6

THE WAR FOR TALENT

Dealing with Scarcity in the Midst of Plenty

Trespassers will be recruited.

Sign on the walls of a software company in India

Finding people [in China] is easy. Finding the right people is harder.¹

Andy Cosslett, CEO, InterContinental Hotels Group

Between them, China and India account for 40 percent of the world's population and about the same proportion of its workforce. The size of the labor force is not just large but has been growing at a rapid rate. In 1990, the total number of working-age people (those fifteen to sixty-four years of age) was 768 million in China and 501 million in India. By 2005, China's figure had grown to 929 million and India's to 703 million.² The number of college graduates has gone up even more dramatically. China produces over 5 million college graduates a year, more than four times as many as ten years ago, and India produces about 3 million college graduates, three times as many as in the 1990s.

Yet every survey and every interview with every executive in both China and India paints a picture of massive scarcity. Consider, for example, a recent report from three U.S. chambers of commerce in China. Finding, training, and retaining top managers was rated by 37 percent of the 324 companies in their survey as the number one operational challenge, ahead of other issues such as corruption or piracy.³ J. Norwell Coquillard, chairman of the American Chamber of Commerce in Shanghai, observed: “Demand for skilled, qualified staff still outstrips supply, and this key operating constraint shows no sign of easing in the near term.”⁴ In India, Nasscom, the National Association of Software and Services Companies, has estimated that by 2010, its industry would face a shortage of a half-million professionals. At any of the top five business schools in India, the entire class of graduating M.B.A.s is placed in less than four hours, a tiny fraction of the time that this process requires at the Harvard Business School. A growing number of CEOs, such as Sunil Bharti Mittal, chairman and managing director of Airtel, India's largest mobile operator, acknowledge publicly that it is often “cheaper to import managers” from the United States or Europe than to hire locally.⁵

In this chapter, we begin by looking at why there exists this scarcity in the midst of plenty in China and India. We then put forward guidelines about what a company might do to increase its odds at winning the ongoing brutal war for talent.

The War for Talent in China

The talent crunch in China is particularly severe at the senior management level, in certain industries such as financial services, in certain function areas such as accounting, and on the east coast.

Over the past five years, several discontinuous changes in the structure and dynamics of China's economy have sharply escalated the demand for managers. First, there has been a radical broadening in the China-focused agendas of multinational corporations (MNCs). Until even three to four years back, most MNCs viewed China primarily from the lens of low-cost manufacturing for export back to other markets. While low-cost manufacturing remains an important story, an increasing number of MNCs now view capturing the China market at least as, if not more, important. Companies such as IBM, GE, Cisco, and Microsoft have pulled out virtually all stops in their efforts to increase revenues from China by at least 30 percent a year, that is, three times the GDP growth rate. Add to that a growing recognition that notwithstanding concerns regarding intellectual property rights, China provides one of the world's two largest pools of science and engineering talent and that too at a fraction of costs in rich countries. Thus, China (along with India) has also become one of the two most important destinations for new R&D centers.⁶ As MNCs intensify their efforts to go after market opportunities and talent in China, they are forced also to redouble their efforts to localize senior management. The need for local knowledge is far more critical when trying to capture local market opportunities and recruit and retain local talent than if the agenda is confined to assembly and export. According to China Daily, mainland-born executives made up only 3 percent of MNCs' senior teams in 1995. By 2005, the figure had gone up to 35 percent and was rising.⁷

Second, the Chinese government has embarked on an aggressive policy of consolidating, professionalizing, and at least partly privatizing state-owned enterprises (SOEs). Add to this an official “go global” campaign aimed at the larger SOEs and championed by the very top leadership, including President Hu Jintao and Premier Wen Jiabao. Larger, publicly listed, and more professionally managed companies with a mandate to pursue aggressive global expansion need a different breed of managers than the SOEs of yesterday did. According to a 2005 McKinsey & Co. report, globalizing Chinese companies will need seventy-five thousand senior managers by 2015 to 2020 against today's figure of only about three thousand to five thousand.⁸

Third, a growing number of domestic private sector companies are growing in size, going public, and poaching seasoned executives from established MNCs with both fat paychecks and sizable stock options. For example, David Wei, until November 2006 the president of B&Q China, a subsidiary of the British DIY retailer Kingfisher, is now president of Alibaba.com, China's and, by some measures, the world's largest business-to-business auction company, which had a successful listing on the Hong Kong Stock Exchange recently. Similarly, Jun Tang, formerly president of Microsoft China, is now the head of Shanda Interactive Entertainment. As part of the move, Jun received 2.66 million options that could eventually be worth more than $100 million.⁹ Given these developments, it is hardly a surprise that MNCs in China report a 30 to 40 percent turnover in senior executive positions.

In the financial services sector, private savings in China exceed $2 trillion. Given a lack of investment options and a stock market that was going nowhere (but down) until the end of 2005, virtually all of these funds were kept in bank accounts. Since then, liquidity on the Shanghai and Shenzhen stock exchanges has increased dramatically. Also, at the end of 2007, the Shanghai Stock Exchange composite index stood at above 5000 versus around 1150 at the end of 2005. The net result has been a flood of money pouring into China's capital markets. Assets managed by funds grew from $40 billion in 2005 to around $450 billion by the end of 2007. The implications of this growth on the demand for financial analysts, fund managers, and securities brokers are obvious.

Every segment of the financial services sector has seen similarly explosive growth. For example, as part of its World Trade Organization accession agreement, the Chinese government has begun to open up the banking sector to foreign banks. As a result, companies such as HSBC, Standard Chartered, Bank of East Asia, and Citigroup have been increasing their China staff by 30 percent or more annually. They need experienced staff who are also bilingual. It is impossible to develop these capabilities overnight.

In terms of functional skills, the shortage of accountants is particularly acute. Before the start of market reforms, the accounting system in China was based largely on Soviet-era fund-based accounting and was designed to inform state planners how the funds were being used and whether production quotas were being met. Western accounting concepts such as assets, liabilities, cash flow, profit margins, and return on investment were largely alien. Even today, almost thirty years after the start of market reforms, concepts such as bad debt provisions, asset impairment, and market-to-market accounting are still in the process of being understood and implemented.

In 1985, accounting standards based on international norms were established for the joint ventures that were beginning to be set up. In 1992, the Ministry of Finance issued a new set of standards for domestic companies. Known as the Accounting Standards for Business Enterprises, these were based on International Accounting Standards and adapted to local conditions. However, as a World Bank report noted, despite these reforms, the quality of domestic financial statements was insufficient for most international users.¹⁰ In 2001, with backing from the World Bank, former premier Zhu Rongji helped set up the China National Accounting Institute, a boot camp for executives and accountants serving in the country's economic departments and state-owned companies. The institute currently trains about twenty-five thousand people a year.¹¹ At the opening ceremony, Premier Zhu called corruption cases covered by false accounting a “tumor” on China's economic order.

More recently, on February 5, 2006, the Ministry of Finance published a new set of accounting and auditing standards based on the International Financial Reporting Standard. The ministry also ruled that all companies listed on the Shanghai and Shenzhen stock exchanges must start complying with the new standards by January 1, 2007. Yet in an economy that is about one-quarter the size of the United States at market exchange rates (and about two-thirds as large when adjusted for purchasing power parity), the Chinese Institute of Certified Public Accountants has only 140,000 members. To make matters worse, only half of these are known to practice accounting. If China were to have as many certified public accountants (CPAs) as the United Kingdom does on a per capita basis, it would need an estimated 5.3 million of them! While it is debatable whether any economy needs as many CPAs on a per capita basis as the United Kingdom, a widely held belief is that China needs at least 300,000. By some estimates, the country does have a large number of accountants: about 13 million. However, there is considerable question as to how knowledgeable many of them are about proper accounting standards.

China also faces a supply-side challenge rooted in its education system. Given a de facto prevalence of the “stuffed duck” syndrome (the more information you can stuff into the student, the better), there continues to be an excessive emphasis on rote memorization, imparting only theoretical knowledge rather than a balance between theory and application, and individual work rather than teamwork. Education is focused narrowly around passing the final examinations rather than internalization and application. This is true across virtually all disciplines, including professional ones such as engineering and business. Thus, graduates emerge with poorly developed skills at taking initiative, problem solving, and teamwork. Add to that an ongoing weakness in the English language. Despite a serious national campaign to improve English language skills, even in major cities such as Beijing and Shanghai, graduating students' English language skills continue to be extremely weak—barely passable in terms of speaking and understanding spoken English and thoroughly inadequate in terms of writing. In tier 2 and tier 3 cities, English language capabilities are even weaker. These characteristics imply that companies, especially MNCs, must be prepared to invest in additional training and development before the fresh recruits become fully productive.

During recent years, a growing proportion of Chinese professionals who had gone abroad for further studies have been returning to China (see Table 6.1). These returnees, often called haigui, or “sea turtles,” have played an increasingly important role in helping the Chinese economy, especially in jobs that require strong English language capability, bicultural skills, and deep understanding of how Western companies are managed. At the senior levels, Zhang Lin, the executive in charge of international business for Chery Automobile, is an excellent example. He went to the United States for a doctorate in engineering at the University of Michigan and then served as an executive with Chrysler for almost ten years before returning to China. Returnees have also played a visible role as the founders of some of China's high-technology start-ups—for example, Robin Li, the cofounder of Baidu, the leading Internet search provider in China, and Ge Li, the cofounder of Wuxi PharmaTech, the leading company from China in outsourced R&D for customers in pharmaceuticals, biotechnology, and medical devices. Robin Li earned a master's in computer science from the State University of New York at Buffalo and worked for Infoseek, a Silicon Valley start-up before returning to China. Ge Li earned a Ph.D. at Columbia University and was a member of the start-up team for a U.S.-based company before returning to China.

Table 6.1 Brain Drain Versus Brain Circulation (000s)

Source: China Statistical Yearbook 2006.

Notwithstanding the returnees' extremely important contributions to the Chinese economy, their numbers are small, so this phenomenon can do little more than have a marginal impact on the ongoing war for talent in China.

The War for Talent in India

The crunch for professional talent in India, which started becoming particularly severe around 2003–2004, has several contributing factors.

First, about five years ago, India's IT services sector started to acquire bulk. As the larger Indian companies (such as TCS, Infosys, and Wipro) have continued to grow at their historical 30 to 40 percent annual rate, each of them is now adding over ten thousand (more recently, over twenty thousand) professionals a year rather than just a few thousand. For example, in March 2002, Infosys Technologies employed fewer than eleven thousand people; as of mid-2008, the figure stood at over ninety thousand. In addition, some of the major international players have woken up and decided to take on the Indian players at their own game. Between 2003 and 2008, IBM and Accenture alone added over 100,000 professionals to their employee base in India. There have also been large expansions by the tier 2 and tier 3 Indian players, as well as other MNCs such as Microsoft, EDS, Capgemini, SAP, Oracle, GE, and Cognizant. True, India is a large country. However, whereas migration from the rural areas can increase the supply of unskilled labor rapidly, growing the supply of professionals is much stickier and takes longer. Aside from concerns over quality, even aggressive entry and ramp-up by private educational institutions also takes time to bear fruit. Thus, India's IT services industry has been soaking up science and engineering graduates from all fields—not just information technology, computer science, and electrical engineering. Companies in other industries have been left scrambling. As the head of HR at one of India's largest motorcycle manufacturers noted to us, “Visiting any of the top-tier engineering institutions was like going to the beach after a tsunami. There was nobody left.” A running joke in one of the mining and metals companies is that it has become impossible for them to recruit engineers at India's mining schools because all of them get lured away by the IT sector for data mining tasks.

Second, around 2003–2004, India's economy started to go into overdrive, exhibiting a steady growth rate of not 6 to 7 percent a year but over 8 to 9 percent a year. Notwithstanding the branding value of the IT industry in helping India acquire an image of smart techies, it is a niche industry that accounts for only 5 percent of the country's GDP. Thus, the bulk of the growth rate in GDP over the past five years has come from two sources: the manufacturing sector, including industries such as steel, cement, autos, consumer goods, chemicals, paper, and infrastructure, and non-IT service sectors, such as financial services and transportation. Just as in China, a booming economy has meant rapid growth in real estate prices, the stock market indexes, the rate of savings and investment, and the consumption of a whole variety of goods and services: cars, health care, telecommunications, banking, consumer durables, and travel for business and tourism, among others. The Bombay Stock Exchange composite index (the Sensex) ended the year 2005 at just below 10,000. It closed 2007 at above 20,000. In short, over the past five years, India's IT sector has been taking in ever larger chunks of the country's science and engineering pool at the same time as the rest of the economy has started to grow rapidly and needs this talent.

Third, given a restructuring underway in many industries, major shortages have begun to appear even for positions that require training and skills in fields other than science and engineering. Retailing and construction are good examples. India today has the world's largest unorganized retail sector: a retail sector populated by small mom-and-pop operators. However, a retailing revolution has now kicked in and is in high gear. By some estimates, this industry alone is likely to need 2.5 million employees by 2010 whose tasks will be very different from those performed in a tiny family-owned shop. This workforce needs to be created and groomed from scratch. In construction, India's infrastructure today is where China's was in the early 1990s. Just as China's infrastructure boom started in earnest in 1995, India's is starting now, with the government planning to invest about $100 billion per year, or 9 percent of the GDP. This means that a company such as DLF, India's largest real estate developer, needs to hire an additional twenty thousand to twenty-five thousand semiskilled construction workers every year. Notwithstanding the large supply of labor in India, what the rapidly growing industries need is millions of workers who are not just willing but also professionally trained in tasks such as laying bricks, cutting and bending metal pipes and pieces, and carpentry.

Fourth, paralleling the story in China, MNCs have expanded the scope of their strategic agendas for India. India remains an attractive place for offshore IT and back-office work. However, it is now also a robust market that can be ignored only at the peril of corporate survival. For example, GE has targeted $10 billion in revenues from India by 2010, and companies such as Hyundai and Suzuki have made India the sole global hub for the production and worldwide export of subcompact cars. After China, India has also become the second most attractive location for the establishment of new R&D centers.¹² Finally, even as Chinese companies are on a rampage to go global, Indian companies have been outdoing their Chinese peers in acquiring major European and American companies such as the U.K.-based steel giant Corus and the auto marquees Jaguar and Land Rover, Germany-based wind turbine manufacturer REpower Systems, and the U.S.-based Novelis, the world leader in aluminum rolling and recycling. Given their fluency in the English language, much deeper and longer exposure to Western management ideas, a lifelong experience with private sector companies, financial and accounting savvy, and much greater ease at working horizontally across cultures, Indian managers have also been in high demand for regional (Asia-Pacific, emerging markets) as well as global positions in a growing number of non-Indian MNCs, including those from China.

Finally, as in China, the vast majority (estimated to be as high as three-quarters) of Indian college graduates suffer from a “last-mile unemployability” problem.¹³ True, they are likely to be reasonably good at English—although with a thick accent. However, they are also likely to have focused too much on passing examinations rather than internalized learning and too much on theory rather than a balance of theory and application. They are also likely to lack skills at effective communication and professional comportment. These are remediable problems. However, without investment in the required training and development, the potential of this talent remains just that: a potential. As the International Herald Tribune noted rather astutely,

Like their Chinese peers, returnee Indians have helped ease the talent crunch in highly important but niche roles, especially at senior levels in companies such as Accenture and IBM and as technology entrepreneurs and venture capitalists. As examples on the corporate side, look at people such as Harsh Manglik, chairman of Accenture India, and Inderpreet Thukral, vice president for strategy and business development at IBM India. Manglik graduated from the Indian Institute of Technology in 1970, earned an M.B.A. from Carnegie-Mellon, and spent over twenty-five years in leadership positions with IBM and Symantec before returning to lead Accenture's operations in India. Inderpreet Thukral graduated from India's University of Roorkee, earned a Ph.D. from Rensselaer Polytechnic Institute, and spent several years with IBM Global Services before returning to India to lead the strategy and business development function there. On the venture capital side, Vani Kola provides a typical and illustrious example. Kola earned an undergraduate degree in engineering from India's Osmania University, obtained a master's from Arizona State, and cofounded two software companies in Silicon Valley, RightWorks Corporation and Nth Orbit, before returning to India as a cofounder of NEA-IndoUS Ventures.

To sum up, although the total labor pool in India is large and is being aided by a growing pool of returnee Indians, major pockets of scarcity exist in virtually all professions.

Winning the War for Talent

Given the intensity of the war for talent, it is virtually impossible for any company to shield itself completely from the labor market reality. In particular, companies have little choice about staying in line with the market in terms of total compensation. Aside from compensation, however, companies do have the ability to influence the rate of attrition. In an industry or job function where the average turnover may be 20 percent, it matters greatly whether the turnover in a company is 10 percent or 30 percent. In a market with high turnover, it also matters greatly how effective and efficient a company is in managing the recruitment process. Thus, in this discussion, we take it as a given that companies generally have to be market competitive regarding compensation and focus on other variables in the HR value chain.

As depicted in Figure 6.1, our road map for winning the war for talent focuses on four domains: treating HR as a strategic function, smart recruitment, smart training and development, and smart retention. We discuss each of these in turn.

HR as a Strategic Function

There are at least three reasons why the human resources (HR) function must be regarded as more strategic in China and India than in most other countries. First, HR is likely to be dealing with much larger numbers and far more rapid growth. In its entire history, IBM had never added seventy thousand people to its rolls in five years as it has had to do in India. Second, these labor markets have very high turnover, which makes the HR function both more important but also more challenging. Third, given rapid growth and high turnover, the ratio of new employees to the existing employee base is likely much larger in China and India than in most other countries. Thus, the need for effective and efficient training and development is likely to be much greater.

Figure 6.1 Action Domains for Winning the War for Talent

Every company talks about HR as a strategic function; however, talk is not the same thing as reality. Two of India's leading companies that do understand this have leaders whose convictions are reflected in their actions. One is Infosys, India's second largest IT services company. In 2006, T. V. Mohandas Pai, voluntarily championed a move from his very successful role as the company's CFO to become the head of HR. In the IT services industry, human resources are far more critical than financial ones. Thus, in agreeing with Pai and reassigning him to manage HR, the company's leaders were making sure that they acted in line with business reality. Another company is the Aditya Birla Group, a $28 billion revenue diversified industrial giant that has been one of the leading globalizers from India. Dr. Santrupt Misra, the company's head of HR, is widely regarded as the right-hand man of the company's chairman, Kumar Mangalam Birla. Unlike most other HR executives, Misra is also a member of the company's board of directors.

Smart Recruitment

In the area of recruitment, a company can potentially create an advantage for itself in four domains: labor market branding, leveraging technology for recruitment, looking beyond tier 1 to consider tier 2 and 3 cities as possible locations for the company's operations, and ensuring that the local leadership team includes both local nationals and expatriates rather than just all local nationals or all expatriates.

Invest in Labor Market Branding. It is entirely conceivable that the mightiest of global companies may still be relatively small players in China or India. Toyota, the world's largest automaker, is not the largest auto company in either China or India. Similarly Wal-Mart, the world's largest retailer, is not the largest retailer (or even the largest foreign retailer) in China, and it is just entering India. Thus, business leaders need to remember that their company's existing brand value may not necessarily carry over from current markets into China or India. Also, brand value in the market for products and services is quite different for brand value in the market for talent. Even if a company has a highly visible product or service brand, it may still require tailored actions for labor market branding. Google in India provides an interesting example of the value of this branding. Landing a job at Google is known to be a plus in helping the young engineer, male or female, become a much more attractive catch in the market where the employer's visibility and job title are often as important as salary.

Accenture in India illustrates how ideas from product and service marketing can also be applied to labor markets. The company engages in fine segmentation of the labor market in order to develop a tailored strategy for each segment. The segmentation helps it plan campus visits and determine the specifics of its labor market campaign, including how much to spend and what messages to communicate to potential recruits through ads in movie theaters and coffee houses, sponsorship of rock concerts, and other channels. As with product and service marketing, Accenture also conducts research after the campaign to assess labor market brand awareness, brand attractiveness, and the like.

As part of labor market branding, here are some additional questions to ask: How often does the CEO visit China and India? How often is she or he interviewed by the local media? And how often do local managers visit college campuses, give talks, and serve as guest speakers?

Leverage Technology for Recruitment. Technology can serve as a potential basis for competitive advantage when the number of people to be recruited is large and the targeted individuals are technologically savvy. Both conditions apply in the case of large companies, such as IBM, Infosys, and Huawei, that need to hire thousands of technical graduates each year. In a typical year, Infosys, for example, receives over 1 million résumés. The company requires that the résumés be submitted online. Automated filtering whittles the number down to about 160,000. These applicants are notified by automated e-mail and invited to take an online test. This reduces the pool to about 80,000 applicants, who are then interviewed to determine which 20,000 to 25,000 or so should get the actual job offers.

When a company is dealing with such large numbers, its recruitment technologies are crucial. As in other contexts, however, a specific company's technology may be more or less effective and efficient than its competitors', thereby making a difference to competitive advantage. The power of technology can be leveraged not just to make the hiring process more effective and efficient, but also in the entire recruitment value chain: building awareness, giving targeted individuals a virtual peek into the company, and so forth.

Look Beyond Tier 1 Cities. The war for talent is most brutal in hot spots such as Bangalore and Shanghai. Tier 1 cities generally have the best infrastructure and the largest pool of qualified individuals. At the same time, however, they also feature the toughest competition for talent, the highest salaries, and the highest turnover rates. Thus, companies should give serious consideration to tier 2 (and possibly also tier 3) cities. Even in a highly developed tier 2 city, such as Dalian in China, salaries for professionals can be 30 to 50 percent lower than in Shanghai.

The case of how Intel made a successful move to central China illustrates well the advantages of looking beyond tier 1 locations. It also illustrates that capturing these advantages may require the company to nurture the local ecosystem from which it will draw the required talent. In 2003, Intel decided to set up its newest Chinese factory not in Shanghai, where its previous research and production operations were based, but in Chengdu, the capital of Sichuan province in central China. On the plus side, labor costs in Chengdu were 30 percent lower than in Shanghai, and the local government was happy to provide tax incentives. On the minus side, the region did not have a single high-tech factory, and Intel executives were concerned that other local companies were unlikely to be the best training grounds for their prospective workforce.

For the Chengdu plant, which would focus on labor-intensive assembly and test operations, Intel decided to “train most of its workers from scratch, including hiring fresh college graduates for 70% of its non-hourly positions, compared with 30% in all other locations.”¹⁵ In order to nurture the labor market ecosystem from which Intel would be hiring, the company's personnel visited local universities and vocational schools. They assessed professors and curricula and added courses on semiconductor physics and factory processes. Intel also bought the textbooks for some of the local schools. In an interesting example of partnership between Intel and local universities, a professor at the local University of Electronic Science and Technology of China even built a small factory in the classroom where students could practice assembly line operations and have their actions recorded and dissected for feedback and improvement. After recruitment, all employees were sent to existing factories in Shanghai, Malaysia, and Philippines for further training and acculturation. The acculturation included helping the new workers internalize Intel's culture of constructive confrontation by noting that the criticism focused on the problem rather than the person. Once the plant was up and running, it was benchmarked routinely against other plants in the company's global network. In 2006, the company was completing work on its second plant in Chengdu. In 2007, Intel announced that it would build a major chip set plant in Dalian, another tier 2 city, located on China's northeastern coast.

Hire a Mix of Expatriates and Locals. At the senior executive levels in China and India, salary differences between expatriates and local nationals have all but vanished. For this as well as other reasons, we believe that companies should prefer to build senior-level teams with a mix of expatriates and local nationals rather than go all the way toward complete localization (or, as is less often the case, a reliance on just expatriates). Preference for a hybrid team is likely to yield at least four benefits. First, it will ease the recruitment challenge by enabling the company to draw from a larger pool. Second, it will help integrate the activities in China and India with the rest of the global network. Given the growing importance of these two countries as platforms for worldwide competitive advantage, complete localization of senior management will run the risk of isolating these operations rather than integrating them more deeply into the global enterprise. Third, creating a hybrid team is likely to help accelerate the transfer of the company's core systems, processes, and values to China and India. Finally, including some expatriates on the senior management team is likely to help these executives develop a deeper understanding of the cultures, economies, and ground-level realities of China and India; they will take this knowledge back when they return home.

A hybrid senior team of expatriates and local nationals must ensure that the team includes the needed mix of capabilities and will function as a cohesive group that can make the right decisions at high speed, not an easy task. In China, we have come across far too many examples where an expatriate country manager recruited a senior team member from within China largely on the basis of good English language skills and good interpersonal chemistry—only to realize later that in terms of needed functional skills and relationships, the individual was basically useless. The reverse can also happen: smart, highly competent, and well-connected local nationals may be critical members of the local team; however, they may wonder why the China or India subsidiary needs an expatriate whom they regard as less competent and more expensive (if not in terms of salary, then in terms of the usual expatriate allowances such as housing and tuition benefits).

As part of recruitment and talent management, it is also important to make sure that there is an equally active reverse flow of executives. Thus, fast-track managers from China and India must form an important part of the company's global talent pool to be deployed as expatriates to other countries, including other major global hubs.

Smart Training and Development

We put forward three guidelines with respect to training and development: nurture the labor market ecosystem within China and India, invest more heavily than the corporate average in in-house training, and cultivate supervisors' leadership skills.

Nurture the Labor Market Ecosystem. The brutal war for talent in China and India exists precisely because the supply of people with the required capabilities has not gone up at the same pace as the demand for them. Facing such a situation, a company has two options. It can take a reactive stance by waiting for the supply side to catch up and, in the meantime, poaching from competitors. Or it can take a proactive stance that is, seed and feed the ecosystem of colleges and universities that play the most central role in creating the needed supply. We believe that this proactive approach should be the preferred one for most medium to large enterprises. Nurturing the ecosystem is not free. However, a primary reliance on poaching from competitors may be even more expensive.

India's Pantaloon Retail provides a good example of how a company can proactively nurture the labor market ecosystem. Pantaloon Retail is India's largest retailer and is expanding at the rate of one new outlet per week. Organized retail is still a relatively new phenomenon in India; thus, retail companies face the massive problem of how to hire and train thousands of people every month—people who will view retailing as a “cool” sector to work in and who will be passionate and skilled enough to provide customers with the desired shopping experience. No other company faces this problem at a bigger scale than Pantaloon.

In 2003, Kishore Biyani, the company's managing director, started tackling the problem by establishing partnerships with a number of regional business schools such as the Welingkar Institute of Management (Mumbai), Indian Institute of Social Welfare and Business Management (Kolkata), and Chennai Business School (Chennai). Pantaloon helps shape the curriculum for a two-year master's degree in retail management and sends its senior staff as visiting faculty to help students understand the practical side of organized retailing. The company also sends about sixty of its own employees each year as students in these programs. Every employee who has been with the company for one year is eligible to apply. Screening and selection from this pool are done by an external vendor. For the employees, it is an excellent proposition. They get a two-year sabbatical and a master's degree, while the company pays their salaries as well as tuition fees. The eleven collaborating schools in this ecosystem graduate about seven hundred candidates each year. Pantaloon takes back its own cohort of sixty employees and hires about a hundred of the new graduates. The decision to hire only some of the graduates is deliberate: it enables Pantaloon to nurture a much larger number of retail management programs at business schools spread throughout India. Also, notes Sanjay Jog, the company's head of HR, “The courses will lose their credibility if we take the entire batch of students. We want other retailers to pick up candidates from our partnering institutes as well.”¹⁶ Pantaloon managers believe that this program, coupled with other initiatives, has played a major role in keeping its middle management attrition rate at 4 percent, a fraction of the industry average of 20 to 25 percent. For frontline staff also, the company's attrition rate is 8 percent, down from 12 percent four years back.

As a similar example from China, consider the case of IHG (InterContinental Hotels Group). IHG is the largest international hotel operator in China, considerably bigger than competitors such as Wyndham, Marriott, Hilton, or Starwood, and it is expanding rapidly within China. According to Andy Cosslett, the company's CEO, the biggest challenge is finding the right people. To help address the challenge, IHG has signed collaborative agreements with ten local schools that run hotel management programs. The company sponsors a special academy in these schools. Students who join the academy participate in IHG-tailored programs, where they learn about the company and its systems and processes. This enables these students to join IHG right after graduation. As Cosslett noted in a 2008 interview with China Daily, “We are supporting, training and sponsoring them and will hopefully get some of them overseas.”¹⁷

Invest Heavily in In-House Training. In-house training serves as a critical complement to nurturing the external ecosystem. Last-mile unemployability is one of the major reasons for the scarcity of supply in China and India. There is no shortage of college graduates. However, most of them emerge with an abundance of theoretical knowledge but a paucity of skills at application, teamwork, and effective communication. China (more so than India) has the additional challenge of an education system and a culture that encourages obedience rather than speaking one's mind. These are all remediable weaknesses. However, they do require investment by the company in training and development. In many cases, such investment may be necessary also to impart company-specific technical skills and to help the new employees understand and internalize the company's values and norms of behavior.

Depending on the context, investment in training and development can range from the simple and inexpensive at one extreme to the complex and much more expensive (but still essential) at the other. An example of the simple and inexpensive kind is Cisco Systems's R&D center in Shanghai, established in 2005. By 2007, the center had grown to over five hundred researchers with an average age of twenty-seven. Jan Gronski, the center's managing director, recruited Chris Dong, his number two, from another company in China. Barring this and a few other exceptions, Gronski and Dong's strategy has been to hire talented but inexperienced researchers straight from universities rather than poach from competition. They have opened Cisco Clubs at three universities in China, which give students a chance to work with Cisco engineers. Gronski and Dong also run a management seminar every Thursday that addresses simple but essential behavioral skills such as how to share openly what is on your mind, how to make decisions, and how to make presentations. As Gronski noted, “I call it management kindergarten class.”¹⁸

The Infosys Global Education Centre provides an example of the other extreme. Opened in 2005 in Mysore, a city about ninety miles from Bangalore in southern India, the center occupies 335 acres and is one of the world's largest corporate training centers. At the completion of an expansion phase currently under way, it will have 10,300 residential rooms, 500 faculty rooms, and the capacity to train over 13,000 professionals simultaneously. Often described as a “combination of Disney World, Club Med, and a modern American university,”¹⁹ the center includes a bowling alley, a hair salon, an infinity pool, India's largest gym, a world-class cricket field, a 24/7 library, and a geodesic dome with three movie theaters. Its mission is to train the company's new recruits not just from universities within India but from every one of the company's geographies including the United States, Europe, and China. Infosys's recruitment philosophy is to hire for learnability rather than sheer technical skills. The company has long believed that it can turn most smart graduates into software engineers regardless of their academic background. A typical fourteen-week training program costs Infosys about five thousand dollars per person. Like the company's headquarters campus in Bangalore, the center is designed not just to achieve a serious intellectual agenda but also to leave a lasting psychological impact: a message that everything about Infosys is first rate and that the Infosys brand stands for the very best quality in the world.

While much of the training focuses on technical skills, part of the time is devoted to the development of soft skills such as interpersonal communication, team building, and body language. N. R. Narayana Murthy, the company's chairman and chief mentor, described the logic behind the investment in this center:

Invest in Supervisors' Leadership Skills. It is a well-accepted fact that how an employee is treated by the immediate supervisor plays a vital role in determining how motivated the person will be and how long he or she will stay with the organization. Given the scarcity of supply over demand, most companies in China and India find that people need to be promoted to supervisory positions at a younger age and with fewer years of experience than would generally be the case in the United States, Europe, or Japan. This reality demands that companies should invest in cultivating leadership skills among people who have been promoted to supervisory positions and will be managing others. The payoffs from this investment are likely to be large.

Smart Retention

Retaining the talent that you have worked diligently to hire depends on several factors, including whom you hire, how you hire, and what investment you make in their training and further development. We focus here on several additional measures targeted more directly at retention: deferred compensation policies, global career paths, and cultivation of deeper intellectual and emotional bonds between the individual and the company.

Offer Deferred Compensation Policies. Deferred compensation policies tie part of compensation directly to length of stay with the company. Depending on the specifics of the situation, deferred compensation can be designed in one or more of several ways: stock options that vest over time, subsidized loans for the purchase of a car or an apartment, and retention bonds. As an example of how retention bonds can be designed, consider the case of a U.S.-headquartered industrial products company that is one of the leaders in its industry worldwide. The company has a sizable presence in China in manufacturing, marketing, and sales. As the Shanghai-based director of HR for Asia-Pacific explained to us:

Develop Global Career Paths. When they are thinking rationally (often but not always true), most smart professionals attach greater importance to long-term career success than short-term compensation. Through its policies, an MNC can help direct the attention of its high-potential staff members in China and India away from the local labor market and toward a global career path within the multinational enterprise. As is obvious, this requires that the MNC develop a systematic and highly visible program of treating its professionals within these two economies as not just local but also regional and global resources.

Depending on the business and the individual, globalization of the career path can be accomplished in either of two ways: assigning the individual to a posting in another country or keeping the individual within the home country (China or India) and changing the responsibility from a local to a regional or a global one. For example, at Goodyear, the U.S.-headquartered tire company, the managing director for the company's business in Turkey is an expatriate from India. Sriram Mangudi, Asia-Pacific head of HR for Timken, the U.S.-headquartered giant in bearings and related products, is an example of the latter. Mangudi joined Timken's operations in India. He remains based in Bangalore, but his HR responsibilities have recently been upgraded to cover the region rather than just India.

Nurture Emotional and Intellectual Bonds. Emotional and intellectual bonds refer to noneconomic ties that bind an employee to the organization. Emotional ties are a function of whether the employee views the company as a caring organization that is sensitive and responsive to the broader needs of not just himself or herself but also the society to which the individual belongs. Intellectual bonds are a function of whether the employee understands, agrees with, and likes the company's strategic direction and the opportunities that it provides for professional development. Following are some of the factors that can nurture emotional bonds:

• Is your company a fun place to work?
• Is your company as sensitive to local holidays and festivals such as Diwali (in India) or the Spring Festival (in China) as it is to, say, Christmas and New Year's Day?
• Does your company build a sense of community within its local organization, or do people remain purely as individual employees with no emotional ties to each other?
• Does your company go above and beyond its contractual responsibilities in times of personal emergency and distress for an employee?
• Does your company's agenda within China and India include making a contribution to the country's social needs, or is the agenda solely economic?
• Does your company see China and India as its permanent homes, or is it acting merely as a “foreign tourist” or “foreign trader”?
• In times of national emergency, such as the May 2008 Wenchuan earthquake in China, does your company respond with genuine caring, or is its response viewed as largely perfunctory?

Examples of factors that drive intellectual bonding include the following:

• Does your company share its vision and strategy for the global market (and the role that China or India plays in this strategy) with the employee base in these two countries, or do your employees operate largely in the dark with no sense for the bigger picture?
• Do your employees in China and India agree with and like the company's vision and strategy?
• Do the employees view your company as an organization that will help them acquire important and highly valued skills and capabilities, or do they view their current tasks as just a job to earn a living?
• Are the employees proud of the fact that they work for your company?

These are illustrative rather than comprehensive lists of factors that are likely to matter in cultivating emotional and intellectual bonds. Such bonds will not reduce the necessity of keeping compensation structure competitive with market conditions. However, they will almost certainly have a notable impact on how productive the employees are, how effective they are in drawing new talent to the company, and the company's attrition rate within China and India. The economic impact of advantages in these areas could well swamp any disadvantages from rising compensation levels.

Conclusion

Throughout history, rapid economic growth in every industry and every geographical region has always been a double-edged sword: vast opportunities but also brutal competition at both ends of the value chain: on the output side, where companies fight the battle for customers, and on the input side, where companies fight the battle for physical resources and people. As is widely and openly acknowledged, people are a company's greatest asset. However, for the same reasons, it is equally true, although rarely stated publicly, that people can also be a company's greatest liability. Which side of the balance sheet people belong to depends very much on how effective a company is at recruiting the right talent, nurturing it, and keeping it dedicated to building the company rather than moving on to its competitors. Given the scarcity of professional talent, this task is particularly challenging in China and India. In this chapter, we have looked at why and where the major pockets of scarcity lie in these two economies and proposed guidelines for improving the odds of winning the ongoing war for talent.