Abstract Number: 020-0362 Abstract Title: Workforce Capacity Management in Service Operations

Authors: Vincent Hargaden Department of Industrial & Systems Engineering, Rensselaer Polytechnic Institute, 110 8th Street, Troy, NY 12180. hargav@rpi.edu

Jennifer Ryan Department of Industrial & Systems Engineering, Rensselaer Polytechnic Institute, 110 8th Street, Troy, NY 12180. ryanj6@rpi.edu

POMS 22nd Annual Conference Reno, Nevada, U.S.A. April 29 to May 2, 2011

Workforce Capacity Management in Service Operations Abstract This research develops a model for the optimization of the workforce capacity management process in professional service organizations. Using data gathered during semi-structured interviews with senior executives in these firms, the model captures the complexities of the workforce planning process in this service sector. The capacity planning process must capture all of the attributes of the resources of the firm (i.e., employees) and optimally assign these resources to satisfy customer demand, represented by projects. A number of test firms are created and experiments are conducted on these firms to analyze the impact of various workforce policies on key business metrics. The key issues considered include employee skill profile, the structure of a firm's project portfolio, the number of concurrent projects an employee can be assigned to, the role of employee cross-training, the management of separation and hiring, and the organizational design. Key words (5 max): Professional Service Firms, Workforce Planning, Mathematical Programming

1.0 Introduction Professional services, such as those provided by management consulting, engineering design, legal and financial services firms, are highly complex, with many non-repetitive and customized activities. The task of workforce planning in professional service organizations is further complicated by the large number of human labor attributes that must be captured in the resource planning process, including indicators of employee skills and knowledge. In addition, the workforce planning process must take account of the inherent operational 2

complexities of a professional service environment, such as the varying nature of customer requirements, the different types and levels of skills available, the question of whether the work experience obtained in one industry sector can transfer to other sectors, the level of cross-training and flexibility employees possess and the speed at which employees learn and forget skills. Finally, the workforce planning process must be completed within the context of the organization's objective, such as profit maximization, subject to a set of operational constraints. While the concept of workforce planning is not new, it is suggested that the discipline has been in decline since the 1970's (Cappelli, 2009). Motivated by calls to action from a number of leading academics and business practitioners (e.g., Dietrich, 2006; Dietrich and Harrison, 2006; Cappelli, 2009), the area of resource allocation and human capital management in professional services has emerged as a significant research opportunity in recent years. Due to the increasing economic importance of professional services and the projected employment growth in the sector, there is a requirement for new systems to control the workforce assignment process which take account of the unique characteristics of the "white collar" work carried out in professional service firms (Hopp, Iravani and Liu, 2009). To achieve this, these companies are starting to focus on "Talent Analytics'', which involves the use of detailed analytical models, rather than a reliance on "gut instinct'' as a method of improving their competitive advantage, by analyzing employee ("talent'') data in order to maximize productivity (Davenport, Harris and Shapiro, 2010). We develop a comprehensive workforce planning model for professional service organizations to enable these organizations to optimize the allocation of their skilled personnel to client projects and to provide strategic and practical insights into different workforce planning policies through the numerical analysis of that model. The remainder of this paper is structured as follows: In the literature review section, we provide an overview of 3

the salient elements from service operations and workforce planning literature, and identify the gap which we believe our research will address. We then describe the model using the information gathered during semi-structured interviews with executives in professional service firms. The experimental data section outlines the creation of the test firms and the experiments conducted. We conclude with a discussion of the results and suggestions for future work. 2.0 Literature Review Professional service firms have become an increasingly important industry group. Drucker (1999) has described the shift away from capital-intensive, manufacturing based industry, towards a knowledge-intensive industry. Goodale, Kuratko and Hornsby (2008) report that employment in professional and business services in the United States has increased by over 50% since 1990. Within the services sector, "professional and related occupations" and "management, business and financial occupations" will rank as the first and third fastest growing occupation categories between 2004 and 2014 (Hopp et al., 2009). The importance and impact of large professional service firms is identified by Greenwood, Morris, Fairclough and Boussebaa (2010), who argue that such firms are critical corporate players in the 21st century as they "sell expertise" and deliver customized solutions to the world's largest corporations and governments. The category professional service has been classified as the activities undertaken by groups such as business consultants, engineers, doctors, lawyers, accountants, which all share common characteristics of a high degree of customer interaction, customization and labor intensity (Schmenner, 1986). In general, service processes can be classified by three main types: professional, service shop and mass service (Silvestro, Fitzgerald, Johnston and Voss, 1992). Using this general classification of services, a significant portion of the literature on workforce planning related to services falls within the mass services and service shop 4

segments, where employee tasks are considered to be homogeneous or where there is a very small number of customer types. Workforce planning research in the professional service sector is seen to lag behind manufacturing and other service sectors (Dietrich, 2006). Much of the existing research on workforce planning has focused on manufacturing-based supply chains (e.g., Azmat, Hurlimann and Widmer, 2004; Celano, Costa and Fichera, 2008) or on the mass services category, with an emphasis on tactical decision-making activities such as the development of schedules and rosters for service employees and the assignment of employees to specific tasks within those rosters. For instance, the transportation services literature focuses on the airline sector, with crew scheduling, pairing and rostering of particular interest (e.g., AhmadBeygi, Cohn and Weir, 2009; Kohl and Karisch, 2004). Similarly, the nurse scheduling and rostering literature describes the generation of optimal rosters, subject to personnel preferences and regulatory constraints (e.g., Cheang, Lim and Rodrigues, 2003). The key characteristic of the professional services segment is that it consists of highly unique and customized activities that are heavily dependent on human resources. In addition, the unit of sales in professional service firms is typically a project contract (Dietrich, 2006). Projects by their nature are unique activities with specified time parameters, requiring human and non-human resources (Gray and Larson, 2010). Most professional service organizations operate as multi-project systems (Engwall and Jerbrant, 2003), each with a portfolio of customer projects having different start dates, durations and end dates. This environment requires such organizations to develop an adequate human resource allocation or capacity management process that optimizes use of organizational resources (Hendriks, Voeten and Kroep, 1999). Similar to the mass service and service shop literature, existing workforce planning research within the professional service sector deals with the tactical short term perspective of allocation and scheduling. This approach has been addressed in research on 5

engineering consulting (e.g., Brennan and Orwig, 2000; Brennan, 2006), financial auditing (e.g., Dodin and Elimam, 1998) and hospital residents (e.g., Franz and Miller, 1993; Sherali, Ramahi and Saifee, 2002; Topaloglu, 2009; Ovchinnikov and Milner, 2008). Recently published work from the IBM Watson Research organization (Gresh, Connors, Fasano and Wittrock, 2007) and Hewlett Packard's Palo Alto Research Laboratories (Santos, Zhang, Gonzalez and Jain, 2009) has led to the development of specific workforce planning tools to assist with the assignment of professional service employees to tasks and the generation of service staffing plans. These decision-making tools were developed to solve a specific problem within the IBM and Hewlett Packard organizations, but apart from Huang, Lee, Song and Eck (2009) they provide little insight into the impact of strategic decisions made by professional service organizations, such as workforce size, skill mix and crosstraining policies, worker flexibility, employee departure and hiring rates and the ability of employees to learn new skills at different rates. The focus of the research presented in the current paper is to analyze the impact of these strategic decisions on the workforce planning process in professional service firms, thereby addressing a gap the literature, which to date has focussed on the development of staff planning and scheduling tools. 3.0 Model Development and Formulation A comprehensive mixed integer linear programming model of the workforce planning process for engineering professional service organizations will now be described, with the objective of optimally matching professional service employees to client projects in order to maximize the profitability of the firm. The workforce planning/allocation problem can be considered a sub-problem of the broader assignment problem (AP), the classic version of which is well described by Kuhn (2005).

3.1 Model Description Informed by data gathered during semi-structured interviews with senior executives in several large professional services firms, our mixed integer programming model captures the complexities of the workforce planning process in this sector. In professional service firms, the workforce planning process must capture all of the attributes of the firm's resources (i.e., employees) and optimally assign these resources to satisfy customer demand, represented by projects, while meeting the overall objective of the firm, such as profit maximization. In developing the model, we capture the various attributes of both employees and projects. Each employee is described in terms of skills possessed, grade or rank in the organizational hierarchy, availability in each planning time period, sub-sector or line of business specialization, overhead costs, revenue and geographical location. Each customer project is described according to its start date, duration, skills and number of hours each skill is required in each time period, nature of the contract (fixed price or billable hours) and geographical location. The workforce planning process is subject to a number of operational constraints, which we identified during the interviews with the firms. Examples of these constraints include the maximum number of customer projects to which any employee can be simultaneously assigned, the maximum number of employees that can be assigned to any one project, the requirement for multi-skilled employees to use all of their skills at various stages over the planning horizon, and the requirement that employees achieve high utilization rates over the planning horizon. 3.2 Experimental Data In order to validate our model, we created sets of test data for four different firms, the parameters for which were informed by the case study interviews with the professional 7

service firms mentioned previously. A number of initial simplifying assumptions were made. The firms each operate a single line of business, but customers and employees can be located in different geographical locations. Each employee has multiple skill types and is fully available, so training and vacation time are not considered. Projects can require multiple skills, with the time required for each skill varying over the project lifecycle. Overhead cost is assigned based on the employee level in the hierarchy, but project revenue can vary by consultant. 3.3 Experimental Results Based on the test firms that were developed, experiments were conducted to analyze the impact of various factors, such as employee skill profile, the structure of a firm's project portfolio, limits on the number of concurrent projects an employee can be assigned to, the role of employee cross-training, separation, hiring and organizational design, on the optimal solution. A commercial optimization software package (Xpress-MP from Fair Isaac Corporation) on a DELL M6400 laptop was used to conduct the experiments. The results are presented in terms of key business metrics, such as project completion rate, net profit, and employee utilization. We first note that the base model can be used to identify where there are shortages and excess resources in the firm. When analyzed in terms of sets of skill shortages for customer projects, this is a very useful input to skill cross training analysis. For example, when medium to long term demand indicates that certain skill sets are likely to become redundant, it is possible to use the model to target those employees with redundant skills for cross training in skills that are projected to be in short supply. We next provide an overview of our main results to date. First, our results indicate that, as expected, increasing the number of skills possessed by employees across the entire 8

firm results in a higher number of projects being completed. There is, however, no marginal benefit obtained from increasing the number of skills beyond three or four per employee. We also find that firms will experience a reduction in profit of up to 10% if they take the short term view of trying to maximize employee utilization. This provides a significant insight into the conflict between the overall objective of the firm, which is to maximize profit, and the targets set by workforce planning managers with the goal of "keeping everyone as busy as possible". We also found that the optimal number of concurrent projects to which every employee can be assigned is generally greater than one, an observation which conflicts with the industry practice of assigning junior staff to just one project at a time. The results indicate no marginal benefit in assigning employees to more than three projects simultaneously. The issue of separation, whereby employees leave the firm, and new replacement employees are hired, was also evaluated. It was found that if the firm can manage this separation rate at a detailed level (i.e., at each employee grade) rather than at an aggregate organizational level, then a reactive ("wait and see") policy with a short hiring lead time provides the best results for the firm. In other words, rather than trying to predict in advance which employees will leave at some point in the future and hiring new employees on this basis before separation actually occurs, the firm is better off waiting until an employee leaves and then replacing that skill as quickly as possible with a newly hired employee. However, for this approach to be beneficial, the firm must be able to reduce the hiring lead time to a level that is less than that generally experienced in the industry. Large professional service firms frequently operate as multi-national organizations, with employees and customer projects based in several different geographical locations. These firms must determine the best organizational design with regard to locating employees 9

and skills in different locations and determine the best policy with regard to assigning employees to projects in locations other than their base location. As expected, the results from the organizational design scenarios indicate that a completely flexible location policy delivers the best results for the firm. In addition, we find that the largest marginal benefit comes from increasing the location flexibility of the lowest grades of employees. The practical implementation of such a policy may prove difficult as it would require the majority of employees to agree to be potentially assigned to customer projects away from their base locations. 4.0 Conclusions and Future Work In professional service organizations, activities are generally complex and highly customized, with customer demand generally captured as projects. The task of workforce planning in these firms is further complicated by the large number of human labor attributes that must be captured in the resource planning process, including indicators of employee skills, knowledge and teamwork. In addition, both the customer demand and employee profiles tend to be dynamic, with project requirements changing over time and employee skill sets expanding as project activities are performed. Given the limitations of the existing literature and the complexities of the workforce planning problem, this paper addresses an area not previously considered in the workforce planning literature. Specifically, we develop a comprehensive resource planning model for professional service firms that captures the real issues encountered by such organizations as they attempt to optimize the allocation of their skilled personnel to client projects. In addition, the model presents a unique opportunity to bring positive economic impact to a broad base of companies in the professional services sector by providing strategic and practical insights into the workforce planning process, which can assist capacity and human resource management in making better informed decisions.

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Opportunities for further research include using the model to develop the optimum start date schedule for every project, in the event that the proposed start dates of projects cannot be met due to lack of available skills. Another potential application is to analyze the impact of long term forecast accuracy on the workforce planning process. For example, projects that are due to start in the immediate future may proceed with 100% certainty, but those in the pipeline one or two years away may only have a 25%-50% chance of proceeding, but still need to be factored in the long term workforce planning process of the firm. Acknowledgements The authors wish to acknowledge the financial support received for this research from the IBM PhD Fellowship Program 2010-2011. References AhmadBeygi, S., Cohn, A. and Weir, M. (2009), "An integer programming approach to generating airline crew pairings", Computers and Operations Research, 36(4), 1284-1298.

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