Labour Market Crunch Time

Unemployment is at a 30 year record low Business growth is being constrained For staff members, “loyalty” has been replaced by “employability” This article explains how SME owners and managers can develop strategies to “beat the labour market”… Martin Price - Director Online Executive Search

WHAT’S HAPPENING IN THE LABOUR MARKET-THE KEY EXTERNAL TRENDS THAT IMPACT BUSINESSES

As one indicator of future expectations, 60% of employers in the HR Equations survey forecast no change in labour market conditions, 39% expect conditions to worsen and tellingly, only 1% see the market as easing.

Low unemployment is here to stay

“People-factors” have increasingly become mission-critical in determining financial results

Current unemployment is at a record low of 3.8% and is predicted to remain low for the foreseeable future - not an economic blip that we can hope will go away if we baton down the hatches and keep our fingers crossed: ‰ We have an aging workforce. It is estimated that in three years, two workers will retire from the workforce for every new one entering it ‰ Steady, positive economic growth of around 3% is predicted, which will reinforce demand for labour, not reduce it ‰ Mismatches between skills demanded by the labour market and output from the education system. NZ continues to produce far too many lawyers and accountants and far too few tradespeople, technologists and engineers ‰ Rates of new immigrants coming into NZ has slowed ‰ NZ immigration policy is several years behind the needs of the labour market. There appears to be a tendancy to favour migrants with strong academic qualifications as opposed to less-qualified people with good Englishspeaking skills who can “land running” into new jobs

Since the 1980’s, people-management and Human Resources practices are becoming an increasingly important determinant of financial outcomes for businesses, for example: ‰ In his book ‘The Age of Unreason’, Charles Handy estimates that intellectual assets are usually worth three to four times the tangible book-value of an average business, across all industries. ‰ Handy also notes that financial capital is in abundance whilst at the same time, individual employees are becoming increasingly aware that the key intellectual property that is needed sits inside their heads and is owned by them , not their employer. ‰ A 1999 study by the University of Southern California showed that companies which implemented certain HR practices showed a 13% higher return on equity, a 20% higher return on investment & assets and a 60% higher return on sales. ‰ Research by the Saratoga Institute shows that anywhere from 15% to 30% of a company’s total value can be correlated with the existence of specific HR practices.

(NB In a major Labour Market survey of NZ’s 100 largest employers undertaken by HR Equations in December 2004, the existence of inadequate outcomes from Immigration policy and programmes was a key finding)

Employees are becoming much more expensive assets for businesses and this trend will intensify The cost of employees is increasing and this trend is here to stay. It is a massive increase in cost, driven by big increases in

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voluntary staff turnover, more investment in training as ‘knowledge-jobs’ increase compared to ‘process-jobs’, a mismatch between education and skill-requirements, demographic changes due to an aging workforce and talent shortages in certain ‘scarce-skill’ areas. For example, some research from a human resources perspective by the Saratoga Institute and Rainmaker Thinking Inc. shows that human capital in the US economy has the following features: ‰ Cost-per-hire has increased 40% since 1997 ‰ Training costs have grown by 36% since 1997 ‰ Over the same period, the rate of voluntary staff turnover has increased 80% ‰ Since 1996, an increase in absenteeism of 14% ‰ Low unemployment, even in a recession, of 5% In NZ as well as offshore, the recessions, redundancies, restructurings and cut-backs of the last 15 years have reinforced the ethic amongst employees that being mobile in the labour market is desirable. Thus, we now have an embedded culture in the NZ workforce that changing jobs every 18 months-to-3 years is both acceptable and a valuable thing to do. The HR Equations survey shows that: ‰ remuneration for skilled-labour jobs (positions over $40,000 salary) has increased by an estimated 30% net of inflation over the last ten years ‰ staff turnover rate for jobs up to $50,000 salary is, on average, 23% per annum for businesses ‰ Recruitment has become a “more for the same” scenario – it takes employers more time, money and effort to get the same recruitment result as it did 5 years ago

FIRST: CHOOSE A LABOUR SUPPLY STRATEGY Labour Market conditions mean SME’s need to plan their supply of labour, applying the same business planning principles as they might apply to the purchase of any major asset or investment. It makes financial sense to do so; personnel costs are usually 40% to 70% of a SME’s annual expenditure.

“25% of companies cite labour as the single factor that most limits their ability to grow revenues” - NZ Institute of Economic Research

The key is to choose the right mix of recruitment tactics for the parts of labour market you deal in. As some hypothetical examples of a Labour Supply Strategy: 1. ‘Company A, Hi-Tech Software and Equipment Business This company has a highly-skilled workforce, which is reflected in a median salary of $70,000. It decides to do its own recruitment for 80% of its vacancies. To equip its line managers with the right knowledge and tools to make this strategy work, line managers are trained in recruitment

techniques and efficient processes are developed. To maximise candidate-drawing power, the company adopts a ‘Everyone is a Recruiter’ tactic including a Reward scheme for staff members who refer job candidates. The other 20% of vacancies are ‘scarce-skill’ positions which are contracted to an executive search/headhunting firm. 2. ‘Company B, Retail Service Business’ This organisation has a mainly semi-skilled workforce with a median salary of $30,000. A large ratio of the workforce have broadly common job descriptions in retail & customer service. It decides to outsource its recruitment to one preferred recruitment supplier, who also develops an assessment centre for the company to ensure consistent high standards across the country of incoming retail & customer service staff. The company utilises job fairs and contact with community groups to increase the reliability and volume of its intake. A successful recruitment improvement programme will often have a Return on Investment of 40%-200%. This is excellent investing given that typical investments in capital such as IT, plant or machinery have ROI’s of 20%-40%. There are a range of measures that can be adopted to help calculate the financial impact of recruitment improvement programmes, including productivity lost from voluntary staff turnover, recruitment & induction costs and productivity loss per new hire.

SECOND: MAKE SURE YOU’RE PAYING RIGHT In a tight labour market, its vital to support a Recruitment strategy by making sure you’re paying competitive levels of Remuneration and have an effective Pay Review process. Part of this should be to ensure your very best performers are paid toward the top end of the market. Top performers deliver productivity far greater than the average person and find it very easy to get new jobs. As a result, it’s easy for them to fall behind their true market worth. Of course, Remuneration is only one piece of the staff retention pie. However, when sound, reliable staff members can readily pick up a 10% pay increase by changing jobs and top performers gain a 20%-30% pay increase, then it pays to know in detail where one’s pay rates sit in the market. Again, it can be a ‘more-for-the-same-scenario’; Economist Brian Fallow notes in the NZ Herald that for many NZ firms, increasing wage pressures will have to be found from existing profit-levels.

“The relentless upward pressure on wages … is likely to continue for another two years” - Brian Fallow, Economist

RECRUITING SUCCESSFULLY COMPETITIVE ADVANTAGE BY TAKING ON SOME NEW TACTICS The HR Equations survey shows a significant trend for large businesses to diversify their recruitment channels (or sources) to maximise the number of relevant candidates for job vacancies. There are a wide range of recruitment tactics SME’s can implement to ‘beat the labour market’. Some solutions include: 1. Preferred Supplier and Master Vendor Agreements – formally outsource to a recruitment firm Outsourcing all of the organisation’s recruitment to one (Master Vendor) or a few (Preferred Supplier) recruitment firms has taken off in the last five years. The quality of candidates improves. The recruitment firm takes on less risk & cost and prices therefore drop significantly. Assessment on which candidates best fit the culture becomes more reliable as candidates are not “sold” by the recruiter to earn a fee. A win-win contract and partnership can be created. The HR Equations survey found that these types of Agreements are rated much more highly than general use of recruitment firms. Organisations with these Agreements reported the following : ‰ ‰ ‰ ‰

73% have reduced cost via reduced recruitment agency fees 64% report reduced time to recruit and another 9% that it’s too soon to tell 77% report improved calibre of external candidates 55% report improved candidate assessment standards

2. Improve your recruitment results - train your managers & improve the process By providing your line managers with knowledge on how to Interview and undertake Verbal Reference Checks you can significantly improve the reliability and quality of your staff intake. Similarly, a recruitment process that is fast as well as thorough will add value because you will recruit faster and with a high ‘strike rate’ on quality. 3. Taking advantage of the technology-much better contact with the skills you want, faster, for longer and at lower cost For skilled labour, the internet provides tremendous opportunities to improve the reliability of bringing buyers and sellers of labour together. Companies can market themselves directly to high value employees over a sustained timeframe via searchable job banks and auto-notification of vacancies. Candidates are easily provided with value-add services such as CV builders & storage, advice on interviewing, news & trends. Recruitment cycle times and costs are reduced. The HR Equations survey shows that the internet is now on a par with the newspaper in terms of advertising effectiveness,

yet newspaper costs are often between two times and ten times more expensive than the cost of the internet. The internet also provides the opportunity to unbundle recruitment firm services and take a modular approach. e.g. you advertise yourself and collect CV’s but then pay the firm to undertake short-listing and appraisal. 4. Everyone is a recruiter - maximise your company’s knowledge of labour supply to improve results All of your organisation’s employees will know people who have skills that you will need. e.g. employees often have excellent knowledge of which company’s and individuals are good performers within their field within the labour market. This information can be systematically captured and used to great advantage. A ‘Reward & Recognition’ programme can be established to help get staff involved. For each placement, the ‘Reward & Recognition’ programme will cost a fraction of otherwise paying recruitment fees. The HR Equations survey notes that referrals from existing employees is “rated highly by 60% of organisations as a source of candidates but vastly untapped.…..almost always left to chance with few organisations making a systematic, thorough job of it”. 5. Labour supply plans-working out where the replacement skills are before you need them to improve candidate quality and reduce costs This requires a commitment to developing a detailed understanding of the labour market niches pertinent to a company. Line Managers should have a detailed understanding of their key supply markets that make for competitive advantage, including labour. Labour Supply Planning means identifying skills/qualifications required for jobs; where those skills exist, (likely current employers, job functions, tertiary education); and what is the best channel to reach those skills. In effect, knowing where good candidates are before vacancies actually occur makes for faster, more reliable recruitment. 6. Create an ‘Alumni’ or ‘Networking Association’ for former staff members Keeping in touch with former staff members on a regular basis makes it easy to retain contact with key skills. The company can tap into their knowledge of their particular labour market niche and perhaps, re-hire good people either permanently or for a project. In return, the Association enables previous staff members to expand their own networks, keep abreast of commercial developments and keep in touch with colleagues. 7. Pre-qualify pools of immigrants to fill future vacancies on an on-going basis Businesses with reasonably large volumes of one job-type may find value in this approach. For example, one company sent

management staff offshore and pre-qualified/selected 50 potential new employees for a current intake (a large one-off demand) and future on-going vacancies. Cost-per-hire by prequalifying candidates en-masse was much lower than the blow-by-blow approach of recruiting separately for roles as they came up within New Zealand. 8. Formalise links with UK and Australian recruitment agencies for returning Kiwis For specific job/skill categories, employers can established formal links with recruitment firms in the UK and Australia with a view to recruiting returning New Zealanders before they physically arrive back.

Depending on the job concerned, adopting formal policies to put meaning to the term “flexible workplace” can increase recruitment response rates as well as appeal to existing staff. Examples can include changing the hours of shifts so parents can collect children straight after school or implementing a ‘Work-from Home’ programme, enabling office workers to have more flexible hours and avoid some rush-hour traffic (especially pertinent in Auckland). “Intellectual property now has a person’s name attached to it . . . In a bizarre way, Marx’s desire and prophesy, that workers should control the means of production, will have come true.” - Charles Handy

9. Develop relationships with immigrant communities Employers of unskilled and semi-skilled staff can find a ‘winwin’ value proposition in forming relationships in a variety of ways with immigrant communities, from advertising in community newsletters to establishing a regular dialogue with community leaders and representative groups. 10. For seasonal workers, form partnerships with other employers Where seasons-of-work are complementary, different businesses can form partnerships which encourage and facilitate staff to move from one employer to the other and provide work-continuity for employees. 11. Job fairs or ‘open homes’ for semi-skilled workers Job fairs or ‘open homes’ can be used to attract semi-skilled workers, providing a good opportunity for the employer to show the benefits of working for them, making it easy for prospective employees to take a look at the employer and the job and also, convenient to drop in a CV or fill in an application form. 12. Developing a programme to attract older workers As the labour market tightens & people are staying healthy for longer and mature workers are showing they possess the same creativity as workers of any age and greater loyalty, the traditional recruitment practice of ‘Age-ism’ (discriminating against older workers) is disappearing fast. 13. Different methods of recruitment advertising- “get behind the eyeballs of the targeted candidates” Various kind of media are being actively trialed, as employers seek to more accurately target their audience. Some actual examples include advertising jobs in the bathrooms at a major sports stadium; letterbox drops; advertising in shopping centres; specialist magazines for specialist staff; community and special interest group newspapers are also regularly being used. 14. Changing the hours and location of jobs to increase the response rate from candidates

OUR TEAM Martin Price – Director Martin worked as a Recruitment Consultant and Regional Manager with profit-centre accountability in the executive recruitment industry for eight years before joining Telecom New Zealand, NZ’s largest public-listed company. He held several senior Human Resources Manager roles over an eightyear period for the Group, including General Manager Human Resources (Acting), Head of Organisational Development and Head of Remuneration & Benefits. He then established HR Equations Ltd, a strategic HR consulting firm, in 2001 and in January 2006 he purchased a 50% share in Online Executive Search Ltd. He has a BA (Psychology & Marketing) from Auckland University. Marcus Clark – Director Marcus has 10 years experience in executive recruitment gained in large consultancies including 3 years with Sheffield. He established Online Executive Search 4 years ago. Prior to entering the recruitment industry, Marcus spent 10 years as the Managing Principal of a consultancy specialising in contract commercial management of agribusiness enterprises owned by offshore investors. Marcus has a BSc (Industrial & Organisational Psychology) from Canterbury University. Jo Mills – Associate Jo has 6 years experience in executive recruitment gained in large consultancies and in-house recruitment roles, including 2 years with Sheffield and 2 years as an HR Advisor with OfficeMax (formerly Boise Office Products). Whilst with OfficeMax she gained extensive experience in managing large-scale recruitment projects and assessment centres for customer service and sales staff. Jo has a BSocSci in Psychology & Sociology and a Graduate Certificate in Career Development. Hawon Lee - Associate Hawon has a Bachelor of Arts in Psychology with First Class Honours from Auckland University, including being awarded the Senior Prize for Psychology. She completes her Masters degree in Industrial Psychology in May 2008. Hawon manages the New Zealand Staff Turnover Survey and assists with Recruitment and Human Resources projects.