The Workforce Planning Process

Workforce planning is the process of predicting an organization's future employment needs, as well as the availability of current employees and external hires to meet those employment needs, develop talent capabilities, and execute the organization's business strategy. The workforce planning process typically includes five steps:

1. Identify the business strategy and competitive advantage. A firm's strategic vision, mission, and strategy affect current and future staffing requirements by influencing the types and numbers of employees needed. It is also important to understand the behaviors and skills your company needs from employees to execute its business strategy so that you can enhance these behaviors through talent management.

2. Articulate the firm's talent philosophy and strategic staffing decisions. Firms differ in their commitment to tasks such as promoting workers and retaining workers as well as in their preference for hiring people with certain skills or training them after they are hired. Because these factors influence the nature of the firm's future labor supply and the type of workers it will need, they are important to understand when forecasting and planning.

3. Conduct a workforce analysis. Forecast both labor demand and labor supply, and identify any gaps between the two.

4. Develop and implement action plans. Develop action plans to address any gaps between labor-demand and labor-supply forecasts. The action plans should be consistent with the firm's talent philosophy. If not, the talent philosophy should be refined to close the gaps. Action plans can include recruiting, retention, compensation, succession management, and training and development. Action plans can be short-term or long-term, depending on the firm's needs and the predictability of the environment. Organizations usually develop both short-term and long-term plans, and review and update the long-term plans based on external and internal changes. Action plans to address aging workforce issues, or workforces that have a disproportionate number of similarly aged employees, may need a longer time frame, as would a strategy to redesign benefits and compensation to retain employees in tight labor markets.

5. Monitor, evaluate, and revise the forecasts and action plans. Evaluate the effectiveness of the workforce plan in meeting recruiting and hiring goals. As the environment changes, forecasts and action plans may need to change.

Forecasting is not an exact science; it is rare for a forecast to be exactly right. Given this uncertainty, it is usually best to construct estimates as a range, providing low, probable, and high estimates. Recalculate estimates as changes happen in the organization's internal and external environments and as the firm's relevant assumptions and expectations change.

Although creating forecasts and plans is easier in more stable organizations and more challenging when a company faces rapidly changing conditions, planning is most valuable for firms experiencing (or that will experience) rapid change because of the greater need to guide actions in the face of uncertainty. The time frame for workforce planning should reflect the length of the business planning cycle. Business plans typically have both a long-term (e.g., three to five years) and a short-term (e.g., annual budget) component. Workforce planning typically reflects both of these time frames. Short-term workforce planning involves the necessary sourcing, recruiting, development, and separation activities to be accomplished in the coming year, although these short-term actions should also support the long-term human resource and staffing strategies.

The core of the workforce planning process involves forecasting the firm's future demand for labor of different types (and the likely future supply of this labor), identifying projected labor surpluses or shortages, and developing action plans to address any forecasted talent gaps. Action plans should proactively address both projected surpluses and shortages to minimize them in ways consistent with the firm's business strategy, talent philosophy, talent strategy, total compensation goals, and broader HR strategy. Figure 1 illustrated the workforce planning process.

At the very least, workforce planning should be done for those positions throughout the organization that create wealth, as well as those considered critical for the success of their unit and the firm as a whole. If innovation and intangible assets such as knowledge or creativity generate a firm's competitive advantage, then top management and knowledge workers are essential. If an organization's competitive advantage is based on service, its success depends on the quality and performance of its customer-facing employees. If a vacancy in a position would create problems for the organization, then the position is a good candidate for workforce planning. The accurate identification of these key positions is extremely important, as their being vacant or poorly staffed can affect the organization's ability to perform well. Positions in which top performers significantly outperform average performers can also be important for workforce planning as these positions have the potential for above-average returns on the investment made in workforce planning. Ensuring that the most effective and productive people are placed into these positions can positively affect any company's bottom line.

We next discuss how organizations can forecast the likely future demand for their products and services, which influences their ultimate demand for labor.

Forecasting Labor Demand

The first step in the workforce planning process is to forecast the organization's demand for labor given its forecasted business activity and business needs, which depend on its business strategy. We next discuss forecasting business activity and forecasting business needs.

Forecasting Business Activity

The first requirement in projecting staffing needs is to understand the firm's likely future business activity. An organization's product demand directly affects its need for labor. If an organization is experiencing growing demand for what it does or makes, it will probably need to hire more people to meet this increased demand, unless, of course, it plans to increase the automation of its manufacturing processes. Even if the organization does plan to automate, automation may increase the demand for a different type of talent able to use and maintain the new machinery or technology even as the demand for employees with currently required skills decreases. On the other hand, if the demand for the organization's products or services is decreasing for any reason, its need for employees is likely to fall, perhaps to the point that it needs to downsize rather than hire new workers. Millions of manufacturing jobs in the United States were lost when the global demand for goods weakened after the 2001 and 2008 recessions. It is important to recognize when a decrease is short-term or long-term. For hard-to-recruit positions during short-term decrease in demand, you may need to carry people in anticipation of the rebound.

After identifying what information is needed, the next step is locating reliable, high-quality information sources within and outside of the organization. Accurately forecasting business activity requires identifying key factors affecting business activity, identifying quality sources of relevant forecasting information for those factors, and using these sources to compile complete, accurate, and timely data. These sources differ for different companies and different industries. For example, Cisco's visibility into expected future orders from customers and data on product availability from suppliers enhanced their ability to make more accurate projections about future sales and workforce needs, and to adjust staffing needs accordingly.

The time frame for a business activity forecast is at the discretion of the organization. It may make sense for organizations in relatively stable, predictable environments to make five-year, or even 10-year, forecasts. Organizations in more dynamic, unpredictable environments may have great difficulty making reasonably accurate business forecasts for periods greater than six to 12 months out. Forecasts are best treated as dynamic estimates, and should be revisited and updated regularly as assumptions and environmental conditions change. Constructing short-, mid-, and long-range estimates is also useful because long-range forecasts are likely to be less accurate than short-range estimates due to the increased likelihood of environmental and organizational changes in the long-term.

In developing any type of forecast, the first step is to identify the types of information needed to make an accurate forecast for the type of business the company is involved in. Although many types of information may prove useful in forecasting business activity, we will next discuss five of the most common: seasonal factors, interest rates, currency exchange rates, competitive changes, and industry and economic forecasts. These are useful for evaluating general trends in business conditions and the labor market. However, they do not necessarily address trends in specific lines of business or in the specific types of future talent required.

Seasonal Forecasts. For some organizations, business demands are seasonal and predictable. For example, United Parcel Service experiences a sharp increase in shipping volume from November to January every year due to increased holiday shipping demands. Landscaping firms know that they will need more workers in the summer than in the winter. Because this increased seasonal demand occurs every year, it can be anticipated. For many organizations, business cycles are much less predictable. Occasional spikes and dips in the demand for an organization's products or services can be harder to forecast, but the better an organization can anticipate them the better it will be able to have an appropriate workforce in place.

Interest Rate Forecasts. In forecasting business activity, interest rate forecasts can project the likelihood that the organization will be able to build new plants and increase production in the near future. Higher interest rates discourage capital investment by making it more expensive for organizations to borrow money to fund their expansion plans. Because higher interest rates make goods and services more expensive for consumers who have to borrow money to afford them, product demand tends to decline when interest rates rise and it tends to rise when interest rates fall. Rising interest rates thus generally suggest declining demand for labor, and falling interest rates generally suggest an increase in labor demand. For example, when interest rates fall, the demand for homes tends to increase, increasing the demand for skilled trades workers and mortgage specialists.

Currency Exchange Rate Forecasts. For many companies, especially global ones, exchange rate forecasts may similarly be useful in making business activity forecasts. If a country's currency is strengthening against other currencies, it means that one unit of the country's currency translates into greater amounts of the foreign currency than when the country's currency was weaker. This means that the country's companies can import goods and materials more cheaply because one unit of their currency buys more foreign goods than it used to, but it also means that country's products are more expensive overseas. If a U.S. company does a lot of business internationally, a strengthening U.S. dollar may translate into decreased international demand for its products, decreasing its demand for labor. This effect was seen in New Zealand when beef jerky maker Jack Links had to cut 102 jobs, or two-thirds of its workforce, when the New Zealand dollar strengthened against the U.S. dollar and it became cheaper for its biggest U.S. customer to buy its jerky from Brazil. As a country's currency weakens, prices of its exported goods fall, increasing international demand for things produced in that country and its companies' demand for labor. Exchange rates can be volatile and difficult to predict in the long-term. The more stable the exchange rate, the more accurate and useful the forecast.

Competitor Forecasts. If new competitors enter an industry or open nearby, the demand for a company's products or services may fall. Customers will have greater choice, and this increased competition will tend to decrease the demand for any one company's products or services. Alternatively, if competitors leave a company's market, then surviving companies might experience an increase in the demand for their products or services. If competition increases, the demand for a company's products or services is likely to decrease. Conversely, if competition decreases, business activity is likely to increase. In the face of increased competition from foreign carmakers, many U.S. carmakers, including General Motors and Daimler-Chrysler, experienced declining demand for their products and downsized their workforces.

Industry and Economic Forecasts. The information relevant to making a forecast is likely to differ for different companies and different industries. For some organizations, a monthly tracking of incoming orders can provide clues to the likely order volume the next month and next quarter. The Conference Board's Index of Leading Indicators, a commonly used barometer of economic activity over three to six months, presents a relatively broad picture of the economy and can help identify trends of economic recession or recovery. The monthly Conference Board Consumer Confidence Index measures consumer sentiment by asking survey respondents questions about their perceptions of their job security and willingness to spend money, which can help predict future economic activity and thus demand for a company's products and services. Additional economic indicators include gross domestic product (GDP), the business inventories/ sales ratio tracked by the Department of Commerce, and the Purchasing Managers Index issued monthly by the Institute for Supply Management. Disappointing corporate earnings pre-announcements from a firm's own customers can also suggest a declining demand for its products.

Industries often have their own forecasts, such as the National Restaurant Association's annual industry forecast. An organization can analyze past relationships between these and other indicators to identify which ones tended to accurately predict changes in business demand and use these to predict its likely future labor demand.

Other Factors. Additional factors can also indicate changing demand for the organization's products and services, and the need for changes in the workforce. For example, many firms start hiring as the economy starts expanding so that new employees will be well trained and productive by the time the increased economic growth generates increased business activity for the firm. Some other factors that often cause companies to change the size of their workforce include:

* An increase or decrease in consumer spending;

* An increase or decrease in the unemployment rate;

* An increase or decrease in consumer disposable income;

* Increased or decreased purchases of durable goods;

* Increased or decreased housing purchases; and

* The company entering or exiting a particular line of business.

Business Needs

Business needs can include things such as:

* Achieving the staffing levels necessary for generating a given amount of revenue within a particular period of time (e.g., salesperson staffing levels necessary to generate $5 million of revenue within six months);

* Increasing staffing levels to execute a growth strategy;

* Decreasing staffing levels during a restructuring; and

* Obtaining the new talents needed to create new products or provide different services.

To better size their sales forces in each of their divisions, companies such as Whirlpool calculate the investment in human resources that would be required to reach their optimum profit level. Sizing analyses and statistical models can identify if a company is slightly overstaffed in one channel or has untapped potential in another, and predict the bottom-line impact of each salesperson added.

The most important labor-demand forecasts are often for those positions and skills that will be central to the organization's intended strategic direction. For example, assume an organization is experiencing slow growth in its bricks-and-mortar facilities but it is intending to roll out a new web-based initiative for selling its product line. Labor forecasts might indicate that overall hiring will stay relatively flat, but in light of the new strategic initiative, the company will obviously need experienced IT specialists, computer technicians, and software writers. It will also need customer service employees who are technologically competent. If it cannot hire these people, then the new web-based initiative is likely to fail.

It is a good idea to identify minimal, as well as optimal, staffing levels when analyzing labor demand. There are many ways to forecast labor demand, and we will next discuss four of the most common: ratio analysis, scatter plots, trend analysis, and judgmental forecasting.