Ad hoc approaches will fall short when the workforce crisis strikes.
Camilo Serna is a Chicago-based partner with management consulting firm Oliver Wyman. Email him at email@example.com.
Utilities are feeling the pain from shortages of skilled employees who are critical to maintaining high quality in operations and building business for the future. These shortages will get worse, perhaps much worse.
Utilities find it increasingly difficult to attract and retain talent in tight labor markets; to accommodate younger employees with different approaches to life at work; to retain older employees considering early retirement; and to transfer critical knowledge within the firm. Though many industries face similar challenges, the situation faced by utilities is particularly acute, in part because of insufficient enrollment in feeder programs, large numbers of retirement-eligible employees, thin ranks at middle-management levels, and the growing demand for new generation and for infrastructure replacement.
Even as executives acknowledge the risks that such shortages pose to their businesses, most have relied mainly on a series of isolated actions to deal with them. However, experience shows that a reactive approach is not sufficient to meet this long-term strategic issue. By understanding the forces behind the talent shortage and anticipating the potential ramifications, executives stand a better chance of instituting a comprehensive strategy to mitigate the risks and minimize the financial and operational impacts. An analytic, fact-based approach to future workforce gaps will allow utilities to deploy appropriate workforce management initiatives.
Before utilities can solve the problem, they must define it for their particular circumstances. That means understanding the dynamics of the current employee base and the drivers of turnover, and in turn, workforce gaps.
Most utilities rely largely on qualitative sources to assess these gaps—anecdotal evidence, performance reports, and assessments by leadership. When they do take a quantitative approach, they look mostly to aggregated workforce statistics. While these sources can give an indication of the general problem, they don’t pinpoint which locations and business units are most at risk. Without a more nuanced analysis, it is impossible to draft actionable, specific strategies to tackle the issue of talent loss. More detailed analyses will allow utilities to identify which areas of the business are most vulnerable (see Figure 1).
First, focusing on disaggregating historic workforce trends, by business function and location, will help project workforce gaps. This will allow senior executives to identify the areas of the organization that are most at risk and to prioritize workforce management initiatives accordingly. The three main drivers of workforce gaps are retirements, non-retirement attrition, and employee transfers. By analyzing disaggregated historic data on these metrics and applying an understanding of current trends and market knowledge, utilities can develop an analytic, fact-based perspective on future workforce gaps.
Retirement arguably is the single greatest workforce threat facing utilities today. Most utilities already have a significant retirement-eligible population, though some of those employees choose to work beyond their retirement-eligible dates. A simple comparison of the number of retirement eligible employees in a given year with the number of actual retirements hints at the retirement risk to a company, but the real value lies in a more granular analysis.
Many retirement decisions are driven largely by factors specific to a company location or function. In the generation business, for example, employees at different locations may be offered site-specific retirement packages. In labor-intensive businesses, an employee’s functional area often dictates the physical prerequisites for the job. In such cases, projecting retirements for a particular business function and location can highlight real differences in trends. To accomplish this, historic retirement rates for a particular location and functional area are applied to projected populations of retirement-eligible employees, also broken out by location and function (see Figure 2).
Though this analysis might not capture all the factors contributing to an individual’s retirement decision, it allows executives to more precisely understand retirement trends and pinpoint specific threats. For example, though the company-wide retirement rate might be high, the problem could be limited to a few functional areas and locations. And some utilities might find exempt status significantly affects retirement trends.
Utilities can use the insight generated from a disaggregated retirement analysis to develop workforce strategies dealing with talent loss in the most critical areas and geographies.
Historic rates, while a good barometer, might not indicate the full extent of the retirement threat. Utilities typically see only 20 to 30 percent of their eligible workforce actually retire. Of course, the eligible population that elects to continue working cannot postpone retirement indefinitely, and thus represents an inherent risk that needs to be managed and understood.
In particular, changes in pension and retirement plans could significantly impact these trends, potentially advancing retirements. In addition, efforts to understand what causes employees to stay beyond retirement age allow companies to target the proper “bridge-to-retirement” programs.
Attrition and Transfers
Employees leave utilities for a variety of reasons. Understanding which areas are most in danger of losing talent can help utilities develop effective retention strategies. Again, a look at historic attrition rates can provide valuable insight. These rates, typically taken as a percentage of the total headcount, can be applied to workforce levels in future years to project expected losses through attrition.
As with retirements, attrition rates can vary significantly with certain segments of the workforce. The younger hires tend to be more mobile and they want to explore other career opportunities, and thus exhibit higher rates of attrition than employees with significant tenure—which can have an even bigger impact when companies start closing the workforce gaps with younger talent. Certain geographies or business functions are more prone to attrition loss than others, depending in part on the number of jobs available in the market that require similar skill sets. Areas with employee satisfaction issues also can lead to higher attrition if those issues aren’t addressed. Therefore, effective analyses of historic attrition rates segment the employee base in ways that highlight these differences.
Historical attrition analysis is not enough, however. Successfully managing attrition risk requires both a quantitative and qualitative assessment of attrition drivers, such as exit surveys, as well as benchmarking the results of such surveys with industry attrition statistics. This allows an organization to address areas where rates fall outside the norm.
The final element that impacts workforce gaps is the transfer of employees among functional areas or locations within an organization. Utilities can identify which functions are key importers or exporters of talent by using historic transfer data and creating tools that track the number of transfers among different functional areas for a given location.
Some utilities might find that they maintain a healthy and balanced flow of employees throughout the organization, while others may find certain areas to be chronic importers or exporters of talent.
Modeling the internal flow of employees can reveal the true organizational needs of certain business functions, as some rely largely on contributions from other areas. This represents an inherent risk, as the transfer of employees from one function to the other might not be sustainable and could lead to shortages that are unforeseeable without a robust transfer analysis. Thus, transfer dynamics have implications for workforce management initiatives, for example, indicating the need for certain rotational or training programs.
Projecting the Workforce Gap
Statistics about retirements, attrition and transfers will inform workforce gap projections. To calculate the gap, however, the projected workforce trends must be compared with a baseline, typically the target staffing level required to maintain current operations. Common ways to determine the baseline staffing level include using the number of employees budgeted to the payroll, conducting staffing studies that analyze the number and type of positions needed, or benchmarking headcount levels with comparable lean organizations. Baseline resource levels might increase or decrease in a given year, based on changes to productivity—for example due to a less experienced workforce or technological innovation.
Starting with the current headcount in the organization—again, disaggregated by functional area, location and employee type—the calculus will factor in projected retirements, attrition, and transfers based on the annualized historic rates. Assuming the historic rates hold true in the future, workforce levels can be projected for several years and compared with baseline staffing levels to determine the size of the gap in a given area and year as well as the drivers.
Other factors, depending on their relevance to the organization, may be accounted for in a workforce gap assessment. In the utilities industry, many positions require long periods of training and certification; at any given time, then, a portion of the workforce is not fully effective. To get a realistic assessment of the workforce gap, the number of ineffective employees should be excluded from the headcount for a given year. Once the training and certification period is complete, those employees are factored back into the effective workforce headcount. The resource ramp-up period for training and certification also is important when utilities consider sourcing strategies, as it informs as to when employees need to be hired.
An additional element that utilities might take into account is the effect of various growth scenarios on staffing levels. If, for example with generation, a utility plans to pursue growth initiatives in the near future, such as building additional facilities, those initiatives might strain the current workforce.
The value generated from a workforce-gap analysis is directly related to the degree of flexibility available in segmenting the data. The more granular the analysis, the better-positioned a company will be to use the output to generate tangible, well-focused efforts. After all, the effort to retain and source talent will be different in a business function with significant losses to attrition than in one that has been plagued by a high degree of transfer to other functions. The flexibility to conduct “what-if” simulation analyses by altering assumptions to the gap drivers is also useful for understanding the implications of best and worst-case scenarios.
Recruitment Business Case
Armed with a data-driven approach to predicting critical gap areas in coming years, utilities can develop sourcing strategies aimed at filling those gaps. Talent can be sourced through various channels, both internally, through retention and promotions, and externally, through experienced and new hires. Circumstances in some geographies or functional areas may make one channel more feasible than another, but most strategies will require a comprehensive approach that uses all channels.
The first decision is to determine the emphasis that different channels will have in the sourcing strategy. Is a utility going to bring new “inexperienced” hires into the workforce, or will it rely on the industry and contractors to fill the gaps? Does the utility have a good set of initiatives to reduce attrition?
An analysis of the external labor market can generate insight into which sourcing strategies are possible given the availability of talent. Such an analysis can be conducted on a local, regional or national level, depending on the job function in consideration. The goal is to identify the size of the potential talent market based on relevant skill sets and experience, and to draft a strategy that not only meets operational needs, but also acknowledges the realities of the available talent pool. In addition, companies should consider ways to expand the pool by tapping alternative skill areas.
Timing also might direct sourcing decisions, as experienced hires likely will be necessary to fill gaps in the near-term, while developing a steady pipeline of inexperienced hires will help mitigate longer-term talent shortages.
Finally, building the business case behind various sourcing strategies requires identifying and quantifying the benefits and costs associated with each strategy. Would bringing in new inexperienced hires be more beneficial than relying on industry hires? Using the business-case figures can help executives compare different sourcing strategies and execute the initiatives they propose.
The alternative to this active risk-management approach is to maintain the status quo and react to talent shortages as they happen, resulting in increased costs for emergency hires, additional contractors, or increased overtime for current employees.
Active Workforce Management
In addition to directing talent-sourcing strategies, a robust gap analysis can help in drafting other workforce management initiatives. The most successful initiatives are customized for particular segments of the employee base and aimed at curbing talent losses from a particular cause. In the nuclear industry, for example, competition for specialized resources is increasing sharply from neighboring utilities, service providers, pipeline projects, and industry organizations. These sites might consider implementing retention programs that offer bonuses or accelerated career progression to outstanding employees who commit to stay for a period of time. Organizations facing significant retirement threats might institute part-time employee programs and strengthen knowledge management and retention efforts.
Beyond guiding talent-sourcing efforts and formal workforce management initiatives, gap analyses will help in other workforce efforts such as guiding deeper workforce analyses and workforce satisfaction surveys.
The analysis, of course, must be in tune with the constant change an organization faces, so changing circumstances will modify the assumptions of the analysis. Every year, as the analysis is updated to reflect the latest demographic trends and assumptions, the workforce initiatives in place will be calibrated accordingly. The progress of these initiatives should be assessed on a regular basis as well, to determine their efficacy in mitigating talent shortages.
There is no single answer to the question of how to address talent shortages. Each company will tailor its strategy to its unique business circumstances and operating environment. The most successful employers will develop a creative mix of tactics for addressing five key areas of the workforce management process: defining workforce needs, attracting the right employees, helping people manage their careers, engaging the right workers so they stay with the company, and transferring and managing critical knowledge. Tactics must not only aim to fulfill workforce needs, but also do so in a way that promotes workforce diversity.
Talent shortfalls facing utilities in the near future cannot be addressed satisfactorily with the ad hoc, reactive approaches that have prevailed in the past. Active workforce management processes will allow utilities to identify critical risk areas before they impact business operations, and to craft customized solutions. A structured, data-driven approach to projecting staffing needs on an ongoing basis, combined with active risk management, will help utilities to optimize staffing decisions and emerge with a stronger, more balanced workforce.