Digital technologies are creating a capability crisis as skills requirements rapidly change. Previous crises in mining and oil industries show that tying wages too closely to short-term demand led to unsustainable costs when prices dropped. The digital skills shortage risks a similar crisis if wages are not managed carefully. New employment models are needed to better align dynamic capability needs with supply to avoid overpaying for redundant skills.

1. Is digital
creating a
workforce
capability
crisis?

2. In a world of uncertainty,
organizations need to change
rapidly – and you need your
people to be agile and adaptable
to that change. At the same
time, it is getting harder to
source, manage, motivate and
retain talent while controlling
costs. Leaders need to adapt to
the changing market conditions.

3. 1Avoiding the Digital Capability Crisis |
In recent years, organizations in the mining and oil
industries have precipitated a capability crisis by
over paying and over investing in selective skill sets
based on demand. Talent was secured at an
expensive rate and locked in with a short-term focus
on the assumption of ever increasing commodity
prices. Disastrously, due to capability constraints,
wage increases were locked into long after
commodity prices began to fall. Companies were left
with large and expensive workforces in a changing
economic landscape, putting their financial viability
at risk.
As we see new demand for digital capability
exponentially escalate, organizations across many
industries are in danger of falling into the same trap.
Shortages in critical digital skills sets could see
digital and technology specialists commanding
rising salaries. Even though global capability will be
leveraged to combat this, there’s a real danger that
wage inflation will build in certain digital skill areas.
Certainly, companies are at risk of being locked into
traditional salaries and payment structures well
above market rates, as global talent comes in and
wages undergo a correction.
To avoid this, organizations need a new
employment and engagement models that takes a
different approach to matching current capability
with a strategic plan and the future capability
requirements. Otherwise, we are likely to see a
repeat of the capability crises in mining and oil,
with organizations finding themselves over paying
for skills that quickly become redundant.
This paper explores previous and current capability
crises in vertical industries before examining the
evidence pointing to a rising digital capability crisis
across almost every sector. Finally, it looks at a new
employment model that will help organizations to
better align capability supply and demand as they
start hiring to complete in the digital economy.
The war for talent never ceases as organizations
seek to build new elements of competitive
advantage. However, the real battle – played out
every day – is to understand how to attract and
retain the right future and current capability at an
affordable price.
We hope this paper offers new insights that will
help executives win this battle.
Darren Gibson
Global Advisory People and Organisational Change Leader
Foreword

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Oct-1995 Apr-2001 Oct-2006 Apr-2012 Sep-2017
Averageweeklytotalearnings/person
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Chart 1
Australian Mining Industry: Wage Growth vs Commodity Prices
2 | Avoiding the digital capability crisis
1 International Labour Organisation, Global Wage Database
2 Australian Bureau of Statistics, Employee Earnings and Hours Report, 2012
Learning from the lessons of the past
iron ore prices. The failure of mining companies to forecast this
cost issue and thus control wage acceleration has brought their
commercial viability into question. There has also been a lack of
design around new engagement models that could be used to
control or manage the cost.
At issue is the likely continued decline in iron ore prices due to
reduced demand from China and the untenable position of
employers locked into a long-term wage pricing that is no longer
affordable. There is also an unwillingness to confront industrial
relations, employee relations and change issues. Even
redundancies are unlikely to be a viable way out of the current
dilemma due to the impact of large scale termination payments
and impacts on cash flow.
Wage inflation out of control in mining
Between 2007 and 2013, Australian wages rose more than in
any developed G20 nation.1 Average wages were particularly
boosted by unprecedented wage acceleration in the mining
sector, where short labor supply and rising commodity prices
led to extraordinary rates of compensation and overall
employment costs. In May 2012, the mining industry was
paying the highest wages in the country, with average take
home earnings sitting at close to AU$2,390 per week2, nearly
four times the lowest weekly full time employment earnings
recorded in the country.
Then, after 15 years of exceptional growth rates peaking at
US$190 per tonne, iron ore commodity prices finally began to
fall. But wages did not experience a similar contraction (see
Chart 1). In the last four years, wages have been reduced to
minimal growth, but they have not fallen to match the decline in

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Chart 2
Australian Mining Industry: Wage Growth vs Commodity Prices Averageweeklytotalearnings/person
CommodityPrice
3Avoiding the Digital Capability Crisis |
3 Wall Street Journal, Oil Jobs Squeezed as Prices Plummet, 28 December 2014
4 Digital Australia: State of the Nation, EY Sweeney, 2014 https://digitalaustralia.ey.com/
Oil industry now showing similar trends
History is now repeating itself in the oil industry, which is about
to find itself in the same situation, as the price of oil has almost
halved over the last six months (see Chart 2).
In the US, from the end of the June 2009 recession to October
2014, employment jumped by almost 50% in sectors most
closely related to oil and gas extraction. This compares with a
7% gain across all job sectors.3 Wages in such industries also
saw a marked increase. For example, average earnings for
workers in oil and gas extraction climbed nearly 23% compared
with a 13% increase for all US workers.
As the US oil industry tries to get wages back under control,
many companies may find themselves in the same position as
Australia’s iron ore miners.
Both the mining and oil sectors have
experienced wage inflation that can be
tracked to rising commodity prices and
a lack of skilled staff. Employment costs
also failed to fall after both respective
booms receded. The resulting
operational cost structures in the mining
and oil sectors have eaten directly into
margins, resulting in the reassessment
of assets for financial viability.

6. 4 | Avoiding the digital capability crisis
Rapidly shifting skills requirements
Historically, the focus of automation has been on work that
requires routine, repetitive tasks. Now this is changing.
Advancements in technology, including innovations in
artificial intelligence, are allowing new categories of jobs to
be mechanized. As a result, many existing technology jobs
will become redundant and new opportunities to develop,
service or operate the next generation of software and
machines will arise. For example, large internal IT
infrastructure teams will be made redundant as organizations
move into cloud technologies and organizations such as
Amazon develop unique ways to manage data and solutions
in the cloud. Drivers of mining trucks will be replaced with
radio frequency (RF) technicians who will monitor and control
many driverless trucks. But these positions will require
advanced skills, which will be in short supply and hence only
available at a premium. It is highly unlikely that an IT business
analyst experienced in applying SAP patches and updates will
be able to manage Amazon Large data environments, or that
a mining truck driver will be retrained to be an RF technician.
In this new job market, the relative importance of digital and
technology occupations will increase. We can already see this
occurring in the occupations the US O*NET program
considers to have a ‘bright outlook’.5 O*NET defines bright
outlook jobs as those where employment is projected to
increase 22% or more over the period 2012-2020.
The O*NET data show that the information technology career
cluster is well ahead of all the other occupations considered
to have a bright outlook6 (see Chart 3). The OECD reports
similar trends in Europe.7
Signs of a rising digital capability crisis
5 Bureau of Labor Statistics (2013),”2012-2022 Employment Projections”,
www.onetonline.org/help/bright/
6 http://www.onetonline.org/
7 OECD (2014), “Skills and Jobs in the Internet Economy”, OECD Digital Economy
Papers, No. 242, OECD Publishing.
http://dx.doiorg/10.1787/5jxvbrjm9bns-en
Organizational capability requirements
are moving into unknown territory,
driven by digital growth and disruption.
Traditional employment models will be
unable to keep pace with the changes
required to adapt to the new digital
environment.
Increasing demand for digital capability
and pass of digital technology evolution
Fuelled by the convergence of social, mobile, cloud, big data
and growing demand for anytime anywhere access to
information, digital technology is disrupting all areas of the
business enterprise. Disruptive technologies are those defined
as rapidly advancing or experiencing breakthroughs and which
have both broad-reaching and significant economic impact
estimated in the tens of trillions of dollars per year. Digital
disruption is taking place across all industries and in all
geographies.
Enormous opportunities exist for enterprises to take advantage
of connected devices enabled by the ‘internet of things’ to
capture vast amounts of information, enter new markets,
transform existing products, and introduce new business and
delivery models. However, Australian businesses may not be as
prepared as their global counterparts to respond: according to
the EY Digital State of the Nation report, 40% of Australian
consumers and 59% of digital opinion leaders believe Australia
is less advanced in digital than other developed nations4.
The evolution of the digital enterprise also presents significant
challenges that organizations must respond to, including new
competition, changing customer engagement and business
models, privacy concerns and cybersecurity threats. The
evolution will also include the way in which organizations will
engage with their workforces and required capability skill sets.
New skills will be required to succeed in this rapidly evolving
environment. The pace of workforce skill evolution is also at a
level that has never been experienced. Skills that were required
nine months ago are now being seen as redundant, and new
capability is now limited. Thinking and problem solving skills are
now expected in line with the technical skills, not in addition too.
Enterprises and workforces able to seize the opportunities
offered by digital advances stand to gain significantly.
Winners will be those who understand the new capability they
will need to operate in the digital world now and into the future
along a defined roadmap. This roadmap would include the
capability they can afford to lose in the short term, verse the
capability required in the future.

7. 5Avoiding the Digital Capability Crisis |
The Information and Communications
Technology (ICT) market shows signs of
future skills shortages
In Australia, growth in ICT employment has risen steadily since
the mid ‘90s (see Chart 4), reflecting the introduction of PCs in
the workplace that decade, the impact of the internet in the
2000s and currently big data, analytics and mobility. The
current forecasts also indicate additional growth in this area,
driven by the evolution of technology, the introduction of new
technologies and the increasing growth in digital technologies.
Although we have yet to see widespread shortages within the
ICT professional occupations locally, research shows that
employers consider many applicants to be unsuitable, mainly
due to lack of experience in the industry, or in the specific
software or language used.8 Also, many roles in the digital
world are not being filled, or in some cases even looked for,
because technologies are so new that the capability does not
exist in the Australian market. According to the research,
employers had very specific skill and experience requirements
and considered proven expertise to be more important than
qualifications. Supporting the argument that it is not about
capacity – the challenge ahead is focused on the right capability.
8 Australian Government, Department of Employment, Information and
Communications Technology Labour Market Indicators report, May 2014
In the next three to nine years, we anticipate shortages in key
niche areas such as data analytics, cloud, digital architecture,
digital designers and app development. As competition
increases for these experienced skill sets, wage inflation will
begin to build unless companies change their traditional fixed
employment models. Otherwise, we are likely to see a repeat of
the capability crises in mining and oil, with organizations finding
themselves over paying for skills that quickly become
redundant. This is especially likely in the case of digital
capabilities, given the extreme speed of change we can already
see as technologies are superseded in record time.
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Arts, Audio/Video Technology and Communications
Government and Public Administration
Manufacturing
Agriculture, Food and Natural Resources
Education and training
Human Service
Transportation, Distribution and Logistics
Law, Public Safety, Corrections and Security
Hospitality and Tourism
Architecture and Construction
Science, Technology, Engineering and Mathematics
Business, Management and Administration
Finance
Health Science
Marketing, Sales and Service
Information Technology
Chart 3
Percentage of occupations in the category that are considered to have a bright outlook
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People(000)
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Employment in Information and
Communications Technology (ICT)
Chart 4
Employment in ICT

8. 6 | Avoiding the digital capability crisis
Better aligning capability supply and demand
• Align to an agile operating model which can be continuously
improved and adopted as a way of life
• Understand the capability that an organization has and how
this is aligned to what it needs. At an individual level this can
mean getting the right person in the right role. For example,
the IT Business analyst who manipulates data in Excel to
produce executive reports may not be the person who can
forecast big data business trends and report on the
organization’s performance against market trends. Similarly,
the best salesman may not be the best manager or an
accomplished surgeon will not necessarily make the best
hospital general manager
• Reassess what and how capability is bought into the
organization and how capability is retired from the
organization
• Identify organizational capability and how much is used and
when it is used. Build a flexible employment model that caters
to the ebbs and flows in demand with supply options that suit
the business and employee needs
• Link to a variable remuneration lever to ensure corporate
survival and ongoing organizational profitability where the
value of capability is linked to current performance not
historical fixed elements
• Engage more digitally with talent, connecting to skills and
resources on demand by tapping into networks of workers
through contracting, outsourcing, partnerships with
suppliers of capability, online crowdsourcing, talent hubs
and freelance platforms
• Acquire and retain the best digital talent
• Develop training to skill existing employees with
digital capability.
Organizations need new employment models with mechanisms
that recognize and adapt to changes in capability requirements
over time. By linking capability plans to future needs and
organizational performance, they will be able to manage the
digital capability crisis.
In most organizations, the supply and demand sides of
capability (the ability to deliver on customer and market
commitments) are often mis-aligned. Currently the CFO has
the primary focus on the financial performance of the business,
and this focus caters to the demand side of capability. In a
neighbouring silo, the Chief Human Resources Officer looks at
the organization from a “hire to retire” perspective, the supply
side. Although leaders in organizations know that supply and
demand are intrinsically linked, the organisational model does
not effectively enable the two functions to support each other.
Organizations need to understand, forecast and plan for how
capability supply and demand intersect – now and into the
future. This will require moving from a model that employs
people with a defined skill set to one that optimizes the
engagement of capability, and is able to adapt to the future
capability needs of an organization.
Based on EY’s experience of working with large organizations
to build these models in environments with unpredictable
capability demands, such a model will:
Based on EY’s experience of working with large organizations
to build these models in environments with unpredictable
capability demands, such a model will:
• Be informed by workforce capability data and business
performance metrics, from HR and finance, ensuring both
supply and demand are understood in real time
• Allow for industry, sector and environmental impact
Are you asking the right questions of your workforce?
• What capability do you have today?
• What capability do you need today?
• What capability will you need in the future? When? How much?
• Is there a realistic development path, and if not who will plan manage
and execute the redundancy program?
• What are you willing to pay for that capability?
• What capability do you need to Buy Develop Retire right now?

9. Digital disruption is happening now and the workforce
resource and capability needed by businesses to succeed
in the future are rare and will continue to be sought-after.
The challenge for organizations is to start planning and
forecasting the workforce needs of the future today.
This can be achieved by dynamically modelling and
forecasting workforce capability requirements in a way
that is aligned to business strategy and financial models.
Organizations need to start looking at new workforce
engagement models and develop new pathways to access
workforce capability ecosystems. Digital is disrupting
every part of our business model, including the
traditional employee-employer relationship. The most
successful organizations will be those that are able to
adapt to a new way of working and workforce
engagement using multiple, but equitable, workforce
engagement models.
We know that people are critical to the success of every
organization, so we team globally with you to change,
enabling you to enhance the value of your workforce,
and your people to enhance their roles and careers.
Darren Gibson
Global Advisory
People and Organizational Change (POC) Leader
+61 2 9248 4970
Steve Koss
Oceania POC Leader
+61 2 9248 4568
Alex Lee
Malaysia POC Leader
+60 3 7495 8778
Dilys Boey
Singapore POC Leader
+65 6309 6246
Benson Ng
Greater China POC Leader
+852 2849 9365
Conclusion

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