This article was first published on 3 September 2012 on the HR Tech Europe Blog
Better decision-making depends on us reducing uncertainty about what is going to happen, not what has happened. Of course, the past is often a good predictor of the future but a way of understanding how the future is likely to develop is key.
One approach that I’ve found particularly appealing over the last 10 or so years is that of systems dynamics. There are two defining elements of this approach; first that the business can be thought of as stocks and flows. HR falls nicely into this approach – on one level the workforce can be seen as a stock of employees who join, leave and are promoted or move. But we can also think of stocks of skills which the business can develop.
The second component is to think of the system not exclusively in a linear cause / effect manner but to consider feedback loops and how these help or hinder the development of stocks. Put together these two elements enable complex, and often counterintuitive behaviours to be understood and predicted.
One of my earliest introductions to system dynamics was through a pre-publication copy of Kim Warren’s 2002 book ‘Competitive Strategy Dynamics’. I recently took some time to talk to Kim about his work and how dynamic models work so well for HR.
I have a career background in strategy – I was head of strategy for Whitbread retail arm and wanting a change I left to join London Business School to teach strategy. This was a time when Michael Porter was everything you did about strategy and Gary Hamel’s work on Core Competencies was starting to be known. I taught this stuff for a few years but I felt that it didn’t really answer any of the questions that I had to deal with in the real world.
During my PhD I was studying change in the brewing industry and it was suggested that I looked at systems dynamics modeling as a way of understanding the industry change. I took one look at it and realised that it was just the tool that you need for strategy as it connects all the decisions you’re making with all of the outputs and how those things are dependent, change over time and deliver performance into the future.
I spent my following 5 years trying to translate a rather technical, OR view to building models to terms and language that ordinary folks can understand. The book was a way of trying to translate system dynamics to a way of dealing with everyday problems and challenges that managers face.
Because it is about how things change over time you can’t answer these problems with static tools. You’ve got to have dynamic models and you can’t understand dynamics without experiencing it. This is why we concentrated on developing simulation based learning materials. That got me to where I have been working over the last 10 years – extending and making the thing and making it more and more accessible.
The other tools are big, expensive, complicated and not the sort of thing the average person sitting at their desk can use. It seems to be working. I recently sat down with someone at one of the major banks and by the end of the afternoon she was developing business models of the companies that they we lending to.
Given the long time when systems dynamics have been taught in schools such as MIT or LBS why hasn’t this approach developed more than it has?
It’s a tough sell. Part of the problem is that there is a significant proportion of management that isn’t comfortable with numbers but that doesn’t satisfactorily answer the problem as some sectors are full of numerical managers and it hasn’t taken off there.
I suspect that it’s because it is a bit difficult. It certainly isn’t the sort of check-list thing that people like. You do actually have to do a bit of work and beyond the simple cases it gets a bit complicated. People are quite wedded to the spreadsheets that they use and they don’t see the need to do anything different even though spreadsheets have let them down.
Another reason for the slow uptake has been the process for building models that most in the field recommend you should build the model. In Senge’s book ‘The fifth discipline’ you draw a chart of how a key indicator has and will change over time. You then get lots of people to explain what they think is going on and you end up with a big, complicated feedback diagram known as a causal loop diagram which you then change into a systems dynamic model.
What you’ve built is a purely qualitative model. As soon as you move away from that one chart you are left with a feedback diagram with no numbers on it as all that are full of opinion. As soon as someone has to build a quantitive model they’re working with something which is probably wrong and certainly where large parts have no evidence.
My approach has been to build out from the known structure. We know people move from level to level given the company’s promotion system. We can get those numbers and rates.
I put it to Kim that with historical simulation tools as quite expensive and specialized it was hard for managers to start apply tools in simple scenarios.
I suppose so, but we need to separate the thinking from the tools. What I’ve tried to do was to get people to start thinking in this manner. It’s easy to put a stock and flow on a piece of paper and work out month by month what the numbers are. As soon as you go beyond there you do get into the software. The first tool – iThink – looks very nice but as soon as you start building something you really do need to know what you’re doing. The new software [Strategy Dynamics's Sysdea] brings that learning curve right down.
For the HR person wanting to take this approach where do they start? There are some key challenges in the area of workforce planning such as effects of demographics that the dynamics approach is probably the right one.
Yes, I’ve seen this over and over again. A friend who works in the utilities industry did one of these models for looking at the challenges of the demographics in one major European energy firms and they were so shocked by the HR implications that they sponsored the creation of 3 university degree programmes with the promise to take 50% of the graduates.
The problem with HR is the long timescales involved. They’re struggling now because of decisions that they made 10 to 15 years ago.
Of course you can predict these things. You can put conditional probabilities on the chances people leaving or getting promoted.
Yes, one of the great things about HR is that the demographics are nice and reliable. You know every year people are getting 1 year older.
How would you see an HR person start using SD?
There are probably two parts to the answer. The first part is just within the function. Let’s assume that the business is telling you good information about the number of people they need at which levels then it’s a relatively straight forward for the HR team to build a model and show what has to happen to hiring, promotion and training rates.
You’d almost certainly want to go further and starting to think about skill levels or experience which you can do.
There are lots and lots of HR challenges which these models can be turned to. With one company I worked with the head of strategy recently they’re changing the business model. This has huge staffing challenges. They currently have x thousand people with skills a,b and c and they need to move to y thousand people with skills d,e and f. Over what rate can we transfer people from x to y, what resourcing challenges are needed and what numbers do we need to hire and how do we handle the transition of x type people that we don’t need any more.
The second issue is the relationship between the HR function and the rest of the business. So in the previous example we assumed the numbers coming from the business were good but what if they’re not quite right? You end up not making the progress you expected. To answer these questions you’d need to have an integrated model between the business and the HR team who are supporting them.
The final approach is a full, dynamic workforce planning system.
As Kim said, the best way of understanding this dynamics approach is by example. In a future article I’ll introduce a simple dynamic workforce model created using sysdea.