If there’s one race that every CEO must win, it’s the race for skilled workers. In overwhelming numbers, chief executives single out the shortage of technically qualified personnel as the greatest barrier to business expansion in a booming U.S. economy.

CEOs have five options to meet the skills challenge. They can bid talent away from others, acquire it out-right by buying companies, import it within the limits of U.S. immigration law, tap into it globally through the World Wide Web, or build it from within. All of these options are being pressed to the hilt. Together, they are working well enough to contribute to impressive gains in U.S. growth and productivity. At the same time, however, each option has drawbacks for companies and for the U.S. economy as a whole.

Bidding. The scramble for workers, especially those with IT skills, is driving up wage costs and fueling workforce churn. CEOs in leading U.S. hubs of innovation routinely project annual turnover of up to 30 percent for sought-after software engineers and Web designers.

Buying. The M&A approach for acquiring talent has succeeded for a relatively small number of firms with deep pockets or high market caps. This strategy, however, provides no guarantee that the best and brightest can be retained and does nothing to expand the U.S. talent pool.

Importing. U.S. high-tech firms have pushed successfully for the loosening of immigration caps and are trying to loosen them further. This strategy, however, is politically risky and doesn’t provide a reliable supply source.

Outsourcing. Firms now have the technical capability to tap into reservoirs of overseas workers. While outsourcing works for many CEOs, it sidesteps the domestic challenge and strengthens the resource base from which overseas competitors can draw.

Building. Improving the U.S. education and training pipeline will do most to contribute to the national economy but requires a long-term commitment as well as more resources than many smaller firms have. In addition, this option provides no secure return on investment in a tight labor market.

The Fundamentals of the Challenge

The Council on Competitiveness has looked in-depth at the skills race and what it will take to win it. We have found that CEOs can make a pivotal difference if they agree on the fundamentals of the challenge and provide leadership.

1. The skills shortage is structural, not cyclical. Whether the U.S. economy slows or not over the next several years, “the demand for increased skills is rising much faster than the capacity of companies, workers, or the nation’s educational system to respond to.” The underlying drivers are technological and demographic.

The information revolution is fueling an unprecedented demand for technically literate workers. The Department of Commerce projects that nearly half of all U.S. workers over the next five years will be employed in industries producing or intensively using new IT. Jobs requiring at least a bachelor’s degree are projected to increase by 25 percent over the same period.

At the same time, a generation of skilled wage earners will reach retirement age during this decade without ready replacements at hand. New entrants to the workforce are projected to be less prepared than at any time in recent decades. The current U.S. immigrant population, which will account for much of the growth of the workforce, is lagging in educational attainment. U.S.-born males are 2.5 times as likely to have finished secondary school than current immigrants.

This mismatch between supply and demand has left many Americans on the wrong side of the skills gap. Literacy experts estimate nearly half of American adults lack the basic skills needed to function successfully in the knowledge economy.

This skills crunch is not confined to a particular sector of the U.S. economy. The shortfall may be most acute in IT, but it extends broadly across the private and public sector. The crunch will not be eased unless Americans who are at the margins of the knowledge economy are brought into its mainstream.

2. K-12 education does not meet global standards. Just ask the CEO of any multinational what it takes to screen for technical literacy in the U.S. compared with East Asia. Despite two decades of high-level attention, the nation’s primary and secondary schools are not turning out nearly enough qualified students.

The much-cited Third International Science and Math Study, comparing 40 countries, shows that American youngsters do progressively worse as they go through the K-12 system. Ranking near the top in 4th grade, they stand near the bottom by completion of high school. Moreover, the top 10 percent of American 12th graders do not outshine their counterparts overseas, but finish in the middle of the pack.

To some extent, these deficiencies are offset by the strengths of U.S. post-secondary education. Here, in contrast to K-12, America outspends most other countries. Community colleges do much to make up ground lost earlier, as well as to provide hands-on training attuned to market demand. Four-year colleges and universities set the world standard across virtually all disciplines.

But a weak K-12 pipeline still reduces U.S. competitiveness by limiting the quality and number of entry-level workers, creating a burden of remedial education, and thinning the pool of Americans ready to pursue studies in technical fields at the undergraduate and graduate level.

In principle, the U.S. should be producing growing numbers of scientists and engineers to maintain “first mover” advantages in many critical technologies. In practice, the opposite is occurring in every technical field except health sciences. Undergraduate science degrees are flat or declining across the board .The under-representation of American students is even more pronounced at the graduate level. As a result, the R&D intensity of the workforce is falling at a time when the premium on commercializing new ideas has never been greater. Although the K12 system cannot be held solely accountable for these adverse trends, a turnaround is unthinkable without continued CEO engagement in early education.

3. CEOs must rely more on community than company resources to upgrade worker skills. Dozens of CEOs have told the Council that they cannot win the skills race with a go-it-alone strategy. It’s a race that has to be won community by community rather than company by company.

CEOs are reaching beyond their firms to keep pace with the growing intensity and complexity of training demands. These demands are outrunning resources. Statistics show a gain of almost 10 percent in productivity for every year of worker education. Yet training expenditures per worker appear to have fallen over the past 15 years. Meanwhile, the compression of time is forcing a shift from subject-driven, off-site, class-room-style programs to on-site, just-in-time training.

In this environment, employers need access to specialized training expertise. They must also accommodate increased worker mobility. CEOs, especially in fast-moving technology sectors, cannot expect to retain many of the workers in whom they invest. Therefore, business leaders are paying much closer attention to the broader base of workforce development in the communities where they operate.

Pressures to strengthen workforce capabilities on a community basis are aligning the interests of employers, workers, educators, and public officials. Companies want education and training services that strengthen the bottom line. Workers want continuous learning opportunities. Providers of training and education, whether private or public, have to be responsive to market demand. The job doesn’t get done if the stakeholders don’t cooperate.

CEO Priorities

1.Act Locally. The skills race will never be won in Washington. Federal policy will

be decisive on a few key issues: immigration quotas, tax incentives for training, and the funding of basic research through which scientists and engineers are trained. But the resources and decision-makers that matter most are at the state and local level.

CEO leadership can make the greatest difference locally by building and sustaining     collaborative networks to upgrade worker skills. Collaboration often begins when CEOs agree on skills needs that will benefit an entire industry sector-competing firms and their local suppliers. These shared requirements define the market demand that a community’s employers, workers, educational institutions, and public agencies strive to meet. High-profile CEO involvement was a defining feature of successful initiatives in Silicon Valley, San Diego, Atlanta, Seattle, Raleigh-Durham, Pittsburgh, and elsewhere.

2. Focus on Scalable Initiatives. CEOs should invest time and energy on strategies that have worked in one place but are applicable nationwide. For example, NASDAQ president Al Berkeley has lined up high-tech CEOs behind an Internet Learning Network that will enable American students to measure their math and science skills against those of students worldwide. Berkeley sees a voluntary, Web-based opportunity to learn what a B+ means in international terms as a powerful force for change.

J.T. Battenberg, CEO of Delphi Automotive Systems, and Paul Allaire, CEO of Xerox, have been driving forces behind FIRST, a science and technology competition that partners U.S. high schoolteams with firms. This year’s robot-building contest finals drew contestants nationwide to the Epcot Center. “The sight of 15,000 kids filling a stadium to cheer an MIT professor made a believer out of me,” said Battenberg.

Charles Heimbold, CEO of Bristol Myers Squibb, has committed his firm to an innovative hands-on science program under the aegis of the National Academy of Sciences and the Smithsonian Institution. The objective is to provide a classroom experience that truly inspires children to learn. Pilot programs are running in a dozen states.

The common thread in all of these initiatives is the effort to create a national multiplier-that’s a standard well worth adopting.

3. Rethink the Definition of Best Practices. Best-in-class applies not only to the cost effectiveness of corporate training programs but to the creation of an accessible pool of talent from which a company can draw. The following principles apply within both companies and communities.

• Collaboration defines best practice. When CEOs make their needs clear, workers have an up-front stake in learning new skills, and training providers are attuned to market demand.
• Good metrics and tight accountability yield best results. Training outcomes should be measured and training providers held accountable for their performance.
• New learning technologies are transforming the workplace. Computer- and Internet-based tools can breach barriers of time, distance, cost, and availability. They can be used to customize the learning process on-site, improve the quality of information, and help small and midsized companies access state-of-the-art training.

The Bottom Line

The most effective agents of change in strengthening worker skills are leaders who can build from within and reach outside their organizations to create networks that deliver results.