Chris Watt

Human Capital Management

Article 2
4/16/15
Optimization models have been used for decades in the supply chain management system. These
models have reduced inventory levels, reduced overall operating costs, and maximized profits. Altering
these models to fit a human supply chain is distinctly different than these traditional uses of modeling.
The people aspect is quite different from machine parts and transportation routes. People can change,
learn, adapt, perform differently in different situation, and dynamic. These differences from parts and
pieces pose a challenge to making an effect model.
The service industry employees 75 percent of the labor force and they produce 70 percent of the
total industry output. The ability to put the right person, in the right place, at the right time is a critical
component of this industry and one that can substantially change the business success rate and
profitability. IBM has taken this task head on developing a model to aid their human capital management
practices, specifically their Integrated Technology Services department. Their annual revenues are
approximately $4 billion with its 10 service lines they offer a range of integration and support service
products. This part IBMs business is based on human talent; the people that make up the department are
not used up and written off after they have performed a service, they are used again and again. Workload
and utilization are key components of effectiveness, people are capable of deploying more than one skill
at a time and using their skills across multiple engagements simultaneously. Modeling is further
complicated by uncertainty in staffing, allocation of multiple people, and timesharing their skills across
different engagements. To solve these complex problems IBM developed OnTheMark with the ability to
forecast engagement demand and human-talent requirements.
We derive stochastic modeling and optimization methods to support risk-based capacity planning that
determines human-talent levels to maximize business performance. We develop an approach to predict
future talent and skill composition via stochastic modeling and optimization (control) of supply evolution.
We perform an optimal matching of multiskill talent against demand targets; we then optimize investment
decisions to address talent shortages and overages via our combined modeling and optimization
solutions.
The model is composed of five main parts demand forecasting, risk-based capacity planning,
supply evolution and optimization, multiskill shortage and overage analysis, and skill shortage and
overage management. Together these five components determine the talent levels and investments over

time that maximizes business performance. The five components put together create a very powerful
tool, independently they are still used to support various human capital supply chain processes.
Demand forecasting is the first step in this five stage process. The components that make up the
demand forecasting are revenue to the provider, number of engagements to be delivered, required time for
starting each service delivery, and the skills required. They use historical data with machine learning
methods to estimate the skill staffing requirements. Statistical forecasting is used to estimate the demand
for each engagement. When these two are put together with the staffing template the demand forecasting
stage is complete. The demand forecasting stage feeds information to the risk based capacity planning
and supply evolution and optimization stages.
Once the outputs are figured form the demand forecast model they become inputs to the riskbased capacity planning model. This models overall goal is to find the optimal solution of staffing levels
and the possible lost opportunity cost associated to deploying certain skill levels to other engagements.
There are definite trade-offs that happen when a skill (person) is deployed to a project. They are no
longer in inventory to be used for a possibly better (more profitable) project. The other side to the model
is determining the ideal staffing levels of skilled personal. Finding the optimal solution to these two
problems is this models purpose. The main decision factors in this particular model are the ideal skill
capacity targets, optimal skill capacity levels, and business investment decisions to achieve these two
levels, while maximizing business performance.
The next stage in the process is the supply evolution and optimization. People unlike parts evolve
and are dynamic, accounting for this is difficult in a model but necessary. Generally, people acquire
skills, gain efficiencies, change roles, leave the company, and obtain new employees which all need to be
accounted for. The model takes all of these factors into consideration and provides an optimal solution
for the amount of employees that should be hired and how many employees should be offered incentives
to stay past their planned retirement date. These outputs are based on expected profits if these optimal
levels are maintained. The outputs from this model are fed as inputs to the risk-based capacity planning
and multiskill shortage and overage models.
The multikill shortage and overage model accounts for the people in the organization that have
the ability to perform more than one skill or job function. The model figures the demand that is needed in
each planning period and pulls from the list of available people that meet the required skill set for each
project. The multiskill people are optimally matched to which skill is in a higher forecasted demand that
exceeds the single skill people to fill the remaining demand. This models output feed risk-based capacity
planning and supply evolution and optimization.

The final model, skill shortage and overage management, pulls all the other models together with
the goal of maximizing business performance over time. The risk-based capacity planning provides
human talent levels, supply evolution and optimization provides evolutionary dynamics of future skill
composition, multiskill shortage and overage analysis provides matching of human capital against the
skill capacity targets, and then this model ties them all together to provide the maximum business
performance.
To measure the success of and the on-going accuracy of such a complex model IBM had a
feedback loop integrated into the model. This allowed them to calibrate and validate predications made
from the model against actual business outcomes, which increased its accuracy in for future outputs. IBM
observed an 85-90 percent accuracy rate for pipeline revenue forecasts and a 90+ percent accuracy rate
for overall human capital demand forecasts. By applying the evolution models to determine how many
people to employee with each type of skillset were within a few percentage points of actual demand in
large companies.
IBM has been able to apply these models conjointly in many different types of applications.
Applied in a cost minimizing problem the risk-based model was able to reduce the individual loss risk
probabilities for different projects by more than 15 percent and have more than a 40 percent reduction in
expected capacity costs. Using the models in a revenue maximizing problem they were able to increase
the capacity levels for skills that are used in high margin activities across a wide range of project types.
The outputs from the model determined that the higher margin activities needed to carry a high loss risk
to that type of skill (employee) and increased revenues by 35 percent. There are many different
applications that these models have been very successful in increasing revenue or decreasing overall or
specific risks.
IBM has reviewed its quarterly performance while using these models based on previously used
approaches. The reviews have highlighted the overall effectiveness by reducing skill shortages by 10-80
percent and overages by 30-150 percent. In the first year of implementation IBM saw over an $11 million
increase in the first quarter in the United States alone in cost savings and increased revenue. Similar
results have been seen in the world-wide adoption of this form of human capital management. Human
capital management is beginning to explode in the industry, being able to forecast the type of skilled
people and how to proper apply those skills to maximize profits and reduce risk is very important to the
service industry. This is an area that will continue to develop and be deployed by many businesses.
There are many businesses that will use human capital management in the future and some were
identified in the article; nursing, insurance agents, sales force numbers, financial analysts, really any

industry that requires a skilled or trained person to perform a task for another person. When I was reading
through this article I pictured another industry that I saw an application for, restaurants and their servers.
Today there are club, frequent purchase cards, and many other ways to track the spending patterns of
customers. Why limit this to just the spending? If the memberships provided an on-line platform to
describe the characteristics that they like most in a server, than that can be applied and select from the
available serves that are available.
Each server would need to be evaluated by management to list certain characteristics;
friendliness, speed, accuracy, gender (probably illegal), and as many other personal traits as you can think
of. The servers profile is stored in a database at the restaurant, when a server clocks in their profile then
becomes available for selection. When a customer arrives with their membership card and it is scanned
when they request a table, the server that meets their criteria is assigned the table. There would need to be
some constraints that were built into the model like maximizing the number of tables any one server could
have and time in between assigning the same server to different tables, among others. If a customer came
in that didnt have the proper information on their membership or didnt have one than they would just be
assigned a server in the typical fashion that they have been using for years.