Changes in labor supply can place limits on the strategies available to firms

"Human Resource Planning"

LEARNING OBJECTIVES

WHEN YOU HAVE FINISHED STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO:

1. Define Human Resource Planning [HRP], examine its relationship with strategic planning and comprehend its importance.

2. Outline the basic steps of the planning process.

3. Explain what Human Resources Information Systems [HRIS] are used for.

4. Discuss why external environmental scanning is an important part of HR planning.

5. Explain how auditing current jobs and skills relates to HR planning.

6. Identify factors to be considered when forecasting the supply and demand for human resources in an organisation.

7. Describe several ways to manage both a surplus and a shortage of human resources.

CHAPTER OUTLINE

• What is Human Resource Planning [HRP] and how is it related to Strategic Planning?
• Why is HRP important?
• The HR Planning Process

1. WHAT IS HRP AND HOW IS IT RELATED TO STRATEGIC PLANNING ?

In general terms, planning is the base upon which human resource management is constructed. More specifically, human resource planning consists of analysing and identifying the need for and availability of human resources required by an organisation to meet its objectives1. It is a process by which an organisation ensures that it has the right number and kinds of people, at the right place, at the right time, capable of effectively and efficiently completing those tasks that will help the organisation achieve its overall goals and objectives.

But any definition of HR planning must begin on a level one step higher - with the overall strategic plan of the organisation. Strategic Planning can be defined as the process of identifying organisational objectives and the actions needed to achieve those objectives2. It involves analysing such areas as finance, marketing and human resources to determine the capacities of the organisation to meet its objectives.

Strategic planning must include planning for human resources to carry out the rest of the plans. Figure 4.1 shows the relationship among the variables that ultimately determine the HR plans an organisation will develop. As may be noted, overall strategy affects the strategies and activities in the HR area.

Fig. 4.1 "Factors that determine HR plans", Mathis and Jackson, p. 57

When engaging in both strategic and HR planning, managers must consider the culture of the organisation, since research has indicated that excellent strategies can be negated by an incompatible culture3. Just as nations and regions have their cultural characteristics, so do organisations. Organisational culture is a pattern of shared values and beliefs giving members of an organisation meaning and providing them with rules for behaviour4. Culture is of utmost significance since it tells people in organisations how to behave [or not to behave]. It is relatively constant and enduring over time.

In quality management, the management of organisational culture and its alignment to the strategy of the organisation are of crucial importance. More specifically, in a TQM environment the basic attributes of a quality culture include5:

• Customer focus;
• Strategic planning and leadership;
• Continuous improvement;
• Empowerment; and
• Teamwork

2. WHY IS HRP IMPORTANT?

Human resource planning serves many purposes. Specifically, planning enables an organisation to6:

• Reduce costs, by anticipating and correcting labour shortages and surpluses before they become unmanageable and expensive.
• Make optimum use of workers' aptitudes and skills.
• Improve the overall business planning process.
• Identify the specific employee skills available and needed.
• Promote sound human resource management throughout all levels of the organisation
• Evaluate the effect of alternative HR actions and policies
• Enhance continuous quality improvement.

With respect to the last purpose, the advent of two new management philosophies, Total Quality Management and Reengineering, have changed the traditionally perceived role of employees in organisations. Employees have always been employed by organisations to perform specific tasks - and, of course, they shall continue to do so. What is changing now is the addition of a second major role - that of continuous quality improvement - previously the preserve of management and staff functions. Thus, with respect to HRP in organisations following a quality improvement programme, emphasis should be placed on answering the following questions7:

• What kind of culture are we trying to foster?
• How many people are required by organisational processes?
• What behavioural characteristics should they possess?
• What kind of [new] skills are required? How can they be provided?

The organisational purposes served by HR planning are more easily attended nowadays via the creation of a human resource information system [HRIS]. An HRIS is a logical and systematic record of human resource information8. These records include information on employee job preferences, work experiences and performance evaluations. They allow a job history to be kept on each employee, and they provide a complete set of information on the jobs and positions within the organisation.

3. THE HR PLANNING PROCESS

Determining an organisation's HR needs lies at the heart of human resource planning. The two major components of this determination are identifying the supply of employees and the demand for employees. However, effective HR planning cannot take place in a void. It must be guided by organisational plans and objectives. The allocation of organisational members to various jobs and positions [see chapters 5 and 6 on job analysis and job design] requires knowledge of any foreseen expansions or reductions in operations and/or economic and technological changes that may affect the organisation. On the bases of such analyses, plans can be made for shifting employees within the organisation, laying off or otherwise cutting back the number of employees, or retraining present employees. Factors to consider include the current level of employee knowledge, skills and abilities [KSAs] in an organisation, and the expected vacancies due to retirement, promotion, transfers or discharge.

The process of HR planning is presented in Figure 4.2. There are six basic phases in the planning process9:

• Scanning the external environment for changes that may affect labour supply
• Analysing internal inventory of skills and potentials and comparing organisational needs against the labour supply available.
• Forecasting HR demand and supply
• Developing objectives
• Designing and Implementing Action Plans: Making Workforce Adjustments
• Evaluating outcomes

Fig. 4.2 "HR planning process", Mathis and Jackson, p. 64

THE PLANNING PROCESS - STEP 1 : SCANNING THE EXTERNAL ENVIRONMENT.

At the heart of planning activities is the knowledge gained from scanning the external environment for changes. Scanning especially affects HR planning because every organisation must draw from the same labour market that supplies all other employers. External environmental factors that affect labour supply are: the workforce composition and the work patterns existing in a country; government influences; economic/geographic influences; and competitive conditions.

Fig. 4.3, "External environmental factors affecting labour supply", Mathis and Jackson, p. 65

• Government Influences. A major element affecting labour supply is the government via legislation [ e.g. labour law, social security legislation, tax law, equal employment opportunity law, etc], government policies and regulations. Therefore, an organisation must consider government intervention when doing HR planning.

• Economic Conditions. The general business cycle also affects HR planning. Such factors as interest rates, inflation and economic growth help determine the availability of employees and figure into organisational plans and objectives. Decisions on wages, the need for overtime, and whether to hire or lay off workers all hinge on economic conditions.

• Geographic and Competitive Concerns. As a global competition for labour appears to be developing in the US and other Advanced Economies, employers must consider the following geographic and competitive concerns when they engage in HR planning:
• Other employers in the area. Other employers in a geographic region can greatly expand or diminish the labour supply.
• Employee resistance to geographic relocation. In the last couple of years, there has been a growing reluctance on the part of many employees, particularly those with working spouses to accept geographic relocation as a precondition of moving up in the organisation. This trend may force organisations to change their employee development policies and practices and their HR plans.
• Direct competitors and international competition. Direct competitors are another important external force in the planning as well as staffing activities of an organisation. Failure to consider the competitive labour market and to offer pay scales and benefits competitive with organisations in the same general industry and geographic location may cost a company dearly in the long run. Underpaying or 'undercompeting' may result in a much lower-quality workforce. Finally, the impact of international competition must be considered as part of environmental scanning - for instance, how diversity in the European workforce influences HR planning.

THE PLANNING PROCESS - STEP 2: AN INTERNAL ANALYSIS OF JOBS AND PEOPLE.

Analysing the jobs that will need to be done and the skills of people currently available to do them is the next part of HR planning after scanning the external environment. The needs of the organisation must be compared against the labour supply available.

• Auditing Jobs. The starting point for evaluating internal strengths and weaknesses is an audit of jobs currently being done in the organisation. A comprehensive analysis of all current jobs provides a basis for forecasting jobs that will need to be done in the future. A planner should examine the following questions10:
• What jobs now exist?
• How many individuals are performing each job?
• What are the reporting relationships of jobs?
• How essential is each job?
• What jobs will be needed to implement the organisational strategy?
• What are the characteristics of anticipated jobs?

• Auditing Skills. Once planners obtain an understanding of current jobs and the new jobs that will be necessary to carry out the organisation's plans, they can make a detailed audit of current employees and their skills. The basic source of data on employees and their skills comprises the use of human resource information systems [HRISs] - e.g. the computerised HR records of the organisation.

• Creating an Employee Skills Inventory. An employee skills inventory is defined as a compilation of data on the skills and characteristics of employees, including:
• education and training
• mobility and geographic preferences
• specific aptitudes, abilities and interests
• areas of interest and internal promotion ladders
• anticipated retirement

• Drawing Aggregate Workforce Profiles. Once the data on individual employees is available it can be aggregated into a profile of the organisation's current workforce. This profile will reveal many of the organisation's strengths and weaknesses. For example, the absence of some skills, such as computer skills, may affect the ability of an organisation to take advantage of new technological developments. If a large group of skilled employees are all in the same age bracket, their retirement plans may leave a major void in the organisation, etc.

It may prove helpful to plot charts giving an overview of the employee situation for each department in an organisation - suggesting where external candidates might be needed to fill future positions; or indicating an available reservoir of trained people that the employer can tap to meet future conditions.

THE PLANNING PROCESS - STEP 3: FORECASTING

The information gathered from external environmental scanning and assessment of internal strengths and weaknesses is used to predict, or forecast, HR supply and demand in light of organisational goals and strategies. Forecasting uses information from the past and present to identify expected future conditions. Approaches to forecasting HR range from a manager's best guess to a rigorous and complex computer situation. It should be noted, however, that despite the availability of sophisticated mathematical models and techniques, forecasting should be a combination of quantitative method and subjective judgment.

FORECASTING HR DEMAND. The main emphasis to date has been on forecasting organisational needs for human resources11. Forecasts of HR demand may be either judgmental or mathematical. However, even mathematical methods usually still require some judgmental human input.

Purely judgmental methods include:

• Estimates. These forecasts can be either top-down or bottom-up, but it is very important to incorporate people that are in a position to know and can supply answers to the questions being made The success of these estimates depends on the quality of the information available to the experts. Useful information can include data on current and projected productivity levels, market demand, and sales forecasts, as well as current staffing levels and mobility information12.
• Rules of Thumb. These forecasts rely on general guidelines applied to a specific situation within the organisation - for example, one operations manager per five reporting supervisors aids in forecasting the number of supervisors needed in a division.
• �The Delphi Technique. In this technique, input from a group of experts is sought by administering them separate questionnaires to be filled out anonymously on what forecasted situations will be. These expert opinions are then aggregated and returned to the experts for a second anonymous opinion. This process continues through several rounds until the experts essentially agree on a judgment. The Delphi technique has been shown to produce better one-year forecasts as compared to linear regression analysis, but it does have some limitations. Difficulties can arise in integrating the expert's opinions. This particular technique, however, appears to be particularly useful in generating insights in highly unstructured or undeveloped subject areas - such as human resource planning13.
• The Nominal - Group Technique. A related method is the Nominal Group Technique. Yet, unlike the Delphi Method, the Nominal Group Technique requires people to meet face-to-face. These ideas are usually generated independently at first and then discussed as a group. Although the Nominal Group and the Delphi Techniques are similar, usually, the Delphi Technique is more frequently used to generate predictions whereas, the Nominal Group Technique is more frequently used to identify current organisational problems and solutions to those problems14. Although all these judgmental forecasts are less complex and rely on less data than those based on statistical techniques, they tend to dominate in practice15. Apart from judgmental methods of forecasting HR demand, there are also various mathematical and/or statistical techniques. Some of the more common ones include:
• Trend Analysis is a study of a firm's past employment needs over a period of years to predict future needs. For example, you may compute the number of each subgroup of your employees [like salespeople, production people, secretarial and administrative staff] at the end of each of the last five years. The purpose of trend analysis is to identify employment trends that you think might continue into the future16. Yet, while trend analysis is valuable as an initial estimate, employment levels rarely actually depend only on the passage of time. Other factors [like changes in sales volumes and productivity will at the end also affect your future staffing needs.
• The Scatter Plot is a graphical method used to help identify the relationship between two variables. If these two variables - for example, a measure of business activity and your staffing levels - are related, then if you forecast the measure of business activity, you should be able to forecast your HR requirements. An example of the scatter plot method is presented in Figure 4.4.

Fig. 4.4 "The scatter plot" Dessler, p. 111

• Statistical Regression Analysis makes a statistical comparisonof past relationships among various factors. For example, a statistical relationship between gross sales and number of employees in a retail chain may prove useful in forecasting the number of employees needed in the future if the retailer's sales increase by 30 percent.
• Simulation Models are representations of real situations in abstract form. They may include available economic models.
• Productivity Ratios calculate the average number of units produced per employee. These can then be applied to sales forecasts to determine the number of employees needed.
• Staffing Ratios can be used to estimate indirect labour. For example, if the company usually used one clerical person for every twenty-five production employees, that ratio can be used to help estimate the need for clerical people.

Thus, the demand-pull approach to forecasting, as contrasted with the supply-push approach presented in the next paragraphs, considers specific openings that are likely to occur and uses that as the basis for planning. The openings [or demands] are created when employees leave a position because of promotions, transfers and terminations. The analysis always begins with the top positions in the organisation, because from those there can be no promotions to a higher level. Yet, unfortunately, the accuracy of forecasts for human resources demand has been relatively week. In one survey of 5,000 firms, only 35% of the forecasts were correct within 1% , whereas about one third were off by more than 25%. Also, a troubling fact found via this survey was that forecasts were made only for one year - not for three years as is commonly suggested and practiced in HR planning17.

FORECASTING SUPPLY. Forecasting the availability of human resources considers both external and internal supplies. Although internal supply is easier to calculate, it is important to calculate the external supply also.

• External Supply. The external supply of potential employees available to the organisation can be estimated by considering the following factors18:

• Net migration in and out of area.
• Individuals entering / leaving the workforce.
• Individuals graduating from schools and universities.
• Changing workforce composition and patterns.
• Economic forecasts for the next few years.
• Technological developments and shifts.
• Actions of competitors.
• Government regulations and pressures.

• INTERNAL SUPPLY. The internal supply is influenced by training and development programmes, transfer and promotion policies, and retirement policies - among other factors. Figure 4.5 shows in general terms how the internal supply can be calculated.

Fig. 4.5 "Estimating internal labour supply for a given unit", Mathis and Jackson, p. 73

Internally, succession analysis is a widely used method to forecast the supply of people for certain positions. It relies on replacement charts, which are succession plans developed to identify potential personnel changes , select back-up candidates, promote individuals, and keep tract of resignations and retirements [attrition] for each department in an organisation. Replacement charts are the most widely used forecasting technique in HR planning - Figure 4.6

Fig. 4.6 "Employee replacement charts" Schuler, p. 117

A transition Matrix or Markov Matrix, can be used to model the internal flow of human resources. These matrices simply show as probabilities the average rate of historical movement from one job to another. Figure 4.7 shows a very simple transition matrix. A line worker, for example, has 20% probability that he or she will be gone in 12 months, 0% probability of promotion to manager, 15% probability of promotion to supervisor, and a 65% probability of being a line worker this time next year. Such transition matrices are the bases for computer simulations of the internal flow of people through a large organisation over time.

Fig. 4.7 "Transition matrix for a 12-month period", Mathis and Jackson, p. 73

THE PLANNING PROCESS - STEP 4: ESTABLISHING OBJECTIVES.

After forecasting HR demand and supply, HR objectives are developed. They are, or should be, a natural outcome of the established corporate goals. The importance of an organisation's objectives for HR planning seems difficult to deny; thus, it is not surprising that more and more firms are establishing human resource objectives and policies.

THE PLANNING PROCESS - STEP 5: DESIGNING AND IMPLEMENTING ACTION PLANS: MAKING WORKFORCE ADJUSTMENTS.

The next step in the process of HR planning - Action Planning and Programme Implementation - is an extremely important extension of all previous activities. After an organisation's needs are assessed, action planning must be developed to serve those needs. Action plans can be designed to increase the supply of the right employees in the organisation [ if the forecasts showed that demand exceeded supply], or to decrease the number of current employees [ if the forecasts showed that supply exceeded demand]. Consideration will be given here to managing a surplus of employees, since managing a shortage is dealt via recruitment and training.

There are a variety of ways that a surplus of workers can be managed within an HR plan. But regardless of the means the actions are difficult because they require that some employees be removed from the organisation. Alternatives that organisations can use to manage a HR surplus include: downsizing, attrition, early retirements/buyouts, layoffs and outplacements.

• o Downsizing. Downsizing is reducing the size of an organisational workforce. A wave of merger and acquisition activity in the US has often left the new, combined companies with redundant departments, plants, and people. Another cause for downsizing is the need to meet foreign competition and cut costs. Studies of the effects of downsizing show mixed results. Cost control is most often the reason given for downsizing, but the relationship between downsizing and increases in profitability appears questionable19. Lastly, some studies even show a negative or at best indifferent effect on quality, productivity and morale20.
• o Attrition and Hiring Freeze. Through attrition, individuals who quit, die or retire are not replaced. With this approach, no one is cut of a job, but those who remain must handle the same workload with fewer people. This method is usually received with better employee understanding than many of the other methods.
• o Early Retirement/Buyouts. Early retirement is a means of encouraging more senior workers to leave the organisation early. To provide this voluntary incentive, employers make additional payments to employees so that they will not be penalised too much economically until their pensions and Social Security benefits take effect. Such voluntary termination programmes or buyouts entice an employee to quit with financial incentives. They are widely viewed as ways to accomplish workforce reduction without the general ugliness of layoffs and individual firings.
• o Layoffs. Layoffs occur when employees are put on unpaid leaves of absence. If business improves for the employer, then employees can be called back to work. Layoffs may be an appropriate strategy to follow if there is a temporary downturn in an industry.
• o Outplacement. Outplacement is a group of services provided to displaced employees to give them support and assistance. It most often is used with those involuntarily removed because of plant closings or elimination of departments. Outplacement services typically include personal career counceling, resume preparation and typing services, interviewing workshops, and referral assistance. Other aids include retraining for different jobs, establishing on-site career centers, and contacting other employers for job placement possibilities. Typically, outplacement is done using outside firms that specialise in providing such assistance.

THE PLANNING PROCESS - STEP 6: CONTROLLING AND EVALUATING HR PROGRAMMES. Control and evaluation of HR action plans are important to manage people effectively. Efforts in this area are clearly aimed at quantifying the value of human resources. Evaluation is an important process for determining the effectiveness of HR plans. Possible criteria for evaluating HR planning include measuring21:

• Actual staffing levels against established staffing requirements
• Productivity levels against established goals
• Actual personnel flow rates against desired rates
• Programmes implemented against action plans
• Programme results against expected outcomes
• Labour and programme costs against budgets
• Ratios of programme results to programme costs.

CASE: - The Big Blue.

Growing up any time during the past 30 years revealed some events that were as certain to go away as any other fad. The 1960s witnessed the hippie generation; the 1970s saw the demise of Beatles; whereas the 1980s brought with it a time of greed: ethics and values appeared to go out of the window, and some of the select rich got increasingly richer.

Throughout these decades, however, one thing remained constant: No matter what was happening in society, IBM was solid. If you were fortunate enough to get a job at IBM, you had one for life. Known for its outstanding products and employee training programmes, those that joined the 'Big Blue' often found a 'Big Brother'. And Big Brother did not lay anyone off.

Unfortunately, the 1990s have seen the passing of the Big Brother too. Its stock prices fell dramatically in 1991, losing more than 30 percent of its value overall from January to November, on a monthly basis. This called for some drastic action in an attempt to save more than $2 billion a year. The most drastic of these actions was to cut 20,000 jobs, and move toward more independent business units. As one former IBMer stated: 'Only strong products and organisations will survive'.

QUESTIONS.

1. Explain how strategic human resource planning is operating at IBM in this case.

2. If you were IBM's vice president of HR, how would you handle the 20,000 jobs cut?

3. Would outplacement services be an option when this many people are laid off? Explain.

NOTES.

Which of the following strategies are the two most common ways to eliminate a labor shortage?

Which of the following is a technique for forecasting the supply of labor?

What are the strategies of human resource development?

Which of the following should be considered when forecasting a firm's supply of employees?