001-A New Role for Finance- Architect of the Enterprise
HQ_vol5_iss3
1. Hewitt Quarterly Asia Pacific
Volume 5 •Issue 3 Subscription copy–not for sale
Business
Transformation
in Asia
Hewitt Quarterly
Volume
The Rewards of
Transformation
HR: The Next
Generation
Eastern Promises:
Relocating Talent
within China
2. 16
Welcome
VOLUME 5 ISSUE 3
The Rewards of Transformation 3
How best to manage organizational growth:
by geographic orientation? By the ‘three
horizons’ approach? Our author suggests
it is only when total rewards enter the
equation that organizations are truly poised
for business transformation and renewal.
Unearthing Human Capital for Attractive
PE Buyouts 10
HR managers of companies which are
potential targets of PE funds should take a
proactive stance at all times.
The Next Generation 16
Set clear criteria if you are going to develop
the Next Generation HR capable of providing
value to the organization well into the 21st
century and beyond.
Merger in Mind 20
In heated Asian markets, take steps to get the
best out of people in a merger, leveraging the
value the merger was designed to create.
Foot on the Gas: Managing Human
Resources in the Middle East 23
The restructuring of economies initially
built around petro-dollars brings with it
new issues for HR professionals.
Eastern Promises: Relocating Talent
within China 26
What are the challenges and solutions
around relocating talented, experienced
workers to less expensive hinterlands?
Inside Hewitt 32
The latest news at Hewitt.
23
183
4. 2 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
5. usinesses that set out to be global success
stories invariably focus on two key goals
– growing their profits, and winning over
international markets. But establishing
businesses across different national
boundaries is one thing; managing their
operations to achieve sustained growth is another.
One of the most formidable challenges
confronting managers of global businesses is how
to come up with a consistent approach to managing
operations and growth across varied geographical
regions. Related to this is the question of how best
to adapt these centrally developed strategies to suit
local conditions without diluting their impact.
Geography has its limits
Very often, organizations adopt the practice of
managing global businesses along geographic or
regional lines, with countries that are near each
other on the map adopting similar modifications
to management strategies emanating from the
corporate headquarters.
But just how useful, or accurate, are these
assumptions as applied to neighboring countries?
How similar, really, are the business climates and
talent environments of countries such as Japan and
China, or Australia and Indonesia, or, for that matter,
Singapore and Vietnam?
B
W W W . H E W I T T A S I A . C O M 3
The Rewards of
Transformation
Taking a time horizon approach to managing global business
could well be the secret to achieving sustained growth. But it is
only when total rewards enter the equation that organizations
are poised for business transformation and renewal.
6. Increasingly, many successful companies
are passing over the purely geographic
orientation in favor of incorporating the
“three horizons” approach to managing
organizational growth across the regions.
Developed by McKinsey & Co, the three horizons
model is based on the premise that successful
companies build a pipeline of businesses that
pay off over different time horizons.
Horizon one encompasses businesses that are
at the heart of an organization. These are the
company’s core businesses that customers and
stock analysts most readily identify with the
company name. Often, these mature businesses
account for the lion’s share of the organization’s
cash flow and profit and their success is critical
to near term performance.
Horizon two businesses include the rising stars
of the company: the fast moving, entrepreneurial
ventures that will, over time, become new core
businesses. These new businesses focus on
achieving explosive revenue growth and often
require heavy capital commitments.
Horizon three contains the seeds for
tomorrow’s businesses. These are nascent
business ideas and opportunities that
could blossom into future growth engines.
These businesses typically involve research
projects, test-market pilots and memoranda of
understanding that mark the first steps towards
actual businesses.
Increasingly, many successful companies are
passing over geographic orientation in favor
of the “three horizons” approach to managing
organizational growth across the regions
4 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
7. Common horizon, common priorities
Most companies that operate across a vast and
diverse region like Asia Pacific have businesses
that fall into all three of these horizons. So rather
than grouping these businesses by geography,
dividing them up into three groupings based
on the horizon model allows for effective
management that responds to the needs of these
companies in their current growth phase.
Richard Kantor, Head of the Asia Pacific
Compensation Consulting practice, Hewitt
Associates, brings to the discussion his
experience of helping clients in over 60
countries to improve business performance
through the effective design and delivery of
rewards and other talent programs.
Kantor explains, “In essence, what the
three horizons model offers is a template for
managing global businesses and ensuring their
continued growth. Regardless of where they are
located, businesses in the same horizon tend
to have similar needs in terms of management
challenges, types of leaders and talent
approach.
“For example, a company may have located
its mature core businesses, or what the model
refers to as horizon one entities, in Germany and
in China. As far as management is concerned,
the key challenge for its German and Chinese
operations is one and the same - to make sure
that they absolutely hit their profit targets.”
As companies move away from the
geography-driven approach in managing their
international operations, the three horizons
model offers a practical, yet structured, basis
for managing international operations.
Says Kantor, “At best, MNCs think of Asia
as a collection of 15 to 20 countries. If you
W W W . H E W I T T A S I A . C O M 5
8. according to these three groupings is that
some of the seemingly intractable problems or
potential sources of tension associated with
running offshore businesses may be dealt with
quite painlessly and objectively.
Kantor speaks from experience when he
observes, “Within global organizations, many
problems that are attributed to communication
issues or a clash of cultures can easily be
explained in terms of a poor horizon fit. Take,
start with 20, then you have to figure out how
to manage each of these 20 countries, how to
localize your operations and still grow your
business and achieve your targets.
“With the three horizons model, you have a
template that offers perhaps 80 to 90 per cent
of the solution to managing a global business.
The other 10 to 20 per cent can then be tailored
to local market conditions.”
The advantage of dividing up businesses
6 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
Within global organizations, many problems
that are attributed to communication issues
or a clash of cultures can easily be explained
in terms of a poor horizon fit
9. Rewards that deliver
Beyond improving the management of global
businesses, adopting the three horizons
model forces management to take a fresh look
at various aspects of the business such as
talent and leadership requirements, training
and compensation. Based on its extensive
experience of working with global businesses,
Hewitt Associates has found that linking total
rewards to horizons often speeds up the process
of business transformation and renewal.
Says Kantor, “Certainly, from a total rewards
perspective, the three horizons model starts you
thinking very differently. The different nature
of businesses in each of the three horizons
calls for different approaches to total rewards.
Now more than ever before, companies across
Asia-Pacific are becoming aware that the way
they reward talent impacts directly on how their
businesses grow and renew themselves.”
for example, an American multinational that
is having problems managing its staff in a
newly established product development center
in India. The heart of the problem may have
absolutely nothing to do with communication
or culture. Rather, any tension could simply
be the result of a poor fit between the target-
oriented horizon one priorities of the head office
in the U.S. and the ideas-driven horizon three
approach of the Indian start-up.”
Just how can companies go about
linking total rewards to the particular
phase of growth of a business?
For a start, companies would do well to match
total rewards to the particular talent profile
they need to recruit for each horizon. Total
rewards have to resonate strongly with the type
of talents needed by a business at its current
phase of growth; only then can the business
achieve its management goals.
Take, for example, the core businesses
of an organization or what the model refers
to as horizon one businesses. Management
focus in these established, mature businesses
is on extending and defending today’s profit
generators by putting in place leaders who
are strong operating managers willing to do
what it takes to hit their targets. To recruit
and retain leaders who fit this profile, horizon
one businesses would do well to incorporate
a target incentive concept into the total
rewards package. Such an incentive concept
would include increased rewards for achieving
forecasted targets and, on the downside, a
steep fall in income for failing to meet targets.
Another key consideration that global
organizations would do well to ponder is the
fact that a mismatch between the total rewards
offered and the talent suited to a particular
W W W . H E W I T T A S I A . C O M 7
10. 8 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
Horizon 1
Those core businesses that
customers and stock analysts
most readily identify with the
corporate name, profits and
cash flow.
Critical to near-term
performance. The cash they
generate and the skills they
nurture help future growth.
Extend and defend today’s profit
generators — focus on execution.
Shore up competitive positions.
Capture remaining potential of
core business.
Emphasis on product
extensions, marketing changes,
restructuring, productivity
enhancement, cost reduction.
Annual operating plan, tactical
plan, resourcing decisions,
budgets.
Near-term, bottom-line results
and cash flow.
Profit, return on capital, costs,
productivity, efficiency.
Strong operating managers who
will do what it takes to hit their
targets.
Operators. Deep functional and/
or industry expertise. Strong
drive to hit targets and meet
plan consistently. Disciplined.
Create consequences (career
and compensation) for
near-term performance,
including penalties for under
performance. Impose “no
excuses” management style.
Horizon 2
Businesses on the rise
— fast-moving, entrepreneurial
ventures in which a concept
is taking root or growth is
accelerating.
Could transform the company
but require considerable
investment. Substantial profits
are 4-5 years away.
Build emerging businesses
—develop new streams of
revenue.
Single-minded drive to increase
revenue and market share.
Continue investment for
expansion. Success depends
on speed and effectiveness of
revenue stream building.
Business-building strategies,
investment budget, detailed
business plans for new ventures.
Top-line growth and capital
productivity.
Revenue growth, market share,
customer acquisition, profit,
capital investment efficiency,
likely net present value (NPV).
Risk takers who think like
owners or investors; focused on
top-line (often with marketing
or sales background).
Builders. Entrepreneurial desire
to create. Comfortable with
ambiguity and change. Top-line
focused. Sharp decision makers.
Willing to make sacrifices
today for gains tomorrow.
Independent. Self-motivated.
Provide autonomy, freedom to
act, and mandate to create and
build. Opportunity to leave a
legacy. Provide alternate career
paths to employees who head
risky ventures — if their business
folds, another challenge awaits.
Horizon 3
The seeds of tomorrow’s
businesses — options on
future opportunities. Research
projects, test-market pilots,
alliances, minority stakes, etc.
Can generate sustained
performance over the long term.
Create viable options — secure
long-term growth.
Nurture promising options but
cut out those with diminishing
potential.
Develop good ideas into
business opportunities. Seed
many and retain options
without committing too much
capital, etc.
Exploration, initial project
plans, project milestones.
Size of payoff and probability
of success.
Project-based milestones, option
valuation of the business, rate of
conversion from ideas to launch,
number of initiatives.
Visionaries who understand
that futures must be imagined,
investigated, and elaborated.
Visionaries. Champions.
Unconventional thinkers. People
who want to look beyond
conventional wisdom to explore
new ideas and opportunities.
Don’t mind being a lone ranger.
Provide psychological rewards,
recognition of ideas, freedom
to experiment and explore.
Provide clear career advantages,
opportunity to satisfy intellectual
curiosity, option to become
horizon 2 business builder.
Definition
Role of the
Business
Management
Attention
Management
Challenge
Operating the
Business
Key Outputs
Key Measures
Other Measures
Type of Leaders
Type of People
Talent Approach
Summary of the “three horizons model”
11. W W W . H E W I T T A S I A . C O M 9
Horizon 1 reward strategies are typically managed over many years (5+) and offer the greatest window for predictability in
terms of measuring against internal company or market competitor norms. In this horizon there is already a rich resource of
market data. Traditional grading or broad grades with a fixed points system is likely to be the most appropriate tool. Horizon
1 reward system requirements are also easier to forecast, as they can be tied to explicit and well-publicized performance goals
– sometimes declared years in advance. Flexibility is also required, however, for rewarding short-term and market opportunity-
related goals.
Horizon 2 reward systems typically require 3-5 years of planning, but offer less predictability. Manager discretion and flexibility
is required here. These projects are focused less on performance programs to extract extra value from mature businesses and
more on creating new value. Awards are closely tied to the growth and speed with which ideas are developed into revenue
streams. These systems require a significant upside for overachieving (a publicly stated cap on performance payments may not
be appropriate) but equally they require a significant downside for falling short of projections. ‘Pool’ approaches on payments
are a possible strategy, with additional discretionary awards for high-performing individuals
Horizon 3 reward strategies have the lowest level of predictability and are focused on responding to fast-moving conditions
in emerging sectors. Planning times are typically 1-2 years. They are competency-based, with emphasis on competing in the
market for the best ‘ideas people’. Peer group and industry recognition may be nearly as important to this talent base as pure
financial reward. These are often highly motivated individuals with an existing strong track record who are motivated by the
thrill of the chase and respond better to bonus structures than incentive payments.
The author can be reached at: richard.kantor@hewitt.com
horizon can have far reaching implications in
the long term.
Says Richard Kantor, “If you have horizon
two ventures or strong up-and-coming
businesses that are ready to explode with
growth, and you apply horizon one rewards
which are basically designed to help employees
meet their targets, you may be damaging the
business. More than that, you may end up
discouraging the very people that you need to
transform these businesses into the rising stars
of your organization.”
And that, Kantor explains, is because
horizon two talents are typically business
builders who think like entrepreneurs. For
these risk takers, target-based incentives are
unnecessarily limiting because they don’t want
to be constrained in terms of “how high is up”.
What will work for these aggressive go-getters
are rewards that offer significant opportunities
to create personal wealth, with considerable
upside for over-achieving.
By the same token, Kantor explains that
horizon three businesses that typically generate
ideas rather than profits need a total reward
package that acknowledges their role as the
hothouse of tomorrow’s business. Says Kantor,
“If you apply the rewards of horizon one or
established businesses to horizon three or
embryonic companies, all you will be doing is
cutting costs and starving the business. So with
horizon three businesses, you have to move
away from profits and hitting financial targets
and think in terms of rewarding talent for
achieving key milestones.”
What is clear from the discussion is that
managing global operations to achieve
sustained growth goes well beyond attracting
the right talent mix and rewarding these
talents handsomely. The challenge for global
businesses is to design a customized package
of total rewards that matches the talent profile
vital to the success of a business at its current
phase of growth.
Forward thinking organizations have
started to apply this conceptual framework to
their rewards programs globally. By redesigning
their incentive programs and other rewards
to engage and motivate their people, many
companies find that they are creating the
correct momentum necessary for sustained
growth at every phase in their business
lifecycle, across all geographies.
13. n the day before the Federal
Reserve cut its discount lending
rate to banks in the United States,
sparking a reversal in plunging
global markets sentiment, a news
report by CNBC Asia noted that
there was at least US$50 billion
in private equity funds in Europe alone seeking
opportunities for corporate buyouts or mergers
and acquisitions (M&A).
In fact, the report went on to say that private
equity firms were hoping to acquire companies at
a discount given the liquidity crunch brought on
by the aftermath of the besieged U.S. sub-prime
housing loans market. While the debt crisis may
have put a temporary dampener on the private
equity (PE) market, expectations are that in the
long-term, values will continue to grow.
O
for attractive PE buyouts
W W W . H E W I T T A S I A . C O M 11
14. According to Boston Consulting Group, PE
deals accounted for $650 billion, or 24 per cent
of all deals by value in 2006, up from a relatively
modest share of six per cent of all deals in 1996.
Between 2002 and 2006, overall values grew
an average of 20.4 per cent each year in India
and China, a clear sign that PE firms have been
increasing their activities in Asia over the last
few years.
Which explains why Piotr Bednarczuk,
the group leader and principal for Corporate
Transactions and Transformations (CTT) at Hewitt
Associates, advises the human resource managers
of companies which are potential targets of PE
funds to take a pro-active stance at all times.
“You don’t want to be caught like a deer
in the headlights and immobilized as private
equity funds are always on the lookout for
opportunities regardless of the conditions in the
market. So it always pays to have a hip-pocket
plan when opportunity knocks at your door,”
he adds.
Hip-pocket plan
By a hip-pocket plan, he means that the HR
department should have a ready-made strategy
to unearth hidden human capital in the company
that can convey value to prospective new owners.
Such an exercise can also be carried out by a
company’s management to better determine its
12 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
15. hidden value, regardless of whether a PE buyout
is in the offing.
Bednarczuk notes that while human
capital and workforce issues account for a
significant part of the value creation and change
management, they are often overlooked and
many companies’ management devote less than
10 per cent to their time on human capital issues.
Adds Christian Doeringer, Hewitt Associates
senior consultant for CTT in Asia, “Asian
companies, both privately held and state-owned
entities, usually either downplay the importance
of human capital when it comes to a potential
acquisition by a PE firm or overestimate the
capabilities of their team.
It pays to focus
on the positive
aspects of human
capital creation
rather than just
dwelling on the
negative aspects
of asset stripping
and cost savings.
Phase 1: Human Capital (HC)
Audit & Prioritization
Potential areas of HC value creation
Cost efficient, effective, fit-for purpose HC programs and infrastructure
Potential Value Drivers Transition and Setup Operations
HC Value Processes • Talent supply
• Assessment of HC spend
• Capability building
• High performance workforce
• Employment relationship
Leadership • Leadership assessment/onboarding
• Retention/severance plan design
• Transition compensation/benefits
• Incentive plans/equity replacement
Organization • Workforce planning aligned with strategic
objectives
• HC organization restructuring for cost/agility
• Define new HC business model and align
leaders/employees
HRIS/HR Operations • HC infrastructure assessment
• Determine go forward HRIS/HR operations
approach
• Facilitate vendor RFP process and assist in
vendor negotiations
• Day 1 migration plans (HRIS/payroll)
• Measure and modify
Compensation & Benefits • Assess current compensation programs
• Address transitional incentive issues
• Rewards and recognition alignment
• Assess current benefits for value, cost,
volatility
• Determine go-forward benefits approach
• Manage benefit vendor RFP process and
negotiate with vendors
• Implement new program/define mix
Culture/Engagement • Identify cultural pillars required to deliver
results
• Transition of cultural characteristics from
current to future state to achieve business
results
• Identify culture gaps
W W W . H E W I T T A S I A . C O M 13
16. • Generally reduce organization costs
by 10 per cent through alignment
workforce mix (insourced/outsourced/
onshore/offshore), and skills change
• Hewitt’s Benefits practice can generally
reduce benefits costs by five to 20 per
cent through re-design and negotiation
of benefits
• Hewitt has saved companies from
20 to 30 per cent on HR operations/
infrastructure annual cost by
establishing highly functional, size
appropriate HR platforms
• Change management methodology
enables sustainable implementation
of strategy through metrics and
consequence management at the
individual employee level
• Streamlined processes and significant
experience enable Hewitt to
establish benefits and HR operations
infrastructure in consolidated
timeframes (45 to 90 days) required by
PE timelines
• Hewitt streamlined HR delivery models
while transforming the HR function
in shorter timeframes than industry
standard (1-1.5 years instead of two to
three years)
• Hewitt’s HC expertise globally enables us
to best identify HC liabilities and advise
on purchase agreement projections that
avoid millions in liabilities (e.g., in the
area of pensions, benefits, executive
compensation, employee transfer/
relations)
• Hewitt’s experience in cross-cultural
deals is leveraged through methodology
that maps and manages cultural barriers
to strategy implementation
• Company growth can increase the
possibility of achieving 20 per cent
return on the buyout
Hewitt’s Value Proposition for
Private Equity Deals
Cost savings through
HC Expertise
Execution Capabilities
in Short Timeframes
Risk Protection/
Mitigation Globally
Support Growth
Initiatives
“In the first case, many company leaders tend
to believe that tangible assets, such as physical
plants, property, equipment, customer lists, sales
contracts and cash reserves, are more critical for
the investor than their employees – which may
or may not be true. In the latter case, the local
companies may vastly overestimate the strengths
and depths of their management teams and
functional experts in areas such as R&D or sales,
for instance, relative to the expectations of global
PE firms.
“Firms in Asia need to take their human
capital more seriously and also better understand
the expectations of global PE firms with regards
to human capital before they put their companies
up for sale,” he adds.
Elizabeth Fealy, senior consultant for CTT,
says that it usually takes no more than two
to three months to carry out a value-mapping
exercise and identify areas of human capital that
can then be used by HR to build a business case
for value creation opportunities. Such attention
is important in order to realise eventual synergy
capture, not unlike those that involve expertise
on the legal, technology or financial fronts during
a company takeover or M&A situation.
Continuity & change
Fealy says that a well-thought-out plan can help
to minimize disruption and help to smooth the
transition during a change in ownership.
Take, for instance, compensation and benefits
in the case of a public-listed company going
private. Plans should be put into place to ensure
that there will be a long-term incentive program
to replace stock options. Top executives, for
example, may be persuaded to ‘re-invest’ a
significant portion of their previous long-term
incentives into equity in the new company.
Says Doeringer, “Many privately owned
companies in Asia have compensation systems
that are not well documented or are primarily
driven by the owner’s discretion. Actual
performances may not play a significant role.
For example, annual bonuses may be paid out to
some executives close to the owner’s family, while
others may not benefit.”
He notes that PE firms typically look for strong
linkages between the financial performance of a
company and the executives’ remunerations and
rewards. Hence, the need for private companies
to show documentary proof on how the linkages
are measured, as well as highlight them in order
to become attractive investment targets.
Bednarczuk notes that private equity managers
do not often have the staff or resources to handle
14 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
17. The authors can be reached at: piotr.bednarczuk@hewitt.com,
christian.doeringer@hewitt.com, elizabeth.fealy@hewitt.com,
anupam.prakash@hewitt.com
or manage the nitty-gritty details of a transition,
and frequently outsource the process to external
parties. “It certainly helps if HR can play a more
proactive role and hence have a bigger say in the
changes and new alignment of the company’s
structure.”
Managing talent
Another area where human resources can help to
facilitate the potential new owners is to have an
existing talent bench or succession plan within
the company.
“If HR is able to show to them that the
company has the managerial talent, the new
owners could be persuaded to hire from within
rather than carry out an external recruitment
exercise,” says Bednarczuk.
In other words, it pays to focus on the positive
aspects of human capital creation rather than
just dwelling on the negative aspects of asset
stripping and cost savings.
Bednarczuk also points out that since
a buyout company tends to hold on to its
investment typically for at least five years, there
is a lot of potential for the human resource
division to fine-tune and grow the human capital
of the company and raise returns on investment
for both the owners and other stakeholders.
Based on his experience, he says that,
in some cases, the change of ownership can
PE firms typically look for strong linkages between
the financial performance of a company and the
executives’ remunerations and rewards
sometimes make it easier for the human resource
division to implement its value-enhancing
programs due to the less hierarchal nature of
private equity firms.
He adds that Hewitt’s experience has shown
that, in some cases, companies were able to
reduce organizational costs by 10 per cent, and
lower HR annual operational costs by some 20
to 30 per cent. When handled well, a company
that has been the subject of a buyout can achieve
at least a return of 20 per cent from the buyout
companies sought by PE funds, says Bednarczuk.
Anupam Prakash, the APAC leader for CTT
at Hewitt Associates, cautions PE firms to move
beyond intuition and historical track records to
assess the management and leadership qualities
in potential target companies. In the context of
most Asian countries, which until recently were
bound by regulations and licensing, the criteria
for success and hence leadership skills were
vastly different from what it is required today.
Formal management team assessments through
expert assistance enhances the probability of
success, especially in the backdrop of deals
getting bigger and involving higher stakes.
W W W . H E W I T T A S I A . C O M 15
18. 16 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
19. In an age of outsourcing where every
function of business is open to scrutiny
in terms of value, cost and efficiency,
the case for maintaining and developing
human resources in-house needs to be
made afresh.
There are no tablets of stone that say
HR talent, HR departments or HR functions
must remain in one particular framework
for all time. What is needed is a radical
assessment of what we mean by HR and
what we want it to be and to do. Only by
setting clear criteria is there a chance
of developing the Next Generation HR to
make it relevant and valuable to business
in the 21st century and beyond.
To lose HR as a distinct business
practice and to attempt to split its
functions into separate outsourced
activities would be to risk losing a body of
knowledge on organizational strategy and
development that has been built up over a
century. Protecting this body of knowledge
HRand professional ethics isn’t self-interest;
it’s common sense.
It can only happen, though, if a
convincing case for HR can be made
and sustained among the people who
ultimately pay the bills.
Issues for clients
Despite improving functional excellence,
HR costs are increasing six per cent each
year and HR sometimes struggles to
demonstrate its value to business.
It’s also clear that in some
organizations, the integration of HR
services across departments – known
as the shared services structure – is not
living up to its potential, with a particular
breakdown in the effectiveness of HR’s
role as a true ‘business partner’.
HR in some organizations has become
isolated from core activities so that it
appears to be a ‘Cinderella’ function with
little accountability. HR can then become
It’s time to boldly go where HR hasn’t always gone before
The Next Generation
W W W . H E W I T T A S I A . C O M 17
20. vulnerable to attack from voices within the
very organization it is designed to develop and
support.
This is often due to a tendency of HR in
some organizations to be passive and to focus
on administrative functions rather than being
a creative part of the business and putting
itself at the heart of the drive to add extra
value for stakeholders. HR’s role is complex,
though, because as well as being a team player,
it does sometimes have to stand back within
the organization and consider the ethical and
compliance issues at stake in a business decision,
and be prepared to be robust if it feels ethical or
legal boundaries are at risk of being crossed.
Vision for the future
As the business environment grows more global
and complex, the need for vision and leadership
on people and organizational issues is greater
than ever. The pressure is mounting, and all
eyes are on HR to see what happens next. Will
the function become a purely strategic business
partner as transactional work is outsourced?
Will it serve indefinitely as an administrative
back office? Or will it evolve into a patchwork
of various specialties ranging from coaching to
payroll administration to compliance training?
While there is no magic bullet, Hewitt
believes HR’s survival and success will depend
on the following four ‘bold bets’:
• serving as the research and development
function for human capital
• delivering a steady supply of needed talent
• driving organizational performance
• building integrity and trust in the workplace.
In terms of the talent issue, the tide of history
may be flowing in HR’s direction.
Demographic challenges
According to the United States’ Bureau of Labor
Statistics, organizations in the US will face
a major worker shortage by the year 2010,
when job openings are expected to outnumber
working age Americans by 10 million. This
shortage is expected to be especially acute
when it comes to highly skilled workers in
the 35 to 44 year-old ‘key leader’ age range.
As if that weren’t alarming enough, we’re on
the brink of a serious dearth in the number of
highly educated workers. In the last 20 years,
the increase in the share of workers with a
post-high school education was 19 per cent. In
the next 20 years, it is projected to grow merely
four per cent. The workforce of the future
is projected to be highly diverse as well. In
2000, 27.8 per cent of workers were Hispanic,
African-American or Asian. By 2025, that
number will be nearly 40 per cent.
Success in today’s labor market requires
organizations to manage a diverse and
changing portfolio of employment relationships
effectively, while simultaneously ensuring that
they retain and develop critical contributors
and potential future leaders.
Overview
The bold bets mentioned are overlapping and
reinforcing, providing a solid foundation for
adding organizational value and expanding the
influence of HR leaders. HR organizations that
passively accept their fate as administrative
service providers, allowing the forces of
outsourcing and cost cutting to overwhelm
them, will eventually become obsolete. The HR
of the future will be a hybrid, as the function
balances new demands with more familiar
areas of expertise. On one hand, strong
To determine where the HR profession is headed and what
the HR professional of the future ought to be doing, Hewitt
Associates conducted a comprehensive study on the future
of HR - its capabilities, structure, strategies, and value
proposition to the organization. We began with a detailed
review of the literature on the history, development and
future direction of the HR function. We then interviewed more
than 50 respected academics and HR executives – people
including management expert Peter Capelli, Dave Ulrich
from the University of Michigan, Jeff Pfeffer from Stanford
University, and Ed Lawler, Director of the Center for Effective
Organizations at the University of Southern California. We
also interviewed HR leaders including Dave Pace of Starbucks,
Dennis Donovan of The Home Depot, Matt Schulyer at Capital
One, and Randy MacDonald at IBM.
Seeking to identify key themes on the future of HR, we
asked this distinguished group not only about the state of talent
in the global market, but also about key challenges facing
About Hewitt’s Research
18 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
21. evidence and analytics – rather than gut instinct
– will be necessary to determine future talent
needs and organizational performance drivers.
In contrast to this call for hard data, restoring
trust and integrity in the workplace – more
typical of HR’s ‘soft side’- will continue to be
vitally important in today’s post-Enron business
world, with market research suggesting trust
in business leadership is at the lowest point
in decades. Without this trust and an engaged
workforce, the organizational performance
needed for sustained business growth will be
impossible to achieve. Real, sustained change
requires a clear vision for transforming HR,
selling that vision to the business and HR
staff, providing the necessary resources for
implementation, giving strong attention to
change management, and putting a plan in
place to ensure that HR professionals have the
skills needed to operate in the new environment.
Next Generation HR – the door to
the future
For HR to maintain a business leadership
role, Hewitt believes it will need to tackle and
provide solutions for the following issues:
Talent Supply – workforce planning, sourcing,
selection, employee introduction (known as
onboarding) and first year performance
Next Generation HR model
From the research, Hewitt has developed what we call the
Next Generation HR model.
Hewitt has successfully tested it with over 50 companies
globally and has started projects in HR strategy and process
improvement with organizations including MetLife, Southern
Company, Intuit and Levi Strauss.
Next Generation HR is Hewitt’s contribution to HR’s
evolution and provides leadership in thinking about this
important topic.
Several companies have already implemented elements of
the model in discrete areas such as the Talent Supply Chain
and High Performance Workforce issues. Readers interested
in more information on the Next Generation HR model can
contact our Talent and Organization Consulting (TOC) team
members in their local markets.
High Performance – High achievement
goal setting, reviews and rewards, and skill
development
Leadership and Key Talent – Succession
planning, assessment, development, and
executive and key talent rewards
Employment Relationship – Employment
branding, benefits, engagement, and career
development
HR Transformation – Based on the Next
Generation HR model redesigning the HR
organization and processes
HR Strategy and Measurement – Developing
a HR strategy and plan and creating business
outcome measures leveraging on data and
analysis
Assessment – assessing how well the
processes, practices and HR organization
supports the desired business outcomes.
Next Generation HR involves maintaining
leadership in thought on organizational
development. It means providing
organizational benefits that are clearly seen
to outweigh HR costs, and, above all, it
means adding value for stakeholders, but in a
responsible way that protects the ethical and
legal position of the organization.
If HR rises to these challenges, then the
future of the Next Generation can be secured.
the function, what business leaders really need from HR, and
the kinds of innovations they see in leading organizations.
A number of big ideas emerged from these conversations,
suggesting new trends in the evolution of the HR function.
What’s more, our research provides a glimpse into the
future by zeroing in on innovations being applied in leading-
edge organizations today.
The final phase of this research included detailed case
studies of leading organizations identified during the first
phases of our research. These include The Home Depot,
Capital One, IBM, Starbucks, Timberland, GenWorth Financial,
Procter & Gamble, GE and Pepsi. We spent a day or more
at each of these top companies, conducting site visits and
talking to HR executives and business leaders. What they told
us serve as examples of how real leading edge companies are
rising to the challenge.
As the business environment grows more global and
complex, the need for vision and leadership on people and
organizational issues is greater than ever. The pressure is
mounting, and all eyes are on HR to see what happens next.
W W W . H E W I T T A S I A . C O M 19
22. ailing to get the best out of your people in a merger
situation is a short cut to destroying much of the value
the merger was designed to create in the first place.
But how do you blend together teams of people
coming from what may previously have been market
rivals and get the best out of them? And how do
you achieve that when not all of them can have the job they
might want in the new organization – even if all have been
guaranteed a role of some sort?
This was the challenge facing Hewitt Associates when they
were asked to act as consultants on one of the biggest ever
mergers in the Asia Pacific region.
The new alliance involved the merger of three large
corporations from a country that is a prominent member of
the economic and political bloc known as the Association of
Southeast Asian Nations (ASEAN).
The newly formed business, with Hewitt’s help, faced the
Merger
in MindWinning friends and adding
value when competitors
become allies
challenge of making more than 100,000 employees feel good
enough to remain productive, while at the same time securing
shareholder value for the new business. Only by maintaining
the support and confidence of all the stakeholders could the
value-adding rationale for the merger be maintained, and an
efficient new company built from the ground up.
The building process meant basic issues, such as
business objectives and organizational structures, had to
be established before talent identification and selection for
key roles could begin. It created an extremely high-pressure
situation because studies show the more drawn out the
integration process during a merger, the greater the risk of
eroding value.
“It caused a lot of intensive work, calling on the
cooperation of many client contacts as well as our internal
team. In effect, we had to conduct a very rapid cascade of
organizational design and leadership mapping,” explains Alan
F
20 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
23. Parker, Hewitt’s Project Director for the merger project.
To direct such a high-pressure integration process, the
new business set up a merger integration office (MIO).
Through this structure, parallel teams from Hewitt and
the fledgling business looked at each aspect of the business.
The parallel structures had cross-reporting systems. This
gave Hewitt space to do fresh thinking on each issue, but
enough direct involvement in the process to cooperate
with and advise the various in-house change leaders and
the management teams, and to respond to their needs and
experiences at ground level within the business.
“The whole project involved dealing with a lot of
stakeholders who were under a lot of pressure – maintaining
their current roles while, at the same time, trying to manage
the integration of the three organizations. These were people
who were trying to run two jobs at once and you’ve got to take
even more of their time to talk about people aspects,” says
Persis Mathias, Hewitt’s Project Manager for the assignment.
This is where effective stakeholder management – the
personal, human aspect to a big merger – is vital. HR
consultants need to show sensitivity and common sense in
gaining the trust of stakeholders, listening carefully to what
they say in the precious time the consultants have with them,
and making it clear the consultants are acting as honest
brokers on behalf of all the merger partners and all the people
involved. Hewitt’s ability to leave stakeholders satisfied and
not frowning at the end of meetings was vital in driving
forward such a complex, intense project.
Once the organizational design and leadership roles were
established, the process of placing people into leadership
roles – known during the assignment as Leadership Mapping
– could begin.
In any merger, two of the most pressing needs are to
appoint new leadership for the new business swiftly in a
way that focuses on the right fit, and to ensure good and
timely communication about the changes within the new
organization.
“The faster you can get people focused on productivity
and customers, the better chance you have of achieving the
revenue and cost synergies,” says Parker.
“If your people cannot fit into the new integrated
culture, you’ll have a tough time creating value. And the HR
integration will fail if your people are not engaged with the
new programs,” he adds.
Without these elements, a business can lose focus, and
employee morale and engagement can suffer, resulting in an
increased turnover of people and a further loss of business
momentum.
Yet, a recent study from Hewitt on M&A activity in the Asia
Pacific region shows many businesses are still not addressing
these issues during the key early stages of M&A.
The study suggested only just over 50 per cent of the
companies involved actually bother measuring employee
engagement before, during and after the M&A process.
Hewitt’s use of formal leadership mapping methodologies
was invaluable in maintaining employee engagement because
the process was seen to be objective and not influenced by
any pre-existing relationships within the partner companies.
Well-marshaled formal mapping was also vital given the
sheer numbers of people who had to be evaluated.
“Leadership mapping was a huge task, and it had to
be done at a hectic pace,” says Susan Gleave, a chartered
organizational psychologist and the Head of Hewitt
Leadership Consulting in the ASEAN country concerned.
Candidates were asked to attend a center where a
variety of leadership profiling tests, including psychometric
personality profiling, were used.
Currently, few acquiring organizations are using the sort
of comprehensive tools and processes for leadership mapping
employed by Hewitt on this particular project. Most are
relying on traditional methods, such as personal interviews
with incumbents, CV reviews, and past performance reviews.
The difficulty with this is that it may result in the wrong
people being appointed to senior positions. Getting the
HR Factors Affecting M&A Success Contribute to Success Detract from Success
% %
HR policies and practices 49% –
Communications or their lack 42% 29%
Compensation design/administration 36% 38%
Parent culture, cultural issues – 34%
Staff and staffing issues 28% 26%
HR programs, plans 14% 14%
Training and development 14% –
Venture culture 12% 10%
Resources availability – 10%
W W W . H E W I T T A S I A . C O M 21
24. leadership issue right from the outset in an Asian M&A
situation is particularly important because, in a heated
mergers market experiencing a talent squeeze, it cannot be
assumed that the right leadership candidates will be available
via internal appointments alone.
“With this project, we not only had to identify a large
number of leadership candidates. We also had to think
carefully about the best mix of roles mapping, as all
candidates were assured of being offered some role in the
organization,” says Gleave.
“The new business had made a commitment that no one
would be without a job. Everybody among the 100,000-plus
people was guaranteed they could continue in employment if
they so wished.”
Senior leaders were identified first and then announced
publicly, with other leadership roles identified and disclosed
on a cascading basis down through the organization.
“It was a very unusual and demanding situation,” explains
Gleave.
“We all had to come out of it with people knowing that this
was a rigorous process and feeling by and large that this was
a good and fair result.”
Another vital element in creating a feeling that this was
a merger conducted with integrity was meshing the different
reward and benefit systems of the three partners together so
that all the stakeholders felt they were being treated fairly.
“We had to do it in a way that not only worked, but that
avoided blowing the cost line out of the water. Failure to deal
with this effectively and fairly would have seriously eroded
value for the new venture,” says Mathias.
“Our experience in reward and benefit consulting,
including the efficient use of tried and tested tools and
methodologies, enabled us to come up with a competitive
and performance focused rewards system, including a flexible
benefits program, that effectively balances and satisfies the
various stakeholder needs.”
Parker adds, “When dealing with a project on this scale,
formal and effective tools are essential for success.
“Yes, you have to think creatively, and yes, you have to
manage stakeholder concerns sensitively on a human level.
But a major merger such as this requires a great deal of
integrated effort, and that requires organizational excellence
on the part of the consultants.
“The amount of work that has to be done in relation to
people from one end of the spectrum to the other, concurrently
and at a high pace, means that experience, along with
excellence in formal tools and processes, is vital. If the
consultants don’t have that excellence, it can lead to lost
opportunities that consulting talent alone can’t rectify.”
The authors can be reached at: alan.parker@hewitt.com,
persis.mathias@hewitt.com, susan.gleave@hewitt.com
Organization &
People Scan
Leadership
Assessment
Leadership
Selection
Organizational
Structure
Key Role
Identification
Leadership
Competencies
Key Role
Profiles
Transition Roles
Employee
Utilization Program
Key Role
KPIs
Manning
Levels
High-level
Business Strategy
Transition Plan
Detailed
Implementation Plan
Retention Incentives
Organization and People Scan
Organization Structure, Leadership and
Manning, including Employee Utilization
HR Strategy and its outcomes – Values,
Culture and HR Organization
Rewards, including Compensation & Benefits
and Retention Incentives
Transition and Implementation Planning
Communication and Change Management
High-level HR Strategy
Retention Strategy
Culture Ingredients
HR Organization Group
Alignment Values
Communication&ChangeManagement
Harmonized Pay
and Benefits
Programs
Overview Chart
22 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
25. country focus
HR issues are of growing importance in the Middle
East as economies founded on petro-dollars
restructure and localize their traditionally
expatriate-heavy work forces. Some countries are
becoming financial service centers, holiday and
medical tourism destinations, and trading and
shopping hot spots in readiness for when the oil
and gas finally run out.
This development is particularly noticeable in
the Gulf Cooperation Council (GCC) states – namely
Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and
the United Arab Emirates.
In the past, HR here mainly involved relocation
planning for foreign workers and deciding on what
currency to pay their tax-free salaries, but those
days have long gone.
Although the fundamentals of the regional
economy are still strongly supported by oil, those
countries that never had much in the first place
– such as Bahrain, the UAE and Qatar – are leading
the race to attract appropriate talent for their high
growth industries.
The challenge is that Middle East markets do
not yet have all the structures in place to feed
sufficient local talent into the talent supply line. The
good news is that, in the Gulf, they do have plenty
of financial resources to build the structures
quickly.
FOOT ON THE GAS
Managing Human
Resources in the
Middle East
W W W . H E W I T T A S I A . C O M 23
26. Jobs in many sectors
are no longer open
to expatriates
Oman: The number of
expatriates in the private
sector fell by about
24 per cent between
2003 and 2005.
Saudi Arabia decided
in 2003 that its foreign
workforce would be
reduced by more than half
in 10 years.
As part of its “cultural
diversity policy,” the United
Arab Emirates announced
a reduction in Asian visas
starting in 2003.
In 2006, GCC ministers
of labor and social affairs
recommended a maximum
six-year uninterrupted legal
stay, tougher recruitment
conditions, deporting surplus
expatriate workers, and
making renewal of residence
permits more difficult
Vivek Chachra, Hewitt’s Consulting Business
Manager for the Middle East, says, “In the GCC
countries, there is a growing focus towards
the establishment of educational institutions,
specialized universities and training schools to
develop and promote key skills and expertise, hence
the need in identifying and developing capability at
school and college levels.”
This process is part of a policy known locally
as ‘nationalization’, which shouldn’t be confused
with the same term once used in Europe for state
ownership of key industries. What it signifies is
‘localization’ – replacing brought-in foreign talent
with homegrown talent wherever possible. Qatar,
for example, is reinventing itself as an educational
center with a collection of well-equipped
colleges called Education City and a science and
technology park.
Dubai, the best known of the seven Emirates,
recently opened a stock exchange to complement
its already thriving luxury resort industry. These
sectors will need plenty of local talent as well as
foreign experts if they are to compete successfully
with other markets in the long term.
A high growth region
The size of the GCC economies has grown by 74 per
cent to approximately US$610 billion, with Gulf GDP
growth far out-pacing world average GDP growth
since 2002 according to research by the Kuwait
Finance House in 2007. Real GDP increased by a
regional average of 6.3 per cent in 2006, the best
performance in more than 10 years. High oil prices
boosted regional liquidity, which in turn fuelled a
boom in the local stock and real estate markets.
Economic liberalization in some countries has led to
privatization of key industries, further fuelling growth.
“The growth seen in the key Asian markets,
especially India and China, is likely to be seen here
too,” observes Debabrat Mishra, Hewitt Associates’
Business Leader for Consulting.
“We are not yet sure though how different it will
be for businesses in the Middle East to move on this
growth curve, given that in the Gulf in particular
there are companies that are flushed with funds and
are therefore in a position to invest much more in
organizational systems and capability development.”
Growing significance of HR
In this macroeconomic climate, HR has moved
from a background support function to a front line
strategic role. It supports business transformation,
including the re-engineering of processes and
strategies. Progressive organizations – whether
locally based or from outside the region – find HR
even more important as the region’s economies
compete with each other in overlapping sectors
such as financial services and tourism and with
other emerging markets such as India.
Real GDP Growth
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Qatar Kuwait UAE Oman Bahrain Saudi
Arabia
7.9%
7.3%
6.4%
6% 5.6% 5.4%
% Increase in Salary
12%
10%
8%
6%
4%
2%
0%
Oman Bahrain Saudi Kuwait UAE Qatar
5.6%
6.4% 6.5%
8%
10.3%
11.1%
Expatriates as % of Total Workforce
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Oman Saudi Bahrain Kuwait Qatar UAE
Arabia
33%
47%
59%
81%
89% 90%
Unemployment Amongst Nationals
16%
4%
8%
4%
0%
UAE Qatar Kuwait Bahrain GCC Saudi Oman
Average Arabia
Source: gulftalent.com
Source: gulftalent.com
24 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
27. country focus
Focus on “localization” in changing the
talent pool and mix
The GCC countries remain major recruiters of
outside labor and talent. In Qatar and the UAE,
almost 90 per cent of the population is made
up of expatriates, though many are low wage
workers from lesser-developed Asian or Middle
Eastern countries employed in sectors such as
construction and domestic service. Mid-level
managers and technicians are often expatriates
from India, Pakistan or Sri Lanka. At the high end
of the labor market, senior managers with regional
responsibilities are often recruited from the
European Union (particularly the United Kingdom,
France and Germany) and from North America.
In the last five to six years, though,
unemployment levels among the indigenous
population have reached unprecedented levels,
encouraging governments to adopt localization
wherever possible. Many companies now have
policies stating that the number of expatriate
employees should not rise above a certain level.
At the moment, expatriates make up an average
of 65 to 70 per cent of the entire workforce in the
GCC countries.
Under the localization policy, the target is to
reduce that average to 50 per cent, which will put
a major squeeze on the local talent pool.
The right talent, at the right price
Employee retention is an inherent problem in
the Gulf countries because of the high number
of expatriate workers. Most of these foreigners
view their stay as a temporary posting of three
to five years rather than as a permanent career
move. Employers will have a difficult balancing
act between encouraging the right expatriates to
stay (e.g., ones with the skills necessary to build an
advanced economy) and developing sufficient local
talent.
In the short term, the retention of key
expatriates in particular may require additional
spending on pay and conditions packages.
Growth in compensation levels and people
costs
The fact that demand for labor has outstripped
supply has created pay inflation in some sectors
– especially those that rely heavily on local talent
such as the tourism industry. Other inflationary
pressures associated with fast economic growth
are also present. In the UAE, housing costs have
shot up. In spite of government intervention and
new property coming on to the market, the much-
anticipated cool-down is yet to happen. Qatar
experienced a surge in rent prices between 2004
and 2006, partly influenced by the Asian Games.
Prices have still not come down, despite houses in
the former Games Village coming on to the market.
One of the traditional attractions of the
region for expatriates was that their net income
was significantly higher than at home, thanks
to excellent salary packages, low or zero tax
rates in the Gulf countries, and a relatively low
cost of living. These pull factors are no longer so
Increasing unemployment means Gulf
governments now encourage local recruitment
% Increase in Salary
% Change in HR Costs /
% Change in Operating Expenses
12%
10%
8%
6%
4%
2%
0%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0%
Oman Bahrain Saudi Kuwait UAE Qatar
Arabia
5.6%
6.4% 6.5%
8%
10.3%
11.1%
Expatriates as % of Total Workforce
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Oman Saudi Bahrain Kuwait Qatar UAE
Arabia
33%
47%
59%
81%
89% 90%
Unemployment Amongst Nationals
16%
4%
8%
4%
0%
UAE Qatar Kuwait Bahrain GCC Saudi Oman
Average Arabia
0.57%
0.66%
0.86%
1.08%
2003 2004 2005 2006
Source: gulftalent.com
Source: gulftalent.com
% Increase in Salary
% Change in HR Costs /
% Change in Operating Expenses
12%
10%
8%
6%
4%
2%
0%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0%
Oman Bahrain Saudi Kuwait UAE Qatar
Arabia
5.6%
6.4% 6.5%
8%
10.3%
11.1%
Unemployment Amongst Nationals
16%
4%
8%
4%
0%
UAE Qatar Kuwait Bahrain GCC Saudi Oman
Average Arabia
0.57%
0.66%
0.86%
1.08%
2003 2004 2005 2006
Year
Pay increase
only because
of localization
1.5D Predicted dema
S
Pay
Pf
Pi
Source: gulftalent.com
Source: Hewitt internal database
Employee retention is an inherent
problem in the Gulf countries because of
the high number of expatriate workers
W W W . H E W I T T A S I A . C O M 25
28. ‘We are unable to get talent from the
Indian subcontinent due to the tightening
of visas, and also due to the higher
salaries they now demand, given the
boom in the Indian economy. We are now
forced to search for alternate locations
like Nepal, Egypt and the Philippines to
acquire talent within our cost budget.’
Head of HR, local bank in Qatar
% Increase in Salary
% Change in HR Costs /
% Change in Operating Expenses
12%
10%
8%
6%
4%
2%
0%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0%
Oman Bahrain Saudi Kuwait UAE Qatar
Arabia
5.6%
6.4% 6.5%
8%
10.3%
11.1%
0.57%
0.66%
0.86%
1.08%
2003 2004 2005 2006
Year
Pay increase
only because
of localization
D
Pay
Pf
Pi
Local labour market
Engagement Drivers in Middle Ea
Source: gulftalent.com
Source: Hewitt internal database
important. Continued weakening of the US dollar
against many currencies has led to a steep decline
in real income and purchasing power for many
expatriates. Companies are forced to pay higher
packages to employees to make them stay. In the
past two to three years, other emerging economies
such as India have become more attractive to the
same talent pool.
The political and military crises in parts of the
Middle East have also had some impact, especially
on western expatriates. As a result, employers are
forced to spend more on salaries, often including a
‘hardship premium’ to attract key talent.
Personnel costs have been rising steadily over
the last few years and the challenge has been
to justify those extra costs by creating stronger
business growth. An analysis of 15 companies
across varied sectors in the Middle East region also
suggests HR costs have been growing much faster
than operating expenses. The ratio between the
percentage rise in HR costs and that of operating
expenses has increased from 0.57 in 2003 to 1.08
in 2006.
Until the local talent supply increases,
highly skilled foreigners are likely to continue
commanding high salaries. In the short term,
localization has even fuelled a rise in local salaries
to match those traditionally paid to expatriates.
In order to mitigate these human capital costs,
employers will need to build engagement among
employees and improve retention rates among this
precious resource.
Evolution of leadership and HR programs to
drive employee engagement
Employee engagement scores calculated by Hewitt
Associates across companies in the Middle East (in
this case Qatar, Saudi Arabia, Jordan, the UAE, and
Kuwait) averaged only 47 per cent – substantially
% Increase in Salary
% Change in HR Costs /
% Change in Operating Expenses
12%
10%
8%
6%
4%
2%
0%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0%
Oman Bahrain Saudi Kuwait UAE Qatar
Arabia
5.6%
6.4% 6.5%
8%
10.3%
11.1%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Oman Saudi Bahrain Kuwait Qatar UAE
Arabia
33%
47%
59%
81%
89% 90%
Unemployment Amongst Nationals
16%
4%
8%
4%
0%
UAE Qatar Kuwait Bahrain GCC Saudi Oman
Average Arabia
0.57%
0.66%
0.86%
1.08%
2003 2004 2005 2006
Year
Source: gulftalent.com
Source: gulftalent.com
Source: Hewitt internal database
26 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
29. country focus
below the Asia-Pacific average of 56 per cent
and the global average of 58 per cent.
“In the Middle East, the concepts of Best
Employer or ‘employer of choice’ are relatively
new. HR’s focus is to help organizations develop
their people management capabilities to the
best global standards quickly,” says Mishra.
Family-run conglomerates as well as
foreign companies are realizing the power
and relevance of strategic HR interventions in
improving engagement and retention, showing
increased willingness to develop and execute
effective HR policies to ensure talent supply
issues don’t jeopardize long-term growth.
2003 2004 2005 2006
Year
Pay increase
only because
of localization
1.5D Predicted demand
post localization policy
D Current demand
S
Pay
Pf
Pi
Local labour market
Senior Leadership
People Practices
Learning and Development
Resources
Policies and Practices
0% 10% 20% 30% 40% 50% 60%
Scores
Engagement Drivers in Middle East
Source: Hewitt internal database
Source: Hewitt internal database
Until the local
talent supply
increases,
highly skilled
foreigners are
likely to continue
commanding
high salaries
The authors can be reached at:
d2mishra@hewitt.com,
vivek.chachra@hewitt.com
Rising to the challenge
The GCC countries in particular have
tremendous potential to redefine their roles
in readiness for the day when oil and gas are
no longer the pillars of the regional economy.
The area will need to change, though, from a
buyers’ market into a growers’ market as far as
talent is concerned.
“All elements of HR will need to play a part
in this growth story,” Chachra sums up with
conviction. “Operational excellence will be as
critical as people management if the Middle
East is to have both sustainable development
and sustainable success.”
W W W . H E W I T T A S I A . C O M 27
31. country focus
As China’s economy matures, foreign and
domestic companies are increasingly seeking
new business opportunities in second and
third tier cities, where markets are less
saturated and start-up costs are lower.
That often means organizations have
to relocate talented, experienced workers
away from first tier cities such as Shanghai
and Beijing. This is vital in order to maintain
continuity of service and product standards
in the new cities, and is a particular focus
for international brands with hard-won
reputations as market leaders.
Before successful relocation of existing
talent can be achieved though, there are
important cultural issues to be understood
and challenges to be addressed, explains
Ryan Metz, Regional Manager, Hewitt Global
Mobility Services for Asia.
Without a clear insight into these hurdles,
foreign businesses in particular may find it
hard to persuade Chinese employees to move
thin China
W W W . H E W I T T A S I A . C O M 29
32. to developing cities with lower living standards.
Although it’s common across cultures for
employees to take on a difficult posting in
exchange for a promotion or pay rise, Chinese
people often face culturally related personal
conflicts when deciding whether to move. Aging
parents may rely on the relocation candidate
for support. The importance of such social
obligations is ingrained in Chinese culture
through Confucian values. Workers in the public
sector may also face formal sanctions from the
state if they neglect their filial duties.
Against this background, it’s vital to make
a clear and unambiguous offer to employees,
setting out how their career will benefit from
such relocation, and offering them some
flexibility, where possible, regarding the care of
dependents.
Career Path – Daisy You, Compensation &
Benefits Manager for Rockwell China, says:
“We offer a salary and benefits increase
in the relocation package, but this is not
the only factor for our employees. The line
manager discusses career development with
the employee, shares how the experience
will benefit the employee professionally, and
explains how the host city offers exciting
business and development challenges.”
She stresses Chinese employees see moving
from first tier cities to developing cities as a
personal sacrifice on behalf of the company and
expect to be rewarded with a clear career path
and future advancement. They expect to return
to their home city in a relatively short period of
time, adds You.
“Our [domestic] ‘assignments’ are usually
for two to three years. These assignments
and relocation packages are reevaluated and
renewed annually.”
Family – The teachings of the Chinese
philosopher Confucius have shaped Chinese
culture, emphasizing, among other things, the
need for respect toward parents and elders. The
recent opening of China’s economy and society
to outsiders – after centuries of isolation and
the turbulent events of the 20th century – have
put these cultural values under pressure. They
still weigh heavily though in many Chinese
homes. Jensen Leung, International Mobility
Team Leader for BP North Asia, says the one-
child policy in China often means there is only
one person to take responsibility for looking
after elderly parents.
“We as a company are reviewing parental
care and other family concerns in order to
attract more assignees to go on assignment.”
The government has also been reinforcing
these traditional obligations through policy.
Government employees are officially required
to support elderly relatives. Punishments can
be imposed on officials “that fail in their filial
duties”, according to a report in China People’s
Daily this April. Given the huge number of
elderly in China, it may only be a matter of
time before the government gives guidance to
private companies on employees’ care of aging
parents.
When a husband and wife both have
careers, it may be harder to get the family to
relocate. “Many trailing spouses are unwilling
to put their careers on hold in China. Many
spouses will choose to remain in the home city
to continue their career while their partner
goes on assignment,” says Leung. Where
families face separation because of relocation,
companies need to consider granting
sufficient home leave for employees to fulfill
their responsibilities to parents, spouses and
children, he adds.
33. country focus
Paperwork – The Chinese national identity
system, known as ‘hukou’, was implemented
after 1949 to prevent the rural population from
flooding into the relatively affluent cities. Today
the system has largely broken down with the
development of the market economy, as cheap
labor from the countryside was needed to
build the gleaming towers now seen in Chinese
cities. Most of these urban centers have a large
number of migrant or undocumented workers.
Professional workers relocating need to address
hukou issues through official channels. While
the system is less rigid then it once was, it still
creates challenges. In order to gain access
to government services in the host city, such
as school enrollment for children, relocating
employees must first obtain a temporary
residency permit. However, each municipality
in China creates its own guidelines regarding
applications for these permits. This makes it
vital to have local HR support or help from a
professional relocation agent with knowledge
of the local rules. Some rules common in all
jurisdictions include the need for a bachelor’s
or higher degree, documentation outlining
the employee’s specialized skills and a work
contract with a local employer. Normally, the
local employer must have a specified amount
of registered capital. Companies need clear
policies and effective strategies for dealing
with these bureaucratic issues. This speeds
up processing times and reduces the stress of
relocation by reassuring employees that their
families will be able to get access to essential
services.
Schooling – One of the biggest challenges
when relocating employees within China is
finding good quality schools for their children. A
successful application to the local government
for a temporary residency permit does, in
theory, allow access to local schools, but in
practice does not guarantee a place. Leung
says his company’s experience is that the
best schools often have limited space. The
application process may also be complex and
lacking transparency. Some schools ask for very
high fees – often referred to as ‘sponsorship
fees’ in order to enroll new students.
“The various fees for school enrollment
are a challenge but we typically will pay these
for our employees, even if they are quite
expensive,” adds Leung. “Some of these fees
can raise questions of compliance as they are
often undocumented by the schools, but the
priority for us is getting employee’s children
into good schools. In the end, the education for
an employee’s children can’t be compromised.”
Regions Count – Because of China’s size
and diversity, relocating employees may find
themselves in an area where they are unfamiliar
with the local language dialect and even
the food. Such issues can provide additional
barriers to relocation and may require
reassurance and support from HR teams.
Keys to Success – As foreign and domestic
companies expand their operations in China,
there is likely to be a growing emphasis on
talent retention. Development of comprehensive
domestic relocation policies to maintain
employee engagement will become increasingly
important. “The key to relocating is
communicating with the employee and setting
the right expectations,” says Leung.
Companies that make employee relocation
within China attractive and comfortable are likely
to be the most successful in their expansion to
China’s vast and still untapped markets.
China Domestic Relocation Quick Facts
While 98% of companies agree employee relocations within
China are due to business needs, only 36% acknowledge
domestic relocations are a means of career development.
Around 60% of companies in China have a defined domestic
relocation policy.
Most domestic re-assignments last from one to three years.
More than 60% of companies prefer a lump sum approach to
relocation expenses, offering the assignee a one-time allowance
to handle relocation costs.
Hardship payments are often given to employees relocating
from first tier cities to developing cities.
Around 40% of companies provide housing assistance to
relocating staff.
Nearly 15% of companies provide family accompaniment
assistance – typically a cash allowance so that relocating
employees can bring dependents with them.
The author can be reached at:
ryan.metz@hewitt.com
W W W . H E W I T T A S I A . C O M 31
34. 32 H E W I T T Q U A R T E R L Y ~ V O L U M E 5 / I S S U E 3
Inside Hewitt
A S I A P A C I F I C
Hewitt Announces Consulting Leadership Moves in India and China
Smita Anand has been appointed Market Leader for Hewitt Consulting in China. She
previously led the company’s consulting services in India, South Asia and the Middle
East. In the last two years, she transformed the Indian operation, making Hewitt the
leading company in human resource consulting in that market. Smita has two decades
of experience in senior HR consulting roles, organization change strategy, training,
industrial relations, and human resource management. She joined Hewitt in 2002 from
PricewaterhouseCoopers, where she headed Human Capital Services. She has also worked
for Ernst & Young in Mumbai.
She leaves in place an excellent leadership team to manage the strong portfolio of
clients there. Eric Fiedler, Regional Director, Asia-Pacific, will assist Smita in ensuring a
smooth leadership transition.
Country Leads for Hewitt South East Asia
Hewitt South East Asia is restructuring its leadership to meet market demand. Singapore,
Malaysia and Thailand are to have dedicated Country Leads, with Kulshaan Singh,
Christian Doeringer and Ian Till, respectively, taking on the roles through internal
succession planning. Each has at least 10 years’ experience in consulting and dealing
with senior executives. They will report to Alan Parker, the newly appointed South East
Asia Market Manager who has worked in HR consultancy for more than 30 years.
“Hewitt has been privileged to work in this market for 20 years. It’s still growing and
so are our clients’ businesses,” says Alan Parker. “Because of this growth, we needed
to make sure our operational efficiency and momentum in content development were
maintained. The new team understands the market and is well placed to help us take
Hewitt South East Asia further in terms of both content development and HR support for
our local and regional clients.”
The three Country Leads will each have their own operational teams, covering content
and other local market issues. Key positions covering Rewards, Talent and Leadership
advice have also been reorganized.
Indraneel Roy appointed as Global Practice Leader
Indraneel Roy has been appointed as the Global Practice Leader for the Leadership
Consulting business. Indraneel has been a Hewitt consultant for the last nine years
and has worked in a variety of roles in the company. His expertise includes Leadership
Development, Executive Compensation, Organization Design, and Talent Management.
Most recently, he was the Market Manager for Hewitt in South East Asia, and he will
continue to be based in Singapore.
New Regional Marketing and PR Leader Appointed
David Clarke has been appointed Hewitt’s Regional Marketing and PR leader based in
the Hong Kong office. One of his responsibilities is editing the HewittQuarterly magazine,
and he will be listening carefully to readers’ opinions. He says: “One of my priorities is to
reviewourHQreadershipsurveyresultstoensurethatcontentsaretimely,informativeand
helpful as clients seek to manage key business issues in the region. I’ll also be working
to further refine and implement HA’s regional marketing strategy.”
36. You’ll love the difference
The Hewitt Academy for Strategic HR was established with the
sole purpose of developing outstanding HR professionals. Our
dynamic approach to learning builds the right combination of
business, HR and personal effectiveness capabilities to deliver
measurable results for both the business and employees.
For more information please email hewittacademy@hewitt.com
