offshoring activity, while retailersand utilities account for just 8% and6%, respectively, according to a 2004Forrester Research study. In general,however, the trend is clear: More com-panies are already offshoring or devel-oping plans to do so. Those that movetoo slowly may get left behind in therace for talent and cost competitive-ness, and may also miss opportunitiesin emerging markets for consumergrowth.


Taking a strategic viewGlobal deployment decisions have adirect impact on a company’s coststructure, market responsiveness, riskprofile, workforce capabilities and evenits brand. They often have a stronginfluence over future growth and prof-itability. As a result, it can be disrup-tive and costly to make deploymentchoices simply by following whatother companies are doing on a piece-meal basis. A decision to offshore aparticular function may make sensewhen viewed in isolation, but it couldhave unforeseen consequences onother critical areas of the business.

Note, too, that wage imbalances arenot permanent, because arbitrage byits nature tends to decrease differen-tials over time. Workforce deploymentdecisions therefore need to account for likely trends in wage rates over themedium term. Immediate arbitragesavings may not be sustainable, andlocal labor regulations may make exit-ing almost impossible after the firm

exhausts its opportunities. In addition,a country’s labor rates need to beweighed against its skills, infrastruc-ture, technology and overall productiv-ity – all of which influence relativecompetitiveness.

Skill differences may be even moreprominent than wage differentials,with certain critical skills showing particularly strong discrepancies inavailability across borders. The growthin workers with engineering or sciencedegrees has been flattening in the USand Australia and has actually turnednegative in Germany, Russia, Canada,Mexico and Brazil. But other regions,including Scandinavia, southernEurope and southern Asia, display relatively robust growth in the numberof scientists and engineers. Gainingaccess to these crucial skills willrequire continuing shifts in the loca-tion of research and development,product development, and other technical operations.

Exhibit 2

$120,000

$100,000

$80,000

$60,000

$40,000

$20,000

$0

China

IndiaUK

US

Management –Upper Middle

Professional – Senior Laborer – Skilled Laborer – General


Global workforce plans, therefore,should be integrated within a broaderstrategic business plan that balancesshort-run gains with long-run posi-tioning, performance expectations andprofitability. Such plans – developed bythe senior management team, withguidance and support from top humanresources executives and staff – pro-vide the framework for evaluating spe-cific job-deployment decisions, ideallybalancing several criteria:

■ Alignment with business model.How does the job fit within our cur-rent business model? How will itslocation affect our brand, profitabili-ty, and growth? Will those effectsincrease or decrease over time?

■ Cost. What are the relative costadvantages – in real estate, work-force, transportation, and so on – of alternative locations? How longcan local labor cost advantages beexpected to persist? How will com-petition, emerging regulations,changing population demographics,and other factors affect workforcecosts?

■ Core capabilities. How does the skill set of the local workforce compare with our critical strategiccapabilities – both now and in thefuture? How will local education,experience, and language trendsaffect the talent pool over time?Does the target location have thepotential to fill emerging talent gapsin our existing organization, or willit make them worse? How will thesemoves affect overall career paths?How will these changes affect workinterdependencies?

■ Risk. What is our risk tolerance?Will the job’s location increase or decrease risk in such areas as worker safety, currency fluctuation,political stability, supply-chain disruption and so on? How is the location’s risk profile likely to evolvein the future vis-à-vis that of otherpotential locations?

■ Market proximity. How far is thelocation from our current marketsand our future target markets? How will it influence customerreach, service and responsiveness,particularly for key segments? Howclose is it to our current and futuresupply base? Is proximity to com-petitors a factor?

■ Culture. How will a shift in the location of this job affect our overallworkforce? Will it reinforce orundermine our current culture? Will it help spur a necessary changein the prevailing culture? Will itweaken or strengthen employee loyalty and motivation? How will it influence the perceptions andactions of our managers and staff?

As these questions suggest, humancapital decisions should be tightlyaligned with business models. To beeffective, each decision must be basedon reliable data and take into accountnot only costs and risks but also thelong-run impact on market position-ing, business processes and talentrequirements.


A pragmatic approachEach company will need to align itsdecisions tightly with its own uniquesources of competitive differentiationand needs; what’s right for one com-pany may be wrong for another, evenin the same industry. But we havefound that a successful approach tosite location across industries general-ly has three basic steps:

1. Business requirements analysis. Toensure that strategic considerationsguide the location choice, this stepentails setting evaluation criteriaand weighting them according totheir impact on overall companycompetitiveness and performance.Both the criteria and their relativeweights often vary for each locationdecision and from employer toemployer. Typically, factors involv-ing local labor supply and cost getrelatively high weightings. Otherfactors, such as hazard risk, educa-tion, transportation infrastructure,local purchasing power and avail-able economic incentives, may alsoget substantial weightings.

2. Multifactor location analysis. Oncethe selection criteria and weightingare in place, each potential locationmust be evaluated. Consider firstthe financial impact of shifting ajob to a new location, in order toproduce a reliable estimate of theeffect on a company’s financialsover time. Each choice will influ-ence both profitability (by changingexpenses and revenues) and capitalmanagement (by changing capitalrequirements and capital costs).Second, assess the external factorsinfluencing each location, according

Keeping key workers after a moveA company may want to keep certain employees through a transi-tion phase in order to retain compa-ny-specific knowledge or to continuekey customer relationships. Yet someemployees will be more amenablethan others to transferring to a newlocation. In these cases, it is critical to identify those employees anddesign specific transition plans toretain them.

A major UK utility had to consolidateits sites after a merger. To influencewhich employees stayed and whichleft, it first divided its workforce intofour categories according to the levelof each employee’s motivation bothto remain with the company and to transfer to a new location.

Then it determined which employeesin each category had the skills criticalto the company. For key workers atrisk of leaving, management was ableto tailor efforts to increase the oddsthat they would stay, including sup-port for working spouses, financialincentives, customized relocationpackages and flexible work arrange-ments. In this way, the utility wasable to maintain core strategic capa-bilities in the wake of a changinggeographic profile.


to the criteria and weightings established in Step 1. External factors include the labor market(encompassing availability, qualityand costs), the business climate(the level of economic development,the level of openness and the regulatory environment) and thecommunity (the quality of roads,communications and other infra-structure; the cost and quality ofliving; and the risk profile). Third,make a quantified evaluation ofoverall business risk. The financialimpact and the probability of various negative events, includingcurrency fluctuations, businessinterruptions and natural disasters,should be estimated to arrive at aconcrete risk assessment for eachlocation.

3. Focused site reviews. The multifac-tor analysis will yield a short list of high-potential locations. Each of these can be assessed throughin-person visits, further data gath-ering, and analysis. It’s particularly

important to recognize the oftenprofound differences in humanresource policies and practices fromone region or city to another andeven from one industry to anotherwithin the same region or city.

One benefit of this analytical approachis that it imposes business disciplineon a task that is too often influencedby anecdotal opinions and aggregatedmarket trends. Companies sometimeshave a tendency to base location deci-sions on their corporate heritage, onpolitics or even on senior executives’quality-of-life preferences. While suchfactors will not necessarily be ignored,they should not be allowed to skewdecisions. In the long run, only busi-ness-driven location decisions basedon hard facts will ensure a company’ssuperior performance. (See sidebar,“Implementing the choice: EnteringChina” for an example of the uniqueconsiderations involved in establishinga business presence in China.)


The approach in actionAn Australian company with US opera-tions created a new specialized healthcare company by acquiring anotherfirm’s US operations. To gain economiesof scale and other benefits, the newhealth care company wanted to consol-idate laboratory operations into a single location, and two quite differentcities emerged as the candidates.

The company first undertook a businessrequirements analysis to determine itssite-selection criteria. To maintain itscompetitiveness, the company had tohave a cost-efficient lab, so cost was animportant criterion. Other criteria wereimportant, too – such as the demo-graphic and educational characteristicsof the local workforce; the relative riskof business interruption due to naturaldisaster and other factors; and localemployee culture, work rules and eco-nomic incentives. (Exhibit 3 shows thefinal set of selection criteria and their relative weights.)

The company then analyzed the twopotential locations against these crite-ria. On the cost side, City A had a clear

advantage. Its average annual wagecost of just over $34,000 per employeewas significantly less than City B’s$41,000. City A also had the edge inemployee purchasing power. But froma labor-supply perspective, City B wasthe winner, its population growing attwice the rate of City A’s. Further, City Bhad a current estimated supply of over10,000 lab workers in contrast to CityA’s 7,000. City B also had 120,000 stu-dents at institutions of higher learning,far more than A’s 38,000. (See Exhibit 4.)

As for hazard risk, City B’s risk of a dis-ruptive event was mainly attributableto hurricanes and had a risk exposurefour times higher than City A’s expo-sure to different kinds of hazards,earthquakes and tornados. But City B’sstricter building codes mitigated thehigher risk to some degree. AlthoughCity A was the less expensive place tooperate, it’s cost advantages were over-whelmed by City B’s advantages inlabor supply and other criteria. Thecompany decided it was in its strategicinterest to consolidate its laboratoryoperations in City B.

Exhibit 3 Example of location decision criteria

Costs

Work ethicHazards

riskEconomic incentives

Labor demand

Labor availabilityFuture

labor market

Site

selection

weightings

100%

Education


Managing the internal labor marketAs workforces become more global,labor markets grow more complex –even at the organizational level.Managing an organization’s internallabor market will be central to work-force sustainability. The flow of talentthrough the organization must matchthe future requirements of the business.

The internal labor markets of employ-ers influence such things as who joinsand stays, how development andcareer paths occur, and the talentbench strength for positions of leader-ship. Companies can map out theirinternal labor market by analyzing thecurrent supply of employees by posi-tion and the estimated demand at various points in the future and thenproject how labor deployment deci-

sions will affect the balance betweensupply and demand. Managers canthen flag a potential workforce skillsgap and bottlenecks in key careerpaths or business processes.

Consider a high-tech manufacturerwhose success hinges on maintainingan adequate supply of talented engi-neers. The average engineer’s careerpath extends over many years. Anentry-level engineer typically goesthrough a two-year training period andthen requires an additional 1.4 yearsof experience before becoming a sen-ior engineer. A senior engineer thenhas two potential career tracks – amanagerial track toward executivepositions and a technical track towardmore advanced professional posts –both of which are crucial to the com-pany’s business success (Exhibit 5).

Criteria City A City BCosts Overall more favorableFuture labor market Overall more favorableLabor availability Overall more favorableLabor demand Overall more favorableEducation Overall more favorableEconomic incentives Overall more favorableHazards risk Undetermined UndeterminedWork ethic Undetermined UndeterminedOverall score 38/100 50/100

Exhibit 4

Results of location decision analysis


Implementing the choice: Entering ChinaThe decision to relocate a particularactivity or function to a specific off-shore location is only the first step in a complex process. The next step is to actually set up the local operation.Given the wide variations in businesspractices and regulations from countryto country, establishing a presence can be frustrating, costly and time-con-suming. Avoiding problems requires aprocess geared toward the specificcountry and based on significant localknowledge.

Here, for example, is a map of thebasic process we recommend for set-ting up a business in China, describingthe steps required as well as the keylocal vendors involved.

While this process will need to be tailored to each company’s specificcharacteristics, requirements and goals,it is a useful template for setting up abusiness in China successfully.

Client business planning

General strategy andplanning

■ Business overviewcontext

■ Site location

■ Environmental study

■ Company registration

■ Strategy and planningon legal, humanresources and finance

ABCcompany-specific

strategy

■ Identify project team/steeringcommittee

■ Define project contents and timetable

■ Select vendors

■ Provide integrated project management

Project management

■ Organizationalstructure

■ Staffing andrecruitment

■ HR program design(compensation,benefits, per-formance)

■ Communication

■ Administration(payroll, individual tax)

Human resources

■ Development zoneselection

■ Land selection

■ Construction

Property

■ Various governmentbodies (tax bureau)

■ Feasibility study

■ Board of Resolution

■ Companyregistration

■ Accounting/taxationoutsourcing

Legal/finance

Key vendors:

■ Development zone

■ Land surveyor

■ Constructioncompany

Key vendors:

■ Tax/accountingconsultant

■ Lawyer

■ Registration agency

Key vendors:

■ HR consultant

■ Headhunter

■ Labor agency

■ Payroll administrator


Decisions to offshore any of the jobsalong this career track could have asubstantial impact on the supply oftalent both earlier and later in thetrack. Opening an engineering opera-tion overseas, in addition to an exist-ing domestic operation, could, forinstance, lead to a greater supply ofentry-level engineering candidates,leading to greater pools of senior engi-neers. On the other hand, repeatedshifts in the location of engineeringoperations could lead to greaterturnover and serious gaps in the inter-nal labor market, as engineers wouldlack the extended in-house experiencerequired to rise to high-level executiveor professional positions.

In the years ahead, a company’s suc-cess increasingly will hinge on its ability to keep supply and demand forkey positions in balance while capital-izing on the opportunities presentedby a global labor market. Indeed, thatability may well become one of themost important of all strategic capabil-ities, separating winners from losers inthe new world of business.

Exhibit 5 Conceptual example of a critical career path in one firm’s internal labor market

2 years1.4 years

6.4 years

10 years

*The times shown are the approximate average time (in years) for the job transitions to have occurred.

2.4 years

Entryengineer

Seniorengineer

Consultant

Supervisor

Engineer

Manager

Contacts

Jay Doherty, a principal in the Human Capital business of Mercer HumanResource Consulting, and Julie Kim, a senior associate in Mercer’s Human Capital business, contributed to this article. Jay can be reached [email protected] or +1 804 344 2614. Julie can be reached at +1 212 345 1406.

They also would like to recognize the significant contributions of DamienDeLuca, an analyst in Mercer’s Human Capital business, in preparing this article.

About Mercer Human Resource Consulting

Mercer Human Resource Consulting is the global leader for trustedHR and related financial advice, products and services. In our workwith clients, we make a positive impact on the world every day. Wedo this by enhancing the financial and retirement security, health,productivity and employment relationships of the global workforce.

Mercer Human Resource Consulting has more than 15,000 employ-ees serving clients from more than 190 cities and 41 countries andterritories worldwide. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (tickersymbol: MMC) on the New York, Chicago, Pacific and London stockexchanges.

Mercer’s Human Capital business helps organizations globally tooptimize their performance by meeting their most critical needs in three related areas:

■ Managing, rewarding and engaging talent to drive business performance,

■ Ensuring responsible executive remuneration, and

■ Enhancing HR effectiveness.

To help clients drive value through people and produce measurablebusiness results, our human capital business offers:

■ High-impact strategic advice combined with deep technicalinsights and knowledge,

■ Credible facts and data,

■ Proprietary technology and decision-support tools, and

■ Implementation services.

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Austria

Belgium

Brazil

Canada

Chile

China

Colombia

Czech Republic

Denmark

Finland

France

Germany

Hong Kong

Hungary

India

Indonesia

Ireland

Italy

Japan

Malaysia

Mexico

Netherlands

New Zealand

Norway

Philippines

Poland

Portugal

Puerto Rico

Singapore

South Korea

Spain

Sweden

Switzerland

Taiwan

Thailand

Turkey

United Kingdom

United States

Venezuela© 2006 Mercer Human Resource

Consulting, Inc.

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The value of people - Mercer