In part one and two of our three-part series on "Understanding People Risk in the BRIC Countries", we examined the people risk associated with recruitment, employment and redeployment of people in these countries. In the third and final part of this series, we held a panel discussion with four senior leaders of Aon Hewitt Consulting to discuss what those risks mean to companies and how companies should cope with such risks. Thais Blanco is the Talent and Rewards Practice Leader in Brazil, Edward Stanoch is a Director for Aon Hewitt Eastern Europe, Rakesh Malik is the Organizational Consulting Practice Leader in India, and Klaus Liu is the Chief Executive Office for Aon Hewitt Consulting Greater China.

The following is an edited version of the transcript.

 Risks in recruitment

 Risks in employment

 Risks in redeployment and restructuring

Recruitment risks

HR Connect: Let’s begin with the issue that everyone is talking about. Talent shortage is a recurring situation across the BRIC countries. Can you give us more insight on the situation of talent shortage in your market and what companies should do to address this risk?

Brazil (Thais Blanco): I believe one of the key factors causing talent shortages in Brazil is the under-investment in education by the government. As a result, the education system is playing catch-up to the industry’s needs. You don’t get enough people to hire, and quite often the new hires lack the skills to be effective right away.

So, essentially, you have a situation where companies are forced to acquire or ‘buy’ talent from competitors and people are constantly moving from one company to another. Companies also have to cope with the problem of skills mismatch. In this area, some companies have taken the training and development to a different level by setting up corporate universities.

Another point is tied specifically to leadership development. The culture in Brazil is still largely paternalistic. Companies do not develop their talent broadly. Five to 10 years ago, few companies ventured into developing their own system for rigorously identifying and developing talent. In the last few years, however, we are seeing more companies -- both local and foreign MNCs -- starting to put more rigor into developing their bench strength. In fact, leadership development is fast becoming an essential human capital topic here.

Russia (Edward Stanoch): Before the financial crisis, Russia experienced talent shortages especially in the area of leadership and managerial skills. Companies in Russia also had difficulty retaining talents due to high turnover with companies resorting to ‘buying’ talents. As the economy is recovering from the crisis, talent retention has become a problem again.

There are a number of issues related to the shortage of talent in Russia.

Firstly, there is this issue of declining education quality despite an increase in the number of universities in Russia. The education system in Russia is still playing catch-up with the demands for new skill sets arising from new or fast-growing sectors. There is a mismatch in the skills that students learned from their schools and what the employers need of them.

Secondly, Russia has experienced a brain drain as it has seen a flight of its human capital over the years.

Thirdly, the workforce in Russia is ageing rapidly and Russian cities are not particularly attractive to foreign talent.

Finally, gender discrimination is still pervasive here. Even now, leadership positions are typically held by middle-aged males with good social networks and it is rare to see female business leaders in senior positions. This situation clearly reduces the overall talent pool.

India (Rakesh Malik): For everything you have heard about India, the opposite is also true. India is facing a rather paradoxical situation. On the one hand, there are talent shortages in many different sectors. On the other hand, the unemployment rate is still high.

The issue for India is not about quantity but rather quality of the workforce. India has a large number of university graduates but there is a pervasive problem of skills mismatch between what the graduates learned and what employers require. In talking about skills mismatch, we would need to turn our attention to the education system, and perhaps how companies can work together with educational institutions to bring more progress in aligning the education curriculum and industry needs.

For example, there’s a British bank that has a large back-office operation in India. At the start of their operation, they realized that the commerce graduates they hired often lack knowledge about banking. So the bank worked together with universities to create a banking curriculum for their commerce program, trained the university faculties and even provides faculties to teach the course; and graduates from this program are guaranteed a job with the bank.

China (Klaus Liu): Similar to India, China has a large pool of graduates but most lack the quality to work for large corporations. I think the skills mismatch can be partially attributed to the education curriculum that emphasizes theoretical learning rather than practical skill training.

At the same time, as it is in India, China is a key growth market for many Western MNCs and the domestic market is under continuous demand for localization of products and services. Powered by domestic market growth, companies that used to consider China solely as a production base now wanted to move into the domestic market. As a result, there is a growing demand for middle managers who are capable of executing aggressive growth strategies for the domestic market.

In the short term, the talent shortage situation is likely to continue. Due to the intense competition, we are starting to see employers coming out with clear and attractive employee value propositions. For instance, China Mobile is widely known for its overseas training opportunities, job security and good pay. Google is seen as an innovative place to work that provides a flexible and positive work-life balance and high pay as well. The Big Four accounting firms’ value propositions are centered on a very clear career path, international opportunities and hot skills development.

Employment risks

HR Connect: Let’s talk about the immediate and long-term employment risks. What should companies do to sustain or improve the level of productivity vis-à-vis the people-related costs and risks, now and in the long run?

Russia (Edward Stanoch): Attrition is an issue especially among the highly qualified talent as there are many job opportunities available to them, in particular for those working in high growth sectors. It is both costly and risky if companies are unable to hold on to their critical talent.

As a short-term solution, companies are simply buying talent to fill the gaps. More companies are paying attention to building an employer brand in order to attract talent more effectively. Talent attraction is not only important for filling the vacancies but also to propel business growth.

Companies are also more aware of the need to engage their employees in order to retain them. The talent shortage would most likely persist in the next five to 10 years as it takes time to revamp the education system. So companies who are doing well in engaging and retaining their people have a lower risk compared to companies that are not doing so well in employee engagement.

In addition, as I mentioned before, the ageing workforce is a critical issue for Russia. One important step to take is to ensure sufficient training and development to prepare the younger workforce to take over from the older workforce. This is currently a challenge because of the shortage of good quality external training resources, which means that they need to rely more on internal training, and not all companies are capable of providing that.

India (Rakesh Malik): In the short term, increases in salary growth are having a negative impact on companies’ bottom line; however, margins are still good and businesses are still profitable. For example, the IT-Enabled Services companies whose margins were around 40% 10 years ago are still enjoying margins of approximately 30%.

I think companies have also developed ways to cope with the salary growth and attrition rate that they experienced in the past few years. Companies are trying to raise productivity and efficiency through technology and automation in order to reduce dependency on people. On the HR front, more companies are making improvement to the HR processes such as recruitment and on-boarding. They are also looking into ways to make training more impactful.

Employee engagement is another key area. Although salary and career development are still the major drivers, they are not the sole factors. We also found that employer branding is an important factor to attract and retain people. In a jobseekers’ preference survey we conducted late last year, local Indian companies emerged as the top choice for 87% of the jobseekers. What this means for foreign companies is that they are no longer considered as the most preferred employer and hence it is important to create a compelling value proposition to attract and retain local talent.

China (Klaus Liu): I think the government will try every means to protect, or at least, prolong China’s competitive edge. China is a large country with over 170 cities with a population of one million and above. The government is facilitating relocation to lower cost cities by building the necessary infrastructures in second- or third-tier cities. So there is a wide range of location choices for investors. Nevertheless, companies need to be careful and rigorous in choosing which city to go to.

One recent example is the widely publicized relocation of Foxconn from Shenzhen to the inland region of Henan province. Considering the fact that close to 20% of its migrant workers in the Shenzhen plant are from Henan province, these workers are given a choice to move back to Henan to be closer to home. Foxconn’s move allows them to alleviate the pressure on rising employment costs in Shenzhen and at the same time addressing the recruitment and employment risks by keeping experienced workers and reducing problems that could arise from employing migrant workers. (Editor’s Note: According to a Bloomberg report, Foxconn is planning to hire 300,000 workers for its Henan operation )

Brazil (Thais Blanco): Brazil’s employment law is rather inflexible and protective. Formal employment is costly to both employees and employers. Employment costs are high as salary increase is guaranteed and linked to the inflation index. However, I think the current labor law has also caused problems to the workers. It is costly to employees because those who are formally employed need to pay higher tax. This situation encourages informal or contract employment and too many contract workers could be detrimental to the long-term future of a business. Unfortunately I do not think that the labor law will ease any time soon. The tough labor law has caused some foreign companies to relocate to other neighboring countries like Argentina; and this could also be detrimental to foreign investment.

I would also like to highlight that Brazil is riding on a growth trajectory and the salary increase is pretty much offset by domestic economic growth. Foreign investors are also attracted by the growth opportunity here and therefore could still find Brazil a good investment destination. With Brazil hosting the World Cup in 2014 and the Olympics in 2016, the growth opportunities in the next five years are tremendous.

One other point to add is the improvement of the crime situations in Sao Paolo and Rio. Crimes can be a business concern not just because of the additional costs that companies have to bear to guard their properties. Crime also raises employment risk because an unsafe environment may restrict working hours and affect employee commitment. Although crime remains a concern, the government has taken a tougher stance to clamp down on drug dealers and those actions are having positive impacts on business.

Risks of restructuring and redeployment

HR Connect: What should companies do to manage people risk in time of change? For instance what are the risks of restructuring, relocation or a merger and acquisition (M&A)?

Russia (Edward Stanoch): Although the labor law in Russia is not particularly restrictive or rigid, as compared to Brazil or India, the bureaucracy and uncertainty in dealing with government agencies can be a key source of risk. Foreign companies are advised to engage local consultants and partners with good networks to help them throughout the process, and generally they need to be adaptable, patient and have a good understanding of the local culture.

In an M&A situation, companies should perform their due diligence, not just the usual HR issues, but also in terms of identifying people within the target company who hold the relationships with key clients. Social networks remain a very important element in doing business in Russia.

Companies also need to be aware of the workforce demographics, as discussed above, especially if they intend to acquire traditional mature businesses such as steel making or oil and gas. Layoff is possible but could be a costly process particularly outside the large cities like Moscow and St. Petersburg. In smaller towns, companies should be prepared to deal with local government and communities. For instance, some small townships could be highly dependent on a particular large employer and it will be difficult to layoff the workers. Retooling of workers can also be a challenge considering the limited availability of good training resources.

Brazil (Thais Blanco): In Brazil, the government is generally more flexible than the law, and it is possible to negotiate with the government; however, bureaucracy remains a problem, and foreign companies may find the negotiation process costly and time consuming.

In an M&A situation, informal or contract workers can be a risk and liability. Buyers of companies also need to understand the business culture in Brazil, which is largely relationship oriented, to ensure they are able to hold on the right talent who hold key client relationships. Layoffs are costly but possible. Foreign companies also need to be aware that union agreements can be more generous that the law. Under such circumstances, companies would need to abide by the agreement with unions.

China (Klaus Liu): Foreign companies need to establish a good understanding of the government policies. Companies should understand the priorities that the government is placing on reducing income gap and maintaining social harmony. An acquisition plan that goes well with these priorities is likely to face less obstacles.

In addition, synergy in M&A nowadays does not come from costs cutting but rather from access to markets and resources as well as branding. These are the key values and so the HR should focus on areas that will help the company to achieve these objectives, including identifying and retaining critical talents who hold the key to markets and client relationships.

India (Rakesh Malik): Redeployment risk in India differs across sectors. For instance, let’s consider the differences between the manufacturing and the services industry. The risk that companies face in dealing with labor issues is higher for the manufacturing sector than the service sectors. The manufacturing sector is more unionized compared to the service sector, so that is a more obvious difference between the two.

On the other hand, union movement is not typical for the service sector and there are fewer disputes. This could perhaps be also due to the fact that the economy is riding on a growth trajectory. There are ample jobs out there and it makes little sense for people to go on strike. When the banking and finance sectors had to cut jobs during the global financial crisis, there were very few disputes being reported. The severance package was generous and those who were laid off were able to find jobs quickly.

Probably a more risky aspect of labor relations is the management of contract workers. Because contract workers are not organized, they have proven to be harder to manage as a group. Here we are seeing a double-edge effect that a rigid wage policy can bring to the companies and employees. On the one hand, companies might be able to keep their employment costs more flexible by turning to contract employment; but on the other hand, disputes with non-unionized/loosely unionized contract labors can turn ugly and put the companies’ reputation at risk, not to mention the risk of getting trapped in political tussles.