Why organizations should take a strategic approach to human capital management

Marni Rozen, director of management consulting for human capital at RSM US LLP, joined ACG’s Middle Market Growth Conversations podcast to discuss how organizations can take a more strategic approach to addressing current trends and challenges in talent management.  

Rozen describes the Great Resignation’s impact on companies of various sizes and in various industries, along with ways to mitigate the risk of attrition. She also covers how current talent trends are affecting mergers and acquisitions, including private equity, and outlines key post-transaction steps to help smooth the integration. 

At a time when human resources departments are under intense strain, Rozen points to outsourcing and other measures to relieve some of the burden. Finally, she addresses wage inflation, and how employers can be proactive rather than reactive when designing employee benefits programs. 

This interview has been edited for clarity and length.

Middle Market Growth (MMG): I've been starting these conversations in this operational excellence series by asking each of my guests from RSM about the developments from the past two years that have had the biggest impact. In your area, human capital, and talent management, what would you say those developments are?

Rozen: It's a great question. I think we all have felt some of the impact of the last two years as it relates to the pandemic and the shifts around talent. While many organizations have recovered from that initial impact—from needing to respond to some of that crisis management around the pandemic—and are starting to level out, there's certainly been a shift from the employee perspective, and thinking about what they're looking for or what their experience needs to be at an organization, and what they expect from the company they're working for.

A lot of things have changed around employees’ priorities—like flexibility, career pathing, diversity. That is really contributing to what we're seeing as most are talking about the Great Resignation. It's no wonder we're seeing a flood of individuals leaving—either going out of the workforce or moving to new opportunities.

As we know, there has been the highest churn and attrition in the U.S., as workers are leaving at a rapid pace. Four million workers left their jobs in the summer and fall every single month. So that's what companies are having to deal with and then wondering how to combat it. It's very challenging, because when you look at organizations that are facing a lot of attrition, they're also facing skill gaps internally and trying to determine how they can retain the workforce they do have and ensure an experience that is meaningful, to keep them sticking to the organization.

As for remote work, we are seeing this being something that's going to stay. A lot of companies that historically hadn't had any type of remote workforce are now shifting to more of a hybrid model. In the middle market about a third of companies now have some type of remote workforce, and about 50% of those companies intend to keep it long term. How we manage a remote workforce becomes, or can be, more challenging, and finding ways to keep the workforce engaged is something organizations really need to focus on.

There has to be an acceptance for that shift, on how you balance needing to potentially be in the office sometimes, but also employees want flexibility. Those are some of the biggest things that have occurred over the last two years.

MMG: A lot of these, I think, are being felt across industries. You know, certainly, the Great Resignation hasn't been concentrated in any one place necessarily. A lot of businesses are having to grapple with this, and same with the shifting worker priorities that you pointed to. But I do wonder if you've observed any differences across industries.

Rozen: We have seen some differences across industry, but we've also seen some differences where you look at the size of company. Where we focus in the middle market, most of the organizations with less than a thousand employees are struggling, particularly in this environment, and not being able to level off in the churn since it's been surging from 2020 and not being able to catch up to their larger peer group, which is companies of a thousand employees and higher. Those organizations have seen attrition level out now over the course of the pandemic.

Those smaller companies, they face challenges in needing to both attract and retain workers. So particularly in that space, I think we've seen a variation. And then when we look at industries, there are a few other unique challenges that companies in manufacturing and distribution are facing. We talk about attrition here, but there's also the aging workforce.

You see baby boomers on a much higher scale leaving the workforce entirely. Three million baby boomers left the workforce over the last two years. For organizations like manufacturing and distribution companies—where you've had that type of workforce and no succession plan—it becomes very challenging and creates these skill vacuums that need to be remediated.

Some other industries have actually fared fairly well—like technology, where those organizations have been used to working remotely and didn't have much of a shift. But their talent is very in demand, so the turnover rates in the technology vertical are very high. They need to think about how they differentiate. Where some companies in other industries are looking at flexibility and remote work as a bonus and a plus, technology and industries that had previously been remote are needing to find other motivators to bring talent to the organization.

MMG: It seems like over the past couple of years, human capital and culture have just gotten a lot more attention because of the Great Resignation and the difficulties around attracting and retaining talent. I'm interested in whether this has led to any change in the M&A process, perhaps in terms of how buyers are evaluating a target, what they're focusing on during due diligence. Are you seeing any shifts around M&A?

Rozen: It's interesting, because most PE firms haven't historically done operational due diligence. If they are, it's not focused in HR. And that creates a significant risk, because the most impactful issue to a deal is generally culture. Culture was recognized as the highest risk to integration—and therefore, being able to look at that pre-deal and do due diligence around that on a potential target is really important.

It creates the opportunity to avoid and mitigate some of that risk, while also understanding the business of the target, when it's really critical to see what leadership is there, what the roles are, and the people that you need for the future, and making sure you have the right people to steer the ship. Doing that on the front end and being able to evaluate that can really help to avoid any of the pitfalls that you would typically see related to people and talent after you've actually gone through an acquisition.

MMG: Are any other human capital-related areas critical to focus on during a deal or that tend to get overlooked but deserve more attention?

Rozen: A lot of the work we do with our clients is really to think about—as you acquire and integrate—how you harmonize business processes, policies and technology. There's not always thought given to that, and you can end up with a lot of disparity where you have—especially in HR—multiple benefit plans and variations of policy and different ways to do things and no accountability for a process. And then on top of that, you have disparate systems.

If you have multiple HR systems or multiple finance systems, there's no one source of truth. That's really challenging for PE firms, when they are not able to get data they need and not able to look at even a complete census for employee count. Looking at that beforehand, to harmonize what you need to and build a plan around that Day 1 readiness—and even what you do Day 100 and Day 365—that road map becomes critically important to focus on.

We found that when you do that on the front end and you have a strategy around what the operating model is going to look like—who are the people that are going to be in leadership roles, what you are going to harmonize across businesses—that can enable success and make it much smoother and, in turn, really minimize the disruption to the business.

There is a renewed focus on change management and making sure there is a thought process around that, including how you think through the employee experience and making sure that whatever change you're going through related to a transaction isn't going to impact negatively with a ton of change and not being fully thought out and communicated.

MMG: I imagine this would be especially important right now. Change is scary at any point, but especially in a moment like this, I think employees do feel like they are empowered to leave or go find another position. If you don't handle that well, you're probably at an even greater risk than you would have been years ago just of folks leaving.

Rozen: Exactly. And a lot of organizations look at things like retention bonuses to be able to keep those key leaders at the organization at least through a deal. But it's not hugely helpful if they leave as soon as they collect that retention bonus—if they don't see the opportunity long term of the organization and you lose all of that knowledge.

It really is an investment on the front end, but then has ramifications if those folks actually leave the organization. So it really does need to be focused on.

MMG: Then post-transaction, it sounds like part of the work is implementing the plan that the firm should be coming up with ahead of the deal, with the private equity firm looking at how they can harmonize some of these processes. What else should leaders be doing post-transaction to better leverage human capital as a way to optimize the business after an acquisition?

Rozen: One of the key things is really to think about how to align culture—how you communicate and how your leaders are going to establish what those cultural pillars are, and what is the vision for the future company. Those are areas that maybe don't have consensus.

Driving communication and transparency and making sure there is a plan around that is key. As you said, when employees feel they have no control or they're in the dark or they don't know what's going on, that can contribute to toxic culture, where they don't have trust in the organization. They don't feel they're supported, they're afraid of what's going to happen next.

Giving some thought into the culture you're going to build in the future-state organization is really important. What are you going to stand for? What are employees going to buy into? We think about it as the employee value proposition, both internally and externally. Those are critical things that are impactful, not only for the folks you're trying to recruit to the organization, but for the folks you have. They need to be tied into what that employee value proposition is.

MMG: Where does some of the work we've been talking about around human capital and talent management fall? How much of that should rest on the shoulders of HR vs. non-HR executives as they lead the organization?

Rozen: As you've heard me say, the leadership tone at the top is really important, and HR needs to be a strategic partner to those leaders. It is really important that HR has a seat at the table and is driving that strategy. But they also need to drive accountability with their leadership. HR can help shape and manage those initiatives, put frameworks in place, help define what that vision is, but ultimately there's a responsibility for leaders and even all the way down to transcending that, to front line managers, to carry those things forward.

Everyone has a role to play. But HR is the glue that keeps it together and needs to be forward-thinking around how they are going to be strategically aligned to the business versus being really reactive. There are times when HR can get stuck in firefighting mode or in the tactical nature of what we see in HR. Being able to have alignment with leadership and really think strategically about what you need in the future, in a year and two years and three years, versus what are we going to transact right now, is the way to elevate HR.

MMG: I'm hearing you suggest HR professionals need to be proactive, and innovative in a way that maybe they didn't need to be before, or at least there was less pressure. I wonder if you've seen any change in the resources allocated to HR or other talent management roles, as human capital gets this greater focus.

Rozen: HR is really feeling a strain right now, because not only do they have their day jobs of helping to run the human resources function of the business, but they also are in crisis mode a lot of the time. They need to respond to the changing regulations, need to manage how you respond to COVID, and COVID tracking and triaging—all the things coming at them constantly.

It becomes very hard to manage the three pieces: the running the business-as-usual tasks, the compliance and the challenges of being able to support the workforce with all the regulatory pieces, and then the strategic pieces that we just talked about, which sometimes aren't prioritized. So we are really seeing a focus around how you can alleviate some of the mid-, lower-value tasks that HR does.

Some companies are looking at outsourcing to do that and pull in resources from other vendors that can take some of that burden off HR while they invest in other skills for their HR team, including things like wellness and coaching and having HR really be a pillar of that. We've seen some organizations add those roles to the HR team, so they can drive what employee wellness is going to need to look like.

The other pieces are within diversity and inclusion and the shifting priorities for employees. Most are now really focused on joining an organization that is diverse, that has inclusive leadership. Those are areas that sometimes, or a lot of times, fall into HR's wheelhouse. HR really needs to lead on what those diversity and inclusion initiatives are, learn new skills around that, how they can overcome biases within the organization, and drive on those pieces. We are seeing a significant investment around DE&I, ESG programs, that HR has a role in.

MMG: I want to go back to your point about outsourcing. That theme has come up in the conversations with your colleagues in cybersecurity, in IT, in finance. It seems like, across the organization, outsourcing is being used to mitigate some of the talent shortages that companies across the board are facing. I wonder if you could talk about the use of outsourcing as a strategy right now or other techniques that companies are using to bridge the talent gap, both in HR as well as more widely across the organization?

Rozen: Sure. Outsourcing generally has been used in HR to take the burden of the actual transactions, the pressing the button, if you will. So being able to outsource things like payroll administration, benefits administration, a help line for password resets, are some of the things you may have heard my colleagues say. There are other ways organizations are looking to organize around robotics process automation, to drive automation to really enable their team members—not to replace them, but to enable them to take on more strategic functions or focus on higher-value areas.

We've seen a lot of organizations deploy bots or co-bots to take some of that burden from their teams. Anything that's administrative, repeatable, that doesn't really need to have a focus from a team member, are all great things that can be offloaded and ultimately add a lot of value, not needing a head count to do that. Those are some of the other ways we're seeing companies respond.

MMG: Are there any other trends beyond what we've already talked about within the human capital arena that you expect to really impact businesses in 2022, that investors or operators should be aware of?

Rozen: One in particular is compensation inflation. What we know from surveys done for our Middle Market Business Index is that 59% of companies intend to raise compensation levels, and that is challenging when you are an operator and need to offset some of that cost.

Organizations are trying to think about how to do that. They know compensation really needs to be aligned to market. Being able to think through your compensation strategy is going to come into view. But it’s not only base salary, it's also incentive programs, equity and total rewards—so benefits is a key driver as well. And it's not only health benefits, it's also other fringe benefits—being creative around that and at the forefront of what your employees are looking for.

It’s really important to listen. It's not always one-size-fits-all. And I think organizations who are seeking out employees to get their feedback on what they want to see can really make good investments around that. Being proactive rather than reactive is where I see us going, so that HR can do some of that work and make sure they're guiding the organization they work with, in order to focus on what's most important—because that priority can help retain talent.

MMG: It's an interesting point about listening to employees, because although it seems obvious, I could imagine organizations trying to implement benefits because other companies are doing it. But if it's not what the employees really want, it might not be the best-spent dollar.

Rozen: Exactly. You don't want to throw money at a problem that's not actually going to solve it. So, measurement. The other piece around that is being able to have touch points where you are actually measuring not only from what employees are saying, but also through data and things like predictive analytics and AI. That's another area that technology is really evolving in the HR space, where you have predictors of who may leave. Sometimes those are related to being able to look at who hasn't had a raise in a number of years or who is not necessarily being recognized for work and being able to use some of those data points to see where those gaps are. Also, once you make changes to an organization, actually tracking them. What metrics are you going to use to know if they're successful? You can think through what the root cause issues are and then know if you've actually come out on the other side. Those things are really important.

Podcast originally published by Middle Market Growth.