American businesses struggle to find the talent they need--especially in the middle market, where growth is strongest. Listen as NCMM’s Tom Stewart discusses the middle market’s workforce challenges with Marek Gootman and Martha Ross, fellows of the Brookings Institution.
Transcription
4 out of 10 middle-market companies say that a lack of talent is slowing their growth. We'll explore what to do about it.
Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid-sized companies and help you take advantage of new opportunities.
Welcome to The Market That Moves America, the podcast that gives a voice to the growing middle market and drives a national conversation about its economic impact. I'm your host, Tom Stewart, the executive director of the National Center for the Middle Market. The US middle market comprises 200,000 companies, with annual revenues between $10 million and $1 billion a year, a group that collectively accounts for the middle third, a third, of private sector GDP and employment.
The middle market is often overlooked by media, policy makers, and others. Yet our studies show that it is the fastest growing part of the economy, the source of about 40% of manufacturing, and the creator of about 60% of net new jobs. We're going to talk about jobs today. In particular , we're going to discuss the challenges that middle-market companies face finding people with the skills they need, finding the talent to grow.
The Brookings Institution and the National Center for the Middle Market have partnered on a just-released study of workforce challenges in the middle market. With me today via Skype are two experts from Brookings, Marek Gootman and Martha Ross. Marek and Martha are both Fellows at Brookings, and Merrick is director of strategy partnerships and global initiatives for Brookings Metropolitan Policy Program. Martha, welcome.
Thanks for having me.
And Marek, welcome to you too.
Thanks.
I think we want to kick this off by asking some questions about how intense the pressure is that middle-market companies face when it comes to employment and what the numbers show. I mean, Marek, Martha, what do you sense from what we saw in our study?
Well, nearly 20% of middle-market companies in the survey that we did reported that talent is-- lack of talent constraints their ability to grow. And they stated lack of skills among candidates and competition from other employers as the top reasons that they have trouble finding the right talent.
I cited that number at a conference sponsored by the Wall Street Journal a couple of months ago. And the person who was asking me that question sort of his jaw dropped, and he said, you're kidding? 40% say that a lack of talent is actually slowing down their growth? And I said, yeah. And he turned to the room, which was middle-market executives and said, how many of you agree with that? And more than half of the hands went up.
So it's remarkable number. And what do we think it-- when you don't have the talent to grow, what does that do to the economy?
- Well, I think one point, and maybe we-- I know how we handle this in the discussion here. But one point is also that we have a significant number-- this is not just about the middle market. But this is an issue for employers generally.
So if you look at the overall share of US employers that were reporting hiring difficulties, they dramatically increased between 2015, when 32% of all US employers, that means large, mid-sized, and small, reported having hiring difficulties. That increased from 32% to 45% in 2016. And you have also for the first time in 21 years of Duke University's Business School doing quarterly surveys of chief financial officers that hiring and retaining qualified employees ranked as the top concern. That's over government regulation and policies or costed benefits or economic uncertainties, cybersecurity, all of those things.
So you see this real attention and problem around talent emerging as a preeminent factor across all kinds of firms. And for-- go ahead.
Is this just, like, nearing full employment, or is this some sort of mismatch between the jobs that are available and the talent that's available?
The mismatch is part of it. There is still some slack in the labor market, I think, if you look at the employment rate. They're lower than they've been in the past. But you can also look to other reasons for why companies have skills problem.
They may not have strong enough HR policy. They may be paying below market wages. They may have unrealistic expectations of what you can expect from job candidates. So there's a whole bunch of factors playing into this mismatch between what employers want and what they can find.
So there's a lot of talk nationally about a skills gap, which seems to put the monkey on workers' backs. Sort of say, the problem is that you haven't got the right skills. One of the things I think we've talked about in working on this study is that that may be the wrong way to think about it. And that the right way to think about it might be to recognize that labor markets, job markets, and depending on whether you're a worker or an employer, it's the same thing. These markets tend to be very local. And you're hiring in Philadelphia or you're hiring in Des Moines or you're hiring in San Francisco, and finding the people that you need for the jobs that you have in these metropolitan areas is really where the rubber hits the road.
You're right. And I think that there's a combination of things to deal with. One is that the workforce system generally is oriented toward the supply side. So there are measurements and expectations of people who do workforce development that shifts their attention principally to helping individuals and individuals identify the right skills or train up and then access jobs.
So it's about me, the worker, trying to say, I don't want to-- there's no jobs in coal mining. Let me learn about solar panel installation. It's about training me.
Correct. There are a lot of interventions that are [? branded ?] toward the worker. And there is a disconnect. It's existed for a long time. And a lot of people have been working on the problem of economic development alignment and workforce and talent.
So we have is economic development job creation in firms that have a certain set of expectations what their role is in job creation, and they expect historically that there will be workers somehow available to them. And then you've got the workforce side, who's thinking historically less about the industrial partnerships and trajectory for major sectors in the regional economy and how those workers can be accessing those jobs. There's not just a mismatch in skills, but there's a mismatch in place.
It's increasing numbers of workers that are located-- that their residences are further away from where jobs are being created. If you just look at the Columbus metropolitan area where the national [INAUDIBLE] market is located, you've had an 8% reduction over about a decade in the percentage of jobs that are located near the average resident. And if you think about where the labor force is and try to access more residents in lower-income neighborhoods, that percentage increase to over 25%.
So what you've got is a combination of industry mismatch with workforce development. You have a disconnect between the skills that firms need, individual firms need, and what they want to do versus what the talent pool is. You've got untapped workers who are out of work.
Mark did a lot of analysis on those characteristics. There's a whole pool of people who could be employed but are not currently in the labor pool or engaging with labor pool. And you've got this physical accessibility challenge about where the jobs are and where people are who should be filling those jobs.
So you know what I love about this, Marek, is that when you think about this from the, sort of, macroeconomic perspective or the economic perspective that Brookings takes, and then I try to put on my middle-market CEO, CHRO hat, I begin to think, well, wait a minute. This system that I've been relying on for a long time is different now. And if I want to make a difference, if I want to get away from being that 40% of companies that say my growth is constrained by lack of talent, I've got to start doing things differently in the way I run my company from a talent perspective.
I can't just, sort of, wait for the resumes to come in over the transom. Or I can't rely on the usual just round up the usual suspects. I've got to start building capabilities for a 21st century talent hunt that I may not have had to have before.
Yeah. And this is a challenge for everybody, as we've said, across large, medium-sized, and smaller firms. But it is a unique challenge, and uniquely important challenge, for middle-market firms because, as we know, middle-market firms generate 60% of all of new jobs. And yet they have a scale problem. These are some of the things that Martha identified and she can talk about.
They have this need of a larger firm for more workers, for training, or accessing them, and yet they have the internal capacity of a smaller firm because they just don't have the scale and sophistication and resources that a large firm can put into the workforce talent development issue. So you got to--
So Martha, amplify that.
Yeah. So the survey also showed that fewer than a third of middle-market companies partner with a training or educational organization. So that means that they're not growing their pipeline. They are not identifying people, working with trainers and educators to keep them up to date on what kind of skills are most important. And it makes them more reliant on the spot market, which is increasingly not getting companies what they want in terms [? of candidates. ?]
When you say the spot market, you mean I got a job. Let me look for a worker, sort of like filling just-in-time recruitment, right? Rather than having something programmatic that's sort of saying, here's a pool of talent that I know is ready or that I know about so that when I need something I know where to go.
- Exactly, yes.
- And the survey identified a couple of things. It's the internal focuses you mentioned. Because there's also the ecosystem supports and how they help those firms overcome that capacity constraint. But just to reinforce what you, Martha, just said, internally the firms are not investing sufficiently in forward-looking talent [? planning. ?]
So you've got nearly 60% that are focusing recruitment on openings. You've got more than 60% that kind of lack a systematic policy or process for career advancement. Nearly half of them wait until a specific need emerges, and then they're hiring for the role versus ongoing training in a whole series of areas that prepares people for advancement. And that addresses not just the attraction of the recruitment component of this, but also how middle-market firms are able to retain the talent they have versus something they identify as a huge problem, which is their talent getting poached by other firms, often larger firms that have those kinds of career ladders or a greater flexibility in what they're offering to their workers.
Yeah, I've got a riff that, I guess, is sort of exaggerated. But it's sort of imagining a growing company, a family business or something. And somebody coming and saying, Dad or Mom, we need an HR director. And dad or mom saying, I don't want any one of those HR bureaucrats at my company. That's what I got away from that big company to avoid.
The kids say, well, Mom and Dad, we're losing people left and right. And we've had a couple of wrongful discharge suits, and we lost them. All right, but just pay benefits, and job descriptions and nothing more. And it's a while before that HR function starts building to be more than transactional.
We did some other studies at the National Center for the Middle Market that sort of showed that middle-market leaders think that they're pretty good at evaluating their current workforce and identifying their key players and knowing their skills, and so on and so forth, but much less good at looking at the future, so things like succession planning, building talent pools, identifying future skills gaps. I may know my current skills gaps. But I I'm not very good at thinking about, whoa, the way technology's going, I'm going to need fewer of this and more of that.
So they're pretty nose to the grindstone and not looking up enough. And I think it's partly, as you were saying, Martha, you need a bit more of a scale before you build the capacity in HR to think-- or talent planning. It's not necessarily in HR. It's often throughout the organization to think forward about future skills need. So you tend to be reactive at a time when we've just established you've got to be proactive.
Yeah. And there's an upfront investment you have to make in doing more proactive talent planning and workforce planning. And it's going to be a little while before it pays off. And if you are already really busy, that can be hard to carve the time.
But in one of the focus groups that we did, there was an HR director. And she said, I have an HR team of 5, and I currently have 14 openings. And there's no way we do that without partnerships. She said, I have so many partnerships with different schools and organizations. And I think I fill 6% of my positions through those partnerships.
That's a perfect segue to what I was thinking about, which is one thing that we're talking about here is middle-market companies can and should do a better job of figuring out where they can become more forward looking, build more capability and capacity in their own talent efforts. But, Marek, you were also talking about the workforce system, community colleges, workforce improvement boards, and all that sort of thing, and how they're going down a path that-- parallel lines that aren't meeting with-- the supply system and the demand system are sort of passing like ships in the night. How do we fix that supply system? Are there some examples of places that have done it right?
Yeah. There's tremendous variation. There are some workforce investment boards and community colleges and nonprofit training organizations that say that they are demand-driven and, in fact, walk that talk. So there are examples of places where the supply side is interacting meaningfully with the demand side and tailoring their efforts according. And I am sorry. I just cut Marek off. He was about to go into some examples, I think.
There are a couple of examples. You can look at this as a private-sector-led effort or a public-sector-led effort. And in most successful places, it's heavily influenced by the private sector taking ownership of this challenge and forcing the public sector and not-for-profit kind of community providers and workforce development to respond to industry needs. And that's also with the private sector taking a lead role investing in these efforts.
There's a combination of examples for large firms that are working with mid-sized firms, because we want to keep this oriented toward mid-sized firms. There's a combination of large firms working with mid-sized firms and then mid-sized firms organizing themselves to be more effective in coalitions or collaborations with providers, people who are able to support talent development or access talent.
One example is out of the Inland Empire. That's Riverside, San Bernardino area east of Los Angeles. And they had a huge problem for mid-sized firms across a range of industries with skills needs and certifications, particularly in the manufacturing area, but a lot of different types of manufacturers.
They came together in a coalition of 50-plus firms to work with the community college system and some other training providers to create something called Intech, which is the Industrial Technical Learning Center, again driven by mid-market firms organizing themselves. And with the company called California Steel, Inc. actually donating $2-million facility for no cost to this effort to house a program with seven different skill training development and certification programs, ranging from machining and welding to cybersecurity and control systems technology that addressed the needs of multiple mid-sized firms throughout this very large region.
So they organized themselves. And they, then, were able to tap some trade adjustment assistance programs out of the Department of Labor. They tapped some California state funding. But it all started with the local firms organizing, strategizing on their common needs and investing their own resources to be competitive around talent development.
One of the stories that I hear, and I think that we've all heard, our stories about a big company moving into a new town, you know, Honda here in Ohio or Boeing or BMW into South Carolina, and going to the community college system and saying, I need x-amount of welders. I need y-amount of programmers. And the community college system basically says, aye-aye, sir, and we'll order them up. And it's harder with mid-sized companies because I don't need 50. I need five. And so this question of how you can pool your muscle or pool your good intentions to get the workforce system, the supply side to realize, hey, we're out there. We've got a lot of demand. I think that's one of the real challenges companies need to figure out how to address.
Absolutely correct And that involves a whole set of problems in the ecosystem for middle-market firms' supports. Those providers, those actors, need to be thinking about how the tailor their mainstream services and programs to middle-market needs.
That is more targeted outreach, making things easier for these firms to be aware and access flexibility and speed and ease of administration. And they also need to build in some specialized activities that recognize the unique characteristics of mid-sized firms, including support for how they accommodate this challenge of career ladders, the career advancement, within a mid-sized firm, individual firms and the outside supports to identify, for example, exposing workers to other categories of activity within the firms as a terrific way to develop the talent and keep people engaged and committed to staying with those businesses.
That's an interesting thing when you think about it. That's another to-do and possibly a to-do where the return on investment comes easier or quicker for middle-market companies is to sort of recognize the high potential talent and say, you, you, you, and pull that team together for a special project, figuring out an export strategy, figuring out a way to lean out the operations of a factory and make them more efficient, figuring out a new choice of a distributor or IT service provider, all these kinds of projects that companies, big companies, will often have dedicated teams working on. And mid-sized companies can pull the high potentials together and say, here is an opportunity to do something meaningful for the company that will also stretch you and expand you and develop you, and it's on-the-job training.
It'll keep you engaged. And it helps with retention. And gets me $1 right away.
Yes, and there are other ways that these firms can collaborate not just to address the scale issues, not just internally, but with each other. So I imagine Intech as one example. But there are other areas where firms can be working with each other within the same sector or outside. For example, huge opportunities in talent development, workforce development, and accessing recruiting people through internship programs.
That's really hard for mid-sized firms because, first, they don't have lot of slots or flexibility and, second, because they're not highly visible in the marketplace. And so organizing with other firms in their space to offer up internships, to go together around increasing awareness for recruitment is part of a sectoral effort or simply with other firms in the region, those are all tools that the firms can use to cultivate the workforce opportunities and address some of the challenges that they identify in surveys.
Martha, we're coming toward that toward the end of our time together, alas, because I think we could be talking for days on this, as we have, actually, working on this study. But as you think about this challenge of 40% of middle-market companies thinking that they're actually held back from growing by talent, what are the couple of things that you would think a CEO and CHRO ought to put one, two on their agenda? And what are a couple of things that you would think that the metropolitan community colleges or workforce systems ought to on put top of mind?
Well, I think in terms of the companies, I think they should take a look at do they have a handle on the-- you can start small. You can start big. But one place is to start small and say, OK, what is our process for finding workers? Let start from the beginning.
When we have a job description, do we just use a boiler plate and check the box? Or do we make the time to actually think through what are the skills that we need, what are the educational credentials? And not just automatically use a bachelor's degree. And then what are our outreach and recruitment strategies? Do we have partnerships?
I would do, kind of, a systems analysis or a flow analysis of what happens from the first time you have a job opening to filling that. And then also looking at it do you have the system to look ahead to match your workforce to your business objectives? Because you can say you want to grow by x and have y profit margin. But if you don't have the right people in the right places at the right time, you're not going to achieve that, so creating more of an interactive relationship between the HR folks and the business unit leaders.
Any other examples?
Yeah. So in Cuyahoga County with the incumbent in the Cleveland area, the county executive launched what's called the Skill Up Talent Development Service. It operates out of the Office of Economic Development. And their goal is to help companies meet their training and staffing needs by providing one-on-one assistance, helping them figure out exactly what they need.
If they need help defining the skills that they want to train for, they'll do that. They'll help them identify any kind of certifications that are good measures of those skills. And they can also put together a list of training providers who can deliver that kind of training.
They can provide coaching to the employees who are receiving this training. It's a lot of very individualized services, because what they wanted to do-- they recognized that meeting the needs of their companies was also helping them meet their own goals as a county of promoting inclusive economic development, because they also--
It's sort of the flip side of Riverside. Riverside, California, the companies get together. And in Northeast Ohio, you get the workforce system getting together to become more sensitive to demand.
Yeah.
Exactly.
Yeah. And Kentucky's got something pretty good, right?
Yes. Kentucky, out of Louisville-Lexington area, represents how large firms can support small firms or medium-sized firms in their workforce issues. You have a heavy concentration of advanced manufacturing in that region led by Toyota, General Electric, 3M. But they recognized that they could not sustain the level of workforce talent and economic vitality in the region that would be helpful to their companies' long-term success without a broader talent pool to draw from and therefore took what was pioneered at Toyota around an apprenticeship manufacturing technician training effort, expanded to include mid-sized firms, ranging from precision instrument development to the Paradise Tomato Kitchen, which is a food processing company.
So you have a whole range of firms, from mid mid-size to larger, that are working together, built off the system that the larger verbs initiated, but ensuring that the entire region has a qualified manufacturing workforce that's benefiting all of them. Coming in behind that are the universities, the community colleges, and then the state government, which is actually trying to take that model and replicate it through other the regions of the state, supporting the initial drive by the private sector, but then sharing it up to other regions because of the successes demonstrated.
So those are three interrelated models. You get the Riverside model with the mid-sized companies pulling together for themselves. And we've also heard about something similar to that in Philadelphia. We get the Northeast Ohio Cuyahoga County model of the system saying, what do to help the mid-sized and also to help workers go from old, industrial skills to new ones? And then you've got this Kentucky example, and there are similar things in, I think, upstate South Carolina, where you've got a sort of a couple of big companies that realize that they need to build a thicker, deeper, broader skilled labor pool that includes companies in their cluster, right? Because other companies cluster around them, and the whole ecosystem needs them.
So three different kinds of ways in which the workforce system, the supply system and the demand system, that's what we've been talking about. It can come together to help mid-sized companies find the talent they need.
Exactly.
A classic big-company problem. But it's interesting that it presents itself in a different and perhaps more intense way in the middle market. Let me try to wrap this up briefly because I think we've had a lot of discussion. And first of all, to tell people that you can go to our website, middlemarketcenter.org. And you can find the research that we've done with Brookings to learn more about how middle-market companies are facing and meeting the challenges of workforce.
But I think what we've learned is that, first of all, they are intense. That you can sort of think about it as almost being a perfect storm, if you'll forgive the cliche, of three things. One is a source of demand. Mid-sized companies that could do a better job, Martha, as you were just talking about, about thinking through how they go and look for the talent that they need.
Secondly is a workforce system that is too much focused-- historically been focused on training up individuals. And as you say, it's not as demand oriented. It's not as actively looking out to say who's hiring these people we want to train, and how do we connect to them? And third, the workforce, it's a workforce itself. And there are well-known issues with skills or drug issues and so on and so forth. And also issues, I think, with whether those workers are aware of the resources available to them on the workforce development side or are as aware of middle-market companies as they should be. And all three can play a role.
But I think particularly what we're hearing is that companies by themselves, working with each other, and working with the workforce system, community colleges and others in their metropolitan areas, can do a lot to address this problem that's bedeviling them. Did that summarize it pretty well?
We're both nodding.
Oh, good. So we will try to record that nod and record it for history. But I want to thank you very much, Martha and Marek, for joining us today for this discussion. Thanks very much. And I want to thank all of you for listening to The Market That Moves America.
Never miss a new episode. You can subscribe to the podcast on iTunes, Stitcher, Google Play, or wherever fine podcasts can be found. And as I said, you can visit us at middlemarketcenter.org.