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Ready for the Other Millennium Bomb?

Business managed the Y2K bug with some alacrity, but savvy CEOs must now prepare for the millennium’s next big hurdle : the leading edge of a tectonic demographic shift. 

FOR A CHIEF EXECUTIVE, few things are more important than ensuring a successor is prepared and in place. While executive selection is an inexact science-a very human process that’s inherently hit and miss, for much of the past century large organizations could at least depend upon a stable and abundant supply of promising candidates, swimming up the developmental ladder with the earnest intent of spawning salmon. Today’s management fishery, however, is a resource that’s within a decade of a serious collapse. Even as the first wave of America’s 78 million baby boomers is rolling into stock-enriched early retirement, the number of managerial jobs is expected to rise by more than 20 percent during the next 10 years. Meanwhile, U.S. demographic projections show that at roughly the same time, the number of 35- to 44-year-olds-the prime pool of future leadership talent—-will drop by nearly 15 percent.

“Because the labor supply is currently peaking, it’s hard for executives to recognize the full magnitude of what they’ll eventually face,” says Bob Proctor, a senior organization specialist with McKinsey & Company’s Washington, D.C., office. “But corporations are already feeling the pinch of finding people to run divisions and manage critical functions. The war for executive and technical talent is on.”

A boom economy and the explosive growth of high tech and Internet businesses are certainly elements of the current conflict. Last year, for example, Amazon.com lured a trio of senior executives from Black & Decker, Delta Air Lines, and AlliedSignal, while Priceline.com bagged a president from AT&T’s top ranks. But today’s rumble is but a mild foreshock of a tectonic demographic shift, a jolt that British Author Paul Wallace describes as an “agequake.”

Even as Paul Erlich prattles on about a global population bomb, fizzling fertility and an aging populace are facts of life in the world’s leading technological and industrial nations. Japan is already the first nation ever to have a population with an average age of 40. By the year 2020-unless its people somehow rekindle their reproductive passion-six out of 10 Japanese will be retirees.

In his book, Agequake-Riding the Demographic Roller Coaster Shaking Business, Finance and Our World, Wallace notes that with fertility woefully below the 2.1 children per woman replacement rate, European populations “are poised to plunge on a scale not seen since the Black Death of 1348.” While these forces will eventually put pressure on government-funded retirement plans and social services, it’s business that must initially confront the conundrum. “Companies can no longer rely on a bubbling spring of new, young recruits,” writes Wallace. “That spring is drying up to a trickle. The existing pool of workers is aging rapidly.”

In fact, recruiting and retaining talent at all levels will likely evolve into the biggest challenge that a 21st century CEO will face. In this millennial battle, winners will find ways to renew an aging workforce. Losers will offer jobs for which no one applies. That’s the scenario that seems to lurk just over the demographic horizon. But it’s also a fact that humans have a remarkable capacity to overcome dire predictions and alter outcomes. The Y2K bug is just one example of a real threat that was managed with some alacrity. After all, had Erlich’s alarming predictions of resource shortages and famines been accurate, most of us would have died during the Carter Administration.

In fact, there are now 6 billion people in the world. Population probably won’t peak until 3 or 4 billion more have joined the party. In the U.S., immigrants and the “echo” children of baby boomers means the nation has no great youth deficit. The great middle, however, is a rapidly aging bulge that promises to confound business for the next quarter century.

As a 1998 McKinsey report called The War for Talent noted, there are no significant countervailing trends. Women are no longer surging into the workforce, white-collar productivity improvements have flattened, immigration levels are stable, and executives are not prolonging their careers. In 1970, about 83 percent of men between the ages of 55 and 64 were working; today, only 66 percent of that group remain employed. The average retirement at some major corporations is falling toward the mid-50s.

“Up until now, senior managers have been able to depend on an ever-increasing labor pool,” explains Proctor. “In the U.S. that resource is now shrinking by at least 1 percent a year. And it’s not just a managerial talent issue. Even the trades are short on carpenters and electricians.”

Blame it on the boomers. Born between 1946 and 1960, this hearty generation is at the core of most major trends both good and bad. Boomers created the surplus of middle managers in the late 1980s, and bore the brunt of corporate downsizing. Because boomers found or created still other jobs, there are now more U.S. workers in their late 40s than there are workers in their late 20s. Moreover, behind a bull market that’s run for 18 years is a clot of humanity saving for retirement. In turn, market prosperity has enabled those managers and executives in their mid-50s to comfortably retire.

Until today, this kind of Darwinism seemed to work in favor of businesses. Sweeping out the old growth was a fine way to continue cutting costs for many firms. Younger workers are less expensive, and perhaps more qualified than their elders; in the high-tech sector of the economy, the wisdom of long experience is almost viewed as a liability. After all, the pups will eventually learn, although probably the hard way.

Yet, the McKinsey report revealed that there’s already some concern about a shortage of wise leaders. A study of nearly 6,000 managers at 77 companies, it found that some 75 percent of corporate officers felt their firms had “insufficient talent sometimes,” or were “chronically talent-short across the board.”

“This is one of the prices business is paying for reducing costs and flattening organizations in the 1980s,” says Valerie Sessa, Ph.D., a research scientist with the Center for Creative Leadership in North Carolina and co-author of a forthcoming book called Executive Selection: A Systematic Approach for Success. “Middle management was the training ground for future executives, a place where people could learn to be leaders. Business cut the pool of candidates and the training ground at the same time.”

Tightened budgets forced even large corporations to concentrate on training future leaders specifically for business needs, rather than using more traditional executive development programs. Companies such as IBM, Westinghouse, General Motors, and Chase Manhattan used to develop far more executives than the organizations needed. Extra talent was thus “exported” to other companies. Today, few companies expend resources on potential surplus.

American business can no longer count on military surplus, either. Once an exporter of managerial talent, the U.S. armed services were also ravaged by downsizing. Recovering will take time. Unlike corporate leaders, generals can’t troll the market for colonels and majors; all military personnel start out in boot camp and work their way up. And when it comes to attracting young individuals of high intellect and potential, business today has the Army, Navy, and Air Force totally outgunned.

Along with demographic changes, there’s also a cultural shift that in some ways makes millennium recruiting easier, and yet makes retention all that much more difficult. It’s the mobility factor. And it’s at once a blessing and a curse. “At any given time these days, two-thirds of your workforce are what we call ‘passive job seekers,’ observes McKinsey’s Proctor. “Since there’s no longer a stigma about jumping jobs in a market this fluid, this means the vast majority of anyone’s workforce is at risk. All it takes is a better offer from an aggressive recruiter and they’re gone.”

As for retention, the companies that hand out all those stock options are probably on the least stable ground. “People told us they take jobs because of lucrative stock options,” says Proctor. “But with future earnings resting on these options, the same people said they’d cut their losses and move on the moment it looked like a company was headed south.”

For all the stories about start-ups, the companies attracting the most talent are those that have been around between two to five years, and with 50 to 500 employees, adds Proctor. “It’s the established players in the new economy who have an advantage over both the start-ups and the big companies. These offer a chance for wealth creation and a hint of stability.”

Because there are so many firms with relatively brief histories, the number of CEOs hired from the outside has increased rapidly. “Some 30 years ago, only 9 percent of new CEOs were outside hires,” says Sessa. “Today it’s about a third.”

That trend may continue, as the new dot-com firms come under even greater pressure to rapidly mature. While giving the heave-ho to youngish founders, venture capitalists put a premium on “gray hairs” with a proven knack for sustaining an established company. But as Sessa points out, hiring from the outside has its liabilities. “Our studies show that about 35 percent of executive level outside hires are considered failures, as opposed to a 25 percent failure rate with internal promotions.”

As demographics grind onward, companies will also have to make fundamental priority shifts, suggests Proctor. “Right now at most companies, the majority of time and effort is focused on consumers. In the future, competition for talent might mean you have to first win in the labor market, before you’re ever going to have the chance to win customers.”

In other words, companies might have to treat recruiting like they now treat marketing. To Proctor, this could mean building a brand image as an employer, and carving out segments of the labor pool. One company might focus on potential employees who prize technical innovation above all else. Another might market itself as a firm for lifestyle-oriented people.

As always, leading edge firms will have relatively little trouble attracting talent. For example, Amazon.com gets about 60,000 unsolicited resumes every month. With a “Who Wants to Be a Millionaire?” brand image, recruiting isn’t much of a problem. Of course, given the market turbulence in the tech sector of late, that may soon change.

Many firms, including some of the top names in technology, are now using cyberspace to facilitate aggressive recruiting. One Silicon Valley firm, for example, advertises on the Dilbert Web site. When a worker at a competing firm surfs in to look at the latest cartoon and happens to click on this company’s ad, the recruiter instantly IDs the company the person works for and knows he or she might be interested in changing jobs. “The company has ways of tracking that person around the Internet,” says a source familiar with the technique. “They can then customize a recruiting pitch.”

An alternative strategy is to go after older employees. “The two unquestionable advantages older workers possess are greater experience and authority,” writes Wallace in Agequake. “An international survey by the U.K.’s Cranfield School of Management found that the most effective leaders were older senior managers who were ‘more able to take a balanced view on issues before reaching a decision.’

And yet, there’s a more compelling reason to change attitudes toward hiring veteran employees it comes down to plain old demographics. “Since the major source of workers is now older,” observes Wallace, “why cut off your nose to spite your face?”

Such recruiters will devise customized “sunset career options” to attract and retain older workers. These could include consulting and part-time work, or mentoring assignments. A few companies are already culturing the resource.

Monsanto, for instance, routinely brings back retirees to ease labor shortages and transfer technical knowledge to younger employees. Its Retiree Resource Corps saved the company more than a half million dollars in the past year, mostly by avoiding fees that would have gone to agencies. More important, some of these returning workers are helping young researchers through arcane government procedures and reporting standards. In fact, one could argue that retirees are a company’s only bench strength.

Meanwhile, most of the business world can feel the demographic temblor only as a faint and distant rumble. And there’s always a chance that the quake will remain mild. New immigration patterns might allow growing populations to flow into and balance those in decline. The Japanese and the Italians might even rediscover procreation.

However, it seems clear that for the first quarter of the 21st century, managerial and technical talent will be a depleted resource. In the new millennium, one of the highest priorities of a CEO will be netting and keeping a company’s fair share.

That’s Not Amore

Americans tend to view Italy as a nation of lusty people with huge families. They may still be lusty, but they sure aren’t having many children. A rapidly aging population combined with a low birth rate will soon make Italy one of the world’s most geriatric nations.

The impact on public policy, government and social services will be profound. In his book Gray Dawn, author Peter G. Peterson describes Italy as “the world’s worst-case pension scenario.” The nation recently became the world’s first to have more citizens over the age of 60 than people under 20. In the midst of a “bambini bust,” Italy’s national fertility rate of 1.2 children per woman is almost a full child below the replacement rate of 2.1. Within 30 years, the cost of Italy’s pensions will exceed 50percent of the worker payroll.

Business is going to deal with the demographic squeeze long before the government. Italy already has a youth deficit, and during the next decade the number of 20- to 34-year-olds in its workforce will drop by 25 percent. What this means for the growth plans of Italian companies is terribly uncertain.

Italy is but the leader of a wider trend in Europe and other developed nations. The Japanese have a term for it, koreika shakai mondai, or “the aging society problem.” In more than 60 nations with roughly half the world’s population, fertility has fallen below the 2.1 replacement rate.

In Gray Dawn, Peterson writes: “I believe that global aging will becomethe transcendent political and economic issue of the 21st century. Like it or not, and there’s every reason to believe we won’t like it, renegotiating the established social contract in response to global aging will soon dominate and daunt the public policy agendas of all the developed countries.” It won’t do much for commerce, either.

Old Employees, New Customers

While the oncoming demographic quake will pose some challenges for business, it most surely opens a host of new opportunities. Dramatic advances in medicine and life-style management have increased life spans in developed worlds. And this is a fairly wealthy group of geezers. Currently there are 74 million men and women in the U.S. over the age of 50. These folks represent only 27 percent of the population. And yet, according to

Age Wave, LLC, a northern California-based marketing and publishing firm, they control about 70 percent of the total net worth of U.S. households, and about half of all discretionary income.

They are, as Age Wave suggests, “the $9 Trillion Consumer.”

For an idea of how this will unfold in the U.S., Gray Dawn author Peter

Peterson suggests watching Japan. “Marketers around the globe now study Japan to find out what happens at the cutting edge of global aging,” he writes. “Among Japan’s losing industries: pediatrics, toys, education, housing starts. Among the winners: nurses, leisure cruises, pets, religious icons.”

Mass marketers still aim at young customers. Folks over 50 probably won’t buy many Pokemons for personal use. They will fork over cash for luxury cars and travel. As the folks at Age Wave suggest, “companies whose products and services are aligned with the age-related needs of new generations of maturing consumers are on the threshold of tremendous opportunity.” And $9 trillion is a lot of opportunity indeed.

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