In many companies, HR strategy is disconnected from business strategy. According to a 2008 McKinsey Study, 58 percent of line managers and 25 percent HR professionals say that HR lacks the capabilities to develop talent strategies, that are aligned with business objectives. In a 2008 survey by Hewitt, 78 percent of companies said their workforce strategies are aligned with business strategy to at least some extent, yet just 17 percent say that is true companywide.

Strategic Workforce Planning (SWP) engages business leaders in analyzing the workforce implications of their strategy so they are not blind-sided later on by unanticipated challenges, such as the cost, quality or availability of talent needed to execute that strategy successfully.

What is SWP?

SWP is the formal process that connects business strategy to human resource strategy to ensure that a company has the right people in the right place, at the right time, and at the right cost. Companies gain a clearer understanding of which skills will be critical to business success and which roles will be hardest to fill, as well as regional variations in human capital quantity, quality, and ROI. These insights help them align their talent investments and business priorities.

While SWP requires an in-depth conversation about long-range business strategy, it also relies on quantitative analysis. SWP uses technology to integrate workforce data from across the company and marry it with other kinds of data, for example, from finance and operations. It employs statistical tools to analyze talent and its impact on business performance and to model alternative scenarios.

As SWP gains credibility and matures, it can become an input to business strategy as well as an integrating process that drives HR practices and strategies. Business leaders can use strategic workforce planning to evaluate a variety of options, such as, the costs and feasibility of building a new plant in location A, B or C, based on the local skills supply, infrastructure and labor laws.

Why is SWP gaining importance?

While most companies are still beginners at SWP, there are compelling reasons for developing their capabilities. In countries like US, Europe, Japan and Australia, two demographic trends – the aging workforce and the smaller pool of younger workers – have led many companies to launch SWP. Globalization is another driving factor. Large multinationals need to manage their worldwide workforce and optimize their use of human capital, including permanent, full-time employees, part-timers, contractors and consultants. Just as supply chain management (SCM) helps companies rationalize their value chain, SWP lets them make better decisions about how they deploy and manage talent. Like SCM, SWP only became possible once companies had the technology to manage and analyze large data sets to produce new forms of business intelligence.

The differences

Companies frequently confuse operational workforce planning with this newer approach. While the purpose of operational workforce planning is to forecast short term headcount, the purpose of a strategic workforce planning is to produce information and insights to support strategic business decisions. Operational planning tends to focus on detail and precision while a SWP lays emphasis on dialogue with senior executives to better comprehend business strategy and changing environment, the work implications and critical roles and skills. The output of operational planning is headcount and staffing plans, while that for SWP is referred to as directional numbers. The critical differentiation lies in the fact that an operational planning more often than not is built on one assumption (single scenario) with a timeline of a maximum of 2 years, while SWP factors in multiple scenarios over a period of 2-5 years.

The pay-off from SWP

Strategic Workforce Planning evaluates strategic business scenarios to effectively manage human capital risk and its impact on strategy execution. Companies identify, assess, prioritize, and treat companywide risks through enterprise risk management; however, risk management often omits human capital issues altogether or focuses on a limited number, such as senior management succession. Yet a company’s workforce typically accounts for at least half of its operating costs and has a significant impact on performance. SWP helps companies prioritize their human capital investments and leverage talent across business lines and geographies to drive business results and reduce costs.

Dr. Mary Young is the Principal Researcher, Human Capital at The Conference Board