Best Practices for Headcount Reporting

Differences in headcounts can be frustrating to executives and managers because they slow down or provide false information about business results, contribute to debates about who has the right numbers, and add hours of work in the form of manual tracking and exception reporting. Perhaps the good news, as noted by the Gartner Group, is that “HR management systems are expanding to include talent and workforce management, and multi-process human resource outsourcing services, as well as new geographic locations (increasing the number of countries/markets with local regulatory support).”[1] The bad news is that this process is still in the early stages for large enterprises.

The Real Reasons for Headcount Reporting Problems

One oft-cited reason for the headcount reporting problem is the different taxonomies finance and HR departments employ to tabulate headcounts. Finance groups typically report and track headcount by cost centers, while HR headcounts are usually summed up based on job role boundaries and managerial or supervisor hierarchies. When cost centers are mapped into a managerial hierarchy, the top corporate or division cost center is usually the only one accounted for. Changes that occur in lower level cost centers do not normally appear on the HR’s headcount reporting radar and are therefore not included in the count. However, even when these types of cross-functional challenges are resolved, headcount reporting problems still exist. The real culprits are the stickiness of HR change processes and an inability to reliably establish who is a worker.

The Stickiness of HR Change Processes

At the lowest or building block level, cost centers can be readily added, deleted, combined, separated, and realigned on a monthly basis. Managerial or supervisor hierarchies are, on the other hand, stickier or slower to change. Changing the personnel side of the business extends well beyond cost center code changes. Managerial approval processes, workforce management systems, administrative applications, and workflows need to be updated along with roles, job descriptions, compensation formulas, incentives, benefits, stock option plans, and bonus reviews. Changes must also be documented and verified so that they do not adversely affect workers on the basis of age, race, and sex. In some cases, unions and work councils must also be notified. These constraints mean that HR change processes will always lag financial and business change processes.

Given the stickiness of HR change processes, workforce planning efforts need to account for and build in transition periods for HR to catch up and realign with changes in financial and strategic business plans.

Defining Who is a Worker

An accepted definition of workforce planning is “the systematic identification and analysis of what an organization is going to need in terms of the size, type, and quality of workforce to achieve its objectives.”[2] The workforce planning process provides a framework to sequence the steps required to obtain the right number of the right people in the right place at the right time.[3] This reinforces the theory that timing and identifying the types of workers with respect to quality, experience, knowledge, skills, and effort levels required to deliver an organization’s objectives are key factors in workforce planning success. According to this model, determining who is a worker is integral. However, in today’s global business environment, the task of determining the worker types needed by an organization can be especially difficult. For example, organizations facing skill shortages or increases in labor costs can now readily access cost-effective alternatives locally or internationally, thus changing the composition of the workforce with very short notice or no notice at all. These types of adjustments often outpace the sticky HR change processes.

The real sources of headcount reporting problems, then, are a failure to properly account for the stickiness of HR change processes versus business and finance change processes and the lack of a sustainable definition of who is to be counted as a worker.

These problems point to a need for organizations to:

• Adopt a broad and adaptable definition “worker,”
• Create planning scenarios that provide for tradeoffs between workers employed across geographic areas,
• Analyze planning scenarios that incorporate changes in the types of workers employed,
• Build a planning method that can support financial planning scenarios, and
• Sustain a planning method that remains consistent with annual headcount numbers.

Companies must also decide if worker types should include geographic identifiers. Smart headcount reporting rules may be needed to align downstream operational headcounts by type with workforce planning headcounts. The challenges are substantial, but clearly, they begin with workforce planning.

Workforce Planning Challenges and Opportunities

To meet the challenges of workforce planning, businesses must be able to anticipate emerging business changes and get ahead of the curve so that the necessary timing adjustments for stickiness and accommodations for potential new worker types can be made. Changes must also be analyzed and tracked on multiple levels.[4] In this article, global market and societal changes and emerging business models are explored as two important opportunities to assist workforce planners in anticipating change.

Expanding Business Choices and Societal Change

Societies are experiencing rapid social, demographic (see Figure 1), economic, technological, and cultural changes. Product life-cycles are shortening, and customers are demanding greater choice and personalized delivery. Meanwhile, employees are demanding more choice at work. Strategies to expand physical and material resources, emphasized in the bygone industrial era, are being challenged by strategies to reduce such resources in today’s service-based era.

Developed countries with productivity measures of $10,000 per worker or higher are experiencing record demographic changes, characterized by declining birth rates, greater longevity, aging populations, and, in some arenas, skill shortages.[5] This focuses attention on the increased competitiveness required of organizations to attract and retain skilled workers in their national and local labor markets. However, when the problem of declining labor supply is considered from a global perspective, a different picture emerges.

Figure 1: Labor Force Growth Projections[6]

In conjunction with the market-seeking and resource-seeking behaviors of global firms, the labor market for skilled workers has also become global, “both in terms of demand and supply for skilled labor.”[7] Global labor supply is expected to grow at an average rate of approximately 40 million persons per year, with the majority of this growth occurring in less developed nations[8] (see Figure 2). This growth represents a new resource for organizations. As such, workforce planners must consider new sources of international demand and competition for skilled labor in order to identify the best choices. These new demands require additional planning resources, new planning and analysis skills, and increased flexibility in terms of HR change processes.

Figure 2: World Population Projections: 1950–2050[9]

However, access to a global talent pool does not necessarily equate with acquisition. Global firms that relocated production centers to access low-cost resources and capture new sources of innovation and new markets are now competing for talent in an environment where internal market demands for talent are rising dramatically.[10] In countries such as India, local firms are turning their talents to internal projects rather than external markets. Similar shifts are also actively underway in China.[11]

While the huge supply of low-cost workers in China has enabled the nation to become the world’s manufacturing workshop,[12] labor pool talent shortages in key skill areas are emerging as concerns. According to the People’s Daily, in 2006, China had 88 vacancies for every experienced, skilled blue-collar worker and 16 vacancies for every factory technician. Difficulties filling senior management positions are also being reported.[13] Access to low-cost workers is also being challenged. In China, pay and benefits are on the rise, with average annual salary increases for mid-level and senior managers at 6 to 10 percent and accountants’ salaries rising by 14 percent per year.[14]

These societal and labor market shifts will require workforce planners to add, reduce, and even eliminate different worker types in the future. With limited resources and an overabundance of possible business strategies to examine, workforce planners will need to carefully pick and choose which trends to follow and which must be reinterpreted to fit constantly evolving business models.

A “Smaller is Better” Business Model

One of the most fundamental and important relationships is that between size (growth) and performance. This raises the question: Is bigger better? If the answer is yes, headcount reporting will focus on existing worker groups and on ways to accommodate and reduce stickiness.

If the answer is no, workforce planners will need to consider new types of alternative workers, including contractors, third-party providers, alliance partners and temporary, off-shore, and outsourced worker types. Employee counts may be fewer, but overall headcounts could rise, especially if alternative workers are cheaper and less productive than current employees. As increased demands for alternative workers by governments and local companies drive up wages, the cost advantages of alternatives will be reduced and business strategies could revert to past trends. Volatility across alternative worker groups will require workforce planners to expand and pull back preferred strategies with equal ease.

In today’s dynamic global labor market, workforce planners must be equally prepared to expand the footprints of alternative worker groups and to reduce them and, in doing so, set the standard for headcount reporting. In general, however, workforce planners should expect the number of alternative worker groups to increase as national labor market demands and societal make-up change. Risk factors are emerging, as they did in financial planning, to define the likelihood that an alternative worker group will be of interest downstream. Typical risk drivers include cost differentials, availability based on internal and external labor market demand, contracting timelines, connectivity differences, and worker productivity or skill differences.

Implications for Headcount Reporting

The challenges that lie ahead for workforce planners have specific implications for headcount reporting. They include:

• Creating a methodology to assess emerging business strategies, especially those based on a “smaller is better” business model;
• Maintaining consistency with financial views, such as position planning;
• Tracking and reporting the impacts of change on different worker groups;
• Providing workers with choices and information so they can make more informed decisions; and
• Incorporating reasonable timeframes to roll out new business initiatives.

These challenges can only be met if headcount reporting can provide information on:

• Full-time employees as well as part-time workers, contractors, temporary, and outsourced workers. Enterprise-wide HR information systems, such as PeopleSoft 9.0, are designed to provide information on these groups and others as “persons of interest” to business and financial planners.
• Alternative worker headcounts in different countries, age groups, and generational subgroups. Changes in the cost competitiveness of different groups in the global labor market affect financial and strategic business choices. For example, if the costs of technical workers in India increase more quickly than in Romania, companies like IBM, which now employs 70,000 Bangalore citizens, will consider moving technical jobs from India to Romania.
• Workers at or near the mandatory age of retirement. The mandatory age of retirement is rising. In Japan, Europe, and the United States, the movement is toward age 70 as the new mandatory age of retirement. Older workers who would have retired at age 65 through 67, based on their country’s mandatory age of retirement, may elect to continue working. Existing business plans to replace older workers will have to be revisited.
• Proposed restructuring of cost centers by financial planners. The headcount reporting problem amounts to more than keeping operating HR headcounts aligned with operating finance headcounts. It also entails keeping HR planning headcounts aligned with finance planning headcounts during transition periods. The stickiness of changes in headcounts during transition periods can be associated with union contracts, Work Council rules in European countries, incentive packages offered to affected workers, and review and acceptance processes rolled out as initiatives.

In summary, workforce planning will require new and better analytical tools to remain aligned with changing business strategies and financial planning analyses. The value of conducting reliable benchmarking comparisons for key workforce metrics, avoiding cycle-to-cycle trend discrepancies, meeting statutory reporting requirements, and using HR knowledge performance indicators to achieve business objectives can only be realized when business strategists and financial planners recognize the need to include workforce planners at the planning table.

[1] James Holincheck. “MarketScope for Large Enterprise HRMS,” Gartner RAS Core Research Note G00154565 (February 19, 2008).

[2] BusinessDictionary.com. Workforce Planning: Definition, http://www.businessdictionary.com/definition/workforce-planning.html.

[3] Ralph Bledsloe. Building Successful Organizations. A Guide to Strategic Workforce Planning. National Academy of Public Administration, (May 1, 2000).

[4] Samuel J. Palmisano. “The Globally Integrated Enterprise,” IBM (2006); Jorn Kleinert. “Trade and the internationalization of production,” Kiel Institute for the World Economy (April 2002); Lynn A. Karoly, and Constantin (Stan) Panis. The 21st Century at Workforces Shaping the Future Workforce and Workplace in the United States. RAND Corporation (2004).

[5] Brad Jorgensen, and Philip Taylor. “Older Workers, Government and Business: Implications for Ageing Populations of a Globalising Economy,” Institute of Economic Affairs Journal, 28, no. 1 (2008): 17–22.

[6] OECD. “Ageing Populations: High Time for Action,” Meeting of G8 employment and labour ministers (March 10–11, 2005).

[7] Petra Zaletel. “Competing for the Highly Skilled Migrants: Implications for the EU Common Approach on Temporary Economic Migration.” European Law Journal, 12, no. 5 (September 2006): 613–365.

[8] Global Commission on International Migration. “Migration in an Interconnected World: New Directions for Action“ (October 2005).

[9] United Nations. “World Population to 2300,” (2004).

[10] MGI. “The Emerging Global Labor Market,” (2005).

[11] Diana Farrel and Andrew J. Grant. “China’s Looming Talent Shortage,” The McKinsey Quarterly, (November 2005).

[12] Ibid.

[13] Manpower.com, “The China Talent Paradox,” www.manpower.com.cn.

[14] “China’s People Problem,” The Economist, April 14, 2005.