Managing demographic risk.

In developed nations, the workforce is aging rapidly. That trend has serious implications. Companies could face severe labor shortages in a few years as workers retire, taking critical knowledge with them. Businesses may also see productivity decline among older employees, especially in physically demanding jobs. The authors, partners at Boston Consulting Group, offer managers a systematic way to assess these dual threats--capacity risk and productivity risk--at their companies. It involves studying the age distribution of their employees to see if large percentages fall within high age brackets and then projecting--by location, unit, and job category--how the distribution will change over the next 15 years. Managers must also factor in both the impact of strategic moves on personnel needs and the future supply of workers in the market. When RWE Power analyzed its trends, the company learned that in 2018 almost 80% of its workers would be over 50. What's more, in certain critical areas its labor surplus was about to become a sizable shortfall. For instance, a shortage of specialized engineers would develop in the company just as their ranks in the job market thinned and competition to hire them intensified. Reversing its downsizing course, RWE Power took steps to increase its supply of workers in those key positions. The authors show how companies that face talent gaps, as RWE Power did, can close them through training, transfers, recruitment, retention, productivity improvements, and outsourcing. They also describe measures that companies can take to keep older workers productive, including workplace accommodations, revised compensation structures, performance incentives, and targeted health care management. The key is to identify and address potential problems early. Firms that do so will gain an edge on rivals that are still relentlessly focused on reducing head count.

The surprising economics of a "people business".

When people are your most important asset, some standard performance measures and management practices become misleading or irrelevant. This is a danger for any business whose people costs are greater than its capital costs-that is, businesses in most industries. But it is particularly true for what the authors call "people businesses": operations with high employee costs, low capital investment, and limited spending on activities, such as R&D, that are aimed at generating future revenue. If you run a people business-or a company that includes one or more of them how do you measure its true performance? Avoid the trap of relying on capital-oriented metrics, such as return on assets and return on equity. They won't help much, as they'll tend to mask weak performance or indicate volatility where it doesn't exist. Replace them with financially rigorous people-oriented metrics-for example, a reformulation of a conventional calculation of economic profit, such as EVA, so that you gauge people, rather than capital, productivity. Once you have assessed the business's true performance, you need to enhance it operationally (be aware that relatively small changes in productivity can have a major impact on shareholder returns); reward it appropriately (push performance-related variable compensation schemes down into the organization); and price it advantageously (because economies of scale and experience tend to be less significant in people businesses, price products or services in ways that capture a share of the additional value created for customers).