Prognosis 2004 and beyond: Labor Market Competitiveness and Poland's Entry to the EU
Poland, like its Eastern European cousins, has had an ongoing war for talent since the early 90s when the economy opened. Especially among multinational investors, the quality of professional staff is an important success factor. However, during the last few years, the maturing of the economy, the slowdown of foreign investment, as well as consolidation and slower growth have all resulted in the increased availability of executive talent, which have given many corporations a chance to breathe more easily, even if this has still not alleviated what is still a fundamental shortage of senior and middle level executive talent.
Despite the shortage of talent for middle and senior level executives there is no shortage of young white and blue-collar workers and the dramatically high unemployment levels are still stubbornly resisting downward movement. The impact of this is clear, especially when you leave Warsaw: at one American manufacturing company in Southeastern Poland, there were 3,000 applications for just one position - Administrative Assistant to the Board.
Underutilization of the Labor Force
The contrast between the economic opportunities available in Poland and the promise of the free market has never been greater. Indeed, the ability to earn a better living is actually being called into question for many here. Economists generally agree that high unemployment in Poland reflects incomplete economic and social restructuring as much as it does a still overly bureaucratic environment. Unemployment is even more dangerous in Poland because Poland has the lowest workforce participation (as a percentage of the total population) in the expanded EU. Long term, it is extremely difficult for any society (as it is for any company) to be competitive whilst substantially underutilizing its human capital.
In the next year we are unlikely to see any immediate changes in these trends. However, over the next three to five years, EU accession is likely to change the current labor markets quite dramatically. This will create substantial new business challenges (and opportunities) for companies as they seek to gain a competitive advantage. It will also put additional pressure on the Polish government to further reform its policies vis-a-vis employment, especially if it continues to ignore the current situation.
Immediate Impact of EU Entry
Poland's entry to the EU in 2004 will not likely immediately be a harbinger of big change to the Polish labor market. But it will begin to fundamentally alter the competition for executive talent, and a new era of competition in Poland (and Central Europe) will probably emerge.
Over the past year or two many multinational manufacturers have been looking for ways to become more competitive: one way is to simply reduce manufacturing costs. And one of the best ways to do this is to transfer manufacturing capability to Central Europe. Over the near term - as early as 2004 - there will be a substantial effect on the availability of senior manufacturing executives since demand already exceeds supply for the best qualified executives - e.g. those with international experience and exposure (for instance, employees who have implemented Kanban, just-in-time or other quality manufacturing systems).
The Financial Times reported that it is estimated that 250,000 financial industry service jobs will disappear in the UK over the next 5 years. Most of these functions, back office document processing or other operational and customer service functions, will be moved to Eastern Europe or India. We have already seen a dramatic expansion of customer service and operations outsourcing in Poland and - if the local markets that are attracting this kind of investment (Poznań, Łódź, Kraków) can compete successfully - this is another area where there will be substantial growth.
Other segments, banking and insurance for instance, will see continued consolidation, especially as pressure on margins continues. Even as consolidation implies less employment, the financial services sector, broadly speaking, still presents tremendous growth opportunities, particularly in retail financial services, credit cards, mortgage products and private banking. Each of these areas and supporting services is likely to see substantial growth in the near term, especially given banking deregulation upon EU entry.
Different Opportunities and Threats for Different Segments
These examples show that Poland is in fact made up of many labor markets. The divergence of these labor markets - whether defined by industry or demographic group - will begin to create political challenges in Poland by later this year. For instance, a look at the differing unemployment rates among young people is an excellent example of the diverging economies in Poland. Unemployment among university graduates is about 7 percent as compared to the overall peer group (early 20s) in general which is over 40 percent! If unemployment levels persist, the best and brightest among the Polish 'underemployed', especially the young - who are likely to be more mobile, better educated and also speak foreign languages - will find increasing opportunities and incentives to work abroad. The long-term risk is that the talent pool in Poland will become weaker (as with previous generations who have left Poland, the majority do not return).
Paradoxically, the mobility of the 'best and brightest' among young Polish professionals (especially to an internationally oriented assignment) is a big potential EU benefit for multinationals. They will find that they can transfer their young professionals to work abroad (or transfer additional responsibilities to Poland) more easily in a unified Europe (because of more uniform regulations and the internal pressure to integrate operations). This will increasingly make working in a multinational environment more and more attractive - and demanding - at all levels.
Although they will have substantial opportunities, Polish-owned and local companies on the other hand are going to need to focus on the ways in which they use their human capital effectively, something they have largely not done.
Many of the implied opportunities - in export and services - require management and staff capable of delivering products/services not just at low cost but also at higher quality. The demands on logistics, efficient production, etc will be substantial.
Polish entrepreneurs have more opportunities. As they grow, their businesses will face the challenge of empowering management and making more strategic decisions, rather than the opportunistic ones that characterized the first decade of the Polish free market. At the same time, while becoming systematic and structured, these companies will need to keep focused on the drive and energy that have allowed them to compete in the first place.
For the large former state sector companies, the problems are likely to be more severe. Competing in Poland increasingly means competing in global markets which, at the end of the day, will require more transparency in decisions, a more open and performance driven culture, more empowerment of staff at middle and lower levels and less political influence in decision-making. Much of this is inevitable, the survivors will be the companies that realize this and act swiftly and decisively. Unfortunately, there are too many 'partially' restructured companies of this kind in Poland.
Keeping Up with the Joneses
The days when an investor in Central Europe chose a location without substantial research have ended. More and more international companies are comparing the human resource capacity of different locations in different countries around the globe (which differs to the situation 10 years ago).
They are also more rigorously evaluating the efficiency of their manufacturing operations in Central Europe as well as worldwide. As we speak to investors, it is obvious that they are taking very clear-eyed views on where they can and should place additional investments. This implies additional competition between Poland and its nearby neighbors, especially Slovakia, Hungary and the Czech Republic. Over the long term, there will be competition from Ukraine, Romania and other regional emerging markets.
This trend is already developing, as seen when Poland, the Czech Republic and Slovakia all openly competed for additional automotive investment from Toyota and Peugot. However, it will only increase, and investors will not hesitate to close a factory that does not fit into their strategic plans. On the other hand, they will reward successful operations with even further investment.
Forecast Within the Executive Market
Overall, in the near term, the shortage of qualified middle and senior level executives in Poland (and in the region) will become more marked. This is due to natural growth from EU entry and related investments as well as because of the increasing demands on existing management to compete on an ever more integrated 'global' scale.
Within Central Europe, Poland has been relatively slow to 'integrate' its business units into larger corporate structures as compared with its neighbors - partially because it has a very large internal market that has its own dynamics. As a result, the importing of certain key skills (in terms of manufacturing, commercial management etc) has been lower. This is compounded by relatively higher corruption (Poland appears higher than its neighbors on all lists indexing corruption), which creates an economic disincentive to hire and build strong management. Furthermore, given the size of the Polish market, company growth creates relatively higher complexity and more demanding management positions than in Poland's smaller neighbors.
As foreign investors have reviewed their regional operations ahead of EU entry - asking whether they can consolidate operations, or by centralizing operations or moving their regional headquarters - they have also begun to look seriously at potentially critical 'constraints' to growth within human capital. Already among British and US investors in Poland, human capital is recognized as an important potential obstacle (or opportunity) to long-term success (a joint US and British chamber of commerce survey with Synovate showed that almost 75 percent of investors surveyed shared this view).
A Ray & Berndtson study in 2002 showed that the vast majority of German investors considered that management performance was among the biggest potential threats to growth over the longer term (study published in Harvard Business Review Polish Edition). Among the major concerns was the view that local management is not strong enough in terms of strategic thinking and results orientation/drive.
It is one thing to forecast problems or difficulties and another to offer solutions. At a corporate level, the recommendation to companies doing business in Poland is clear:
Do not compromise on ensuring that your organization has the best people. This can only be accomplished through an emphasis on human capital development, a strong adherence to a performance culture (measuring results and assessing performance on the basis of results) and by expecting senior management to lead by example.
Matthew Tebeau, the Managing Partner of Ray and Berndtson Poland and the Baltic States
Despite the shortage of talent for middle and senior level executives there is no shortage of young white and blue-collar workers and the dramatically high unemployment levels are still stubbornly resisting downward movement. The impact of this is clear, especially when you leave Warsaw: at one American manufacturing company in Southeastern Poland, there were 3,000 applications for just one position - Administrative Assistant to the Board.
Underutilization of the Labor Force
The contrast between the economic opportunities available in Poland and the promise of the free market has never been greater. Indeed, the ability to earn a better living is actually being called into question for many here. Economists generally agree that high unemployment in Poland reflects incomplete economic and social restructuring as much as it does a still overly bureaucratic environment. Unemployment is even more dangerous in Poland because Poland has the lowest workforce participation (as a percentage of the total population) in the expanded EU. Long term, it is extremely difficult for any society (as it is for any company) to be competitive whilst substantially underutilizing its human capital.
In the next year we are unlikely to see any immediate changes in these trends. However, over the next three to five years, EU accession is likely to change the current labor markets quite dramatically. This will create substantial new business challenges (and opportunities) for companies as they seek to gain a competitive advantage. It will also put additional pressure on the Polish government to further reform its policies vis-a-vis employment, especially if it continues to ignore the current situation.
Immediate Impact of EU Entry
Poland's entry to the EU in 2004 will not likely immediately be a harbinger of big change to the Polish labor market. But it will begin to fundamentally alter the competition for executive talent, and a new era of competition in Poland (and Central Europe) will probably emerge.
Over the past year or two many multinational manufacturers have been looking for ways to become more competitive: one way is to simply reduce manufacturing costs. And one of the best ways to do this is to transfer manufacturing capability to Central Europe. Over the near term - as early as 2004 - there will be a substantial effect on the availability of senior manufacturing executives since demand already exceeds supply for the best qualified executives - e.g. those with international experience and exposure (for instance, employees who have implemented Kanban, just-in-time or other quality manufacturing systems).
The Financial Times reported that it is estimated that 250,000 financial industry service jobs will disappear in the UK over the next 5 years. Most of these functions, back office document processing or other operational and customer service functions, will be moved to Eastern Europe or India. We have already seen a dramatic expansion of customer service and operations outsourcing in Poland and - if the local markets that are attracting this kind of investment (Poznań, Łódź, Kraków) can compete successfully - this is another area where there will be substantial growth.
Other segments, banking and insurance for instance, will see continued consolidation, especially as pressure on margins continues. Even as consolidation implies less employment, the financial services sector, broadly speaking, still presents tremendous growth opportunities, particularly in retail financial services, credit cards, mortgage products and private banking. Each of these areas and supporting services is likely to see substantial growth in the near term, especially given banking deregulation upon EU entry.
Different Opportunities and Threats for Different Segments
These examples show that Poland is in fact made up of many labor markets. The divergence of these labor markets - whether defined by industry or demographic group - will begin to create political challenges in Poland by later this year. For instance, a look at the differing unemployment rates among young people is an excellent example of the diverging economies in Poland. Unemployment among university graduates is about 7 percent as compared to the overall peer group (early 20s) in general which is over 40 percent! If unemployment levels persist, the best and brightest among the Polish 'underemployed', especially the young - who are likely to be more mobile, better educated and also speak foreign languages - will find increasing opportunities and incentives to work abroad. The long-term risk is that the talent pool in Poland will become weaker (as with previous generations who have left Poland, the majority do not return).
Paradoxically, the mobility of the 'best and brightest' among young Polish professionals (especially to an internationally oriented assignment) is a big potential EU benefit for multinationals. They will find that they can transfer their young professionals to work abroad (or transfer additional responsibilities to Poland) more easily in a unified Europe (because of more uniform regulations and the internal pressure to integrate operations). This will increasingly make working in a multinational environment more and more attractive - and demanding - at all levels.
Although they will have substantial opportunities, Polish-owned and local companies on the other hand are going to need to focus on the ways in which they use their human capital effectively, something they have largely not done.
Many of the implied opportunities - in export and services - require management and staff capable of delivering products/services not just at low cost but also at higher quality. The demands on logistics, efficient production, etc will be substantial.
Polish entrepreneurs have more opportunities. As they grow, their businesses will face the challenge of empowering management and making more strategic decisions, rather than the opportunistic ones that characterized the first decade of the Polish free market. At the same time, while becoming systematic and structured, these companies will need to keep focused on the drive and energy that have allowed them to compete in the first place.
For the large former state sector companies, the problems are likely to be more severe. Competing in Poland increasingly means competing in global markets which, at the end of the day, will require more transparency in decisions, a more open and performance driven culture, more empowerment of staff at middle and lower levels and less political influence in decision-making. Much of this is inevitable, the survivors will be the companies that realize this and act swiftly and decisively. Unfortunately, there are too many 'partially' restructured companies of this kind in Poland.
Keeping Up with the Joneses
The days when an investor in Central Europe chose a location without substantial research have ended. More and more international companies are comparing the human resource capacity of different locations in different countries around the globe (which differs to the situation 10 years ago).
They are also more rigorously evaluating the efficiency of their manufacturing operations in Central Europe as well as worldwide. As we speak to investors, it is obvious that they are taking very clear-eyed views on where they can and should place additional investments. This implies additional competition between Poland and its nearby neighbors, especially Slovakia, Hungary and the Czech Republic. Over the long term, there will be competition from Ukraine, Romania and other regional emerging markets.
This trend is already developing, as seen when Poland, the Czech Republic and Slovakia all openly competed for additional automotive investment from Toyota and Peugot. However, it will only increase, and investors will not hesitate to close a factory that does not fit into their strategic plans. On the other hand, they will reward successful operations with even further investment.
Forecast Within the Executive Market
Overall, in the near term, the shortage of qualified middle and senior level executives in Poland (and in the region) will become more marked. This is due to natural growth from EU entry and related investments as well as because of the increasing demands on existing management to compete on an ever more integrated 'global' scale.
Within Central Europe, Poland has been relatively slow to 'integrate' its business units into larger corporate structures as compared with its neighbors - partially because it has a very large internal market that has its own dynamics. As a result, the importing of certain key skills (in terms of manufacturing, commercial management etc) has been lower. This is compounded by relatively higher corruption (Poland appears higher than its neighbors on all lists indexing corruption), which creates an economic disincentive to hire and build strong management. Furthermore, given the size of the Polish market, company growth creates relatively higher complexity and more demanding management positions than in Poland's smaller neighbors.
As foreign investors have reviewed their regional operations ahead of EU entry - asking whether they can consolidate operations, or by centralizing operations or moving their regional headquarters - they have also begun to look seriously at potentially critical 'constraints' to growth within human capital. Already among British and US investors in Poland, human capital is recognized as an important potential obstacle (or opportunity) to long-term success (a joint US and British chamber of commerce survey with Synovate showed that almost 75 percent of investors surveyed shared this view).
A Ray & Berndtson study in 2002 showed that the vast majority of German investors considered that management performance was among the biggest potential threats to growth over the longer term (study published in Harvard Business Review Polish Edition). Among the major concerns was the view that local management is not strong enough in terms of strategic thinking and results orientation/drive.
It is one thing to forecast problems or difficulties and another to offer solutions. At a corporate level, the recommendation to companies doing business in Poland is clear:
Do not compromise on ensuring that your organization has the best people. This can only be accomplished through an emphasis on human capital development, a strong adherence to a performance culture (measuring results and assessing performance on the basis of results) and by expecting senior management to lead by example.
Matthew Tebeau, the Managing Partner of Ray and Berndtson Poland and the Baltic States
