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Human Resources

Is it time to end outsourcing and develop talent in house?

Published 14 December 2021 in Human Resources • 8 min read

Employers have largely abandoned the traditional talent management planning model and moved towards talent acquisition. But they are not doing it with much care. 

Talent management, the task of identifying human capital needs and having some plan or strategy for meeting them, has been around for more than 60 years. But the tried and tested system is undergoing a rapid period change. 

This vital branch of HR includes workforce planning and hiring along with the subcategories of recruitment and selection, training and development, assessment, promotions and succession. 

However, three developments are new to this generation: 

  1. The expansion of hiring experienced candidates in place of internal development and advancement. 
  2. The dismantling of much of the internal labor markets of large companies and corporations.
  3. The use of non-employees in the workforce. 

Taking the first point, data from applicant tracking systems suggest that corporations and larger employers now fill two-thirds of vacancies from the external labor market, and they do so for all levels of jobs, right up to the C-suite. This contrasts to the period of the Great Corporations after the Second World War and through the 1980s, when it was common to fill vacancies at the entry-level and use promotions and transfer staff to all other open positions. Only about 10% or so of vacancies were filled from outside, typically focused on a small set of jobs.   

At the executive level, for example, our research has found that in the 10 largest corporations, the percentage of top executives who had never worked anywhere else in their career declined from 53% in 1980 to 30% in 2011. We also found that the average tenure among executives by the early 2000s was only about four years and that half of such executives were open to becoming a candidate for a job elsewhere. 

The second development, tightly related to the first, was to dismantle much of internal labor markets of those large companies. The first step in this process was the white-collar layoffs in the 1980s – the first ever for most companies. If one could simply hire from outside when there were vacancies, the need for workforce planning essentially disappeared and with that, the need for internal development disappeared as well. As long as companies were dropping large numbers of experienced and trained employees on the job market, filling jobs from outside was easy.

The changing face of work: for several decades after the Second World War, the great corporations developed and promoted talent ‘in house’

A related practice was to outsource learning and development. Arguably the most noticeable change in this arena was the explosion of MBA programs. Large corporations before the 1980s had management development programs where new hires into the management ranks spent months, sometimes years, in classroom training that taught many of the skills learned in MBA programs. When those development programs were cut, it created a need for an MBA degree.  Hiring of MBAs exploded and with it, the expansion of MBA programs. Master’s degrees in business in the US rose from 61,000 in 1982 to 192,000 in 2018. 

A more recent development is the use of non-employees in the workforce. While the “gig” economy, work associated with electronic platforms and other forms of contracting get most of the attention, the biggest source of non-employee labor is actually “leased” employees (workers from other organizations working on behalf of clients at their location). They constitute as much as 30% of the labor budget at US corporations. Outside the US, the use of non-employee labor is arguably greater. The most commonly tracked form of such labor is temporary help, where the average use across the 38 OECD (Organization for Economic Co-operation and Development) countries – 11.4% of all workers – is more than double the US rate. 

We see this most explicitly in the topic of succession, which was a ubiquitous feature in the earlier period. Few companies do succession planning, and those who do it at all typically only do so for the CEO role. More than half of such companies say that it would take at least six months to identify an internal successor to the CEO. 

This is not to say that many large organizations do not care about the internal development of talent, albeit typically limited to top management talent or internal development. Public sector employers in particular retain a powerful internal labor market. But the efforts that remain are scaled back considerably from the days when talent reviews were the single biggest item on CEO calendars.  Memories are short, however. While some newer employers are introducing practices that seem novel to them, such as tuition reimbursement for front-line workers, virtually all of these – 360 feedback, talent reviews, assessment centers, and so forth – date from the Second World War.

Employers expect employees to manifest commitment to the organization, but the organization effectively maintains a low commitment approach to them

A new system?   

Much of the change in talent management over the past 40 years has simply been tearing down parts of the old system. To the extent that things are new, it is about emphasis, especially recruiting outside talent, which is now a huge industry. The organization that now does the most hiring in the US, for example, is Talent Scout, a company of which few have heard. It hires 600,000 people every year as a recruitment process outsourcer on behalf of its clients. Efforts to think more creatively about the movement of employees across jobs internally via bidding and posting systems date in a significant way from the dot.com era, and they are just being taken seriously now. 

Why did this happen? One answer is that the stripping down of important elements of the old system of internal labor markets were part of the massive restructuring and downsizing wave of the early 1980s: if we are shedding talent, why spend all this money trying to develop new talent? Once those systems for developing talent were cut, the considerable fixed costs associated with starting them up again no doubt hampers the ability to move back in that direction. 

The other factor one hears continuously from the business community is the need for agility and flexibility. Business strategies based on developing a competency to exploit an opportunity over the long term appear to have given way to a strategy of exploration, moving quickly to new opportunities and then moving on from there to other opportunities. A generation ago, companies such as IBM argued that lifetime employment and extensive training made it easy to adjust, create new capabilities, and move to new opportunities. 

The flurry of interest in what became known as “functional flexibility” (cross training and teamwork, retraining, and so forth) to help organizations adjust quickly faded against the perceived advantages of “numerical flexibility” (layoffs and hiring and use of contractors).

Office life in the 21st Century: Google’s Sydney HQ is a dramatic example of how times have changed, and the company is one of many to rely heavily on outsourced labor

To what extent and in what contexts the latter is superior to the former is an open question. It is possible that sharp changes in direction and in competencies in business require changes in people. It is also possible that more modest changes in direction are easier to achieve internally where employees retain company knowledge, cultural values, and so forth. However, the perceived wisdom appears to be that it is far easier to achieve flexibility by changing the workforce; out with the old workers and in with new hires and new skills. This approach does cut current labor costs: laying off employees now when business is down saves money. Whether in the long term, the cost of rehiring or replacing workers when business picks up again offsets those savings is a question that financial accounting does not answer. This story is obviously less plausible outside common law countries where employers have far less ability to cut labor.  

Do these new practices that make use of the external labor market while retaining elements of the old model constitute a new system? There are adaptations that suggest a system-like nature to current practices. Among the most obvious is in compensation where practices have adapted to the extensive use of the outside labor market. Concerns about internal equity and the associated pay systems based on job evaluations, pay bands, and so forth, have largely given way to market-pricing of pay and individual negotiations.   

There is no doubt that, at least in large corporations, there are efforts to straddle the older internal labor market model and the open market model. Employers expect employees to manifest commitment to the organization, but the organization effectively maintains a low commitment approach to them (i.e., little job security and often limited opportunities for career advancement). A research question that is central to whether there is truly something like a new system is the effort to understand how careers advance when individuals have the ability both to move within their employer and to move across employers. 

The fundamental question is, where are current practices headed? The notion prevalent among the human resource practitioner community that the planning-based approaches from generations ago are still dominant is hard to sustain. Neither is the idea that we now have labor markets so open that they overwhelm the management practices of individual employers. We appear at present to be somewhat stuck in the middle. Individual employers and indeed average practices across countries are arrayed across the distribution between the two poles. What might move them in one direction or the other remains unclear.   

What we can say is that many of the older and larger companies in the US are hanging on to at least the internal development practices of the traditional model, at least for their managerial employees. The phrase “academy companies” was coined 20 years or so ago for organizations such P&G, IBM, and J&J, because they were the last ones continuing down that path. Now even these companies make extensive use of outside hires as well as leased employees.   

Because it is so much more difficult to drop employees in European countries, it is also more difficult to go outside to hire. Therefore, larger corporations are likely to hang on to the traditional, internal model. The best bet for expansion of the traditional model is in countries such as India where the outside labor market does not yet provide enough talent. One consequence is that employers in those fast-growing economies are no longer looking to the US as the model for managing employees.

Authors

Peter Cappelli

Peter Cappelli is George W Taylor Professor of Management, Director of Wharton’s Center for Human Resources and Research Associate, NBER.

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