Taking on Low Productivity and Labor Shortages at Japanese Companies Through Capabilities-Based Human Resources Management　Part 1: Why the Capability-Based Approach Now? A Background and an Overview of the Approach

Japanese labor productivity (added value per hour of work) was at 56.8 USD as of 2023, dwelling at a low of 29th out of the 38 OECD nations (source: Japan Productivity Center, “International Comparison of Labor Productivity 2024”). This represents a level that compares unfavorably against the other major developed countries, and lags significantly behind the OECD average. Driven by Japan’s falling birth rate and aging society, the fall in the working-age population is also a factor getting in the way of Japanese economic growth. In practice, there are already chronic protestations of labor shortages on the ground, and there is little hope of sustainable growth without improvements in labor productivity.

An aging working-age population is not a challenge unique to Japan. Germany has a similarly aging society, and even resembles Japan structurally, with its major automotive industry. Despite this, Germany maintains a vastly higher rate of labor productivity than Japan. For example, comparing the countries as of 2017, Germany’s hourly labor productivity was 7th in the OECD at 69.8 USD, while Japan’s was 20th at 47.5 USD. This means that Germany boasted some 1.5 times the productivity of Japan (source: Japan Productivity Center, “International Comparison of Labor Productivity 2018”). It has been pointed out that this discrepancy is much more down to differences in workstyle and systems for the use of human resources than differences in working-age population or national characteristics. Germany had made progress in clarifying the scopes of duties and responsibilities of each worker and in employing IT, and had put in place structures that allowed each worker to fulfill their duties efficiently in line with their roles. By contrast, while Japanese companies excelled in terms of quality and teamwork, in many cases, they lost efficiency due to a lack of clarity over division of roles and due to individualization of operations.

Despite the outcry over labor shortages, a surprising fact is that there is a “mismatch phenomenon” at Japanese companies wherein there are both departments that lack personnel and departments with too many personnel both at once. Looking at the results of the “Internal Personnel Mismatch Survey” performed by ABeam Consulting, we see that while 89.8% of companies responded that they were experiencing labor shortages, 63.6% of companies responded that they were experiencing “labor excesses.” Companies are experiencing labor excesses even among employees in their peak working years in their 30s and 40s, and we see many companies fail to make effective use of their human resources.
Our survey also revealed that 79.8% of companies were deploying personnel with capabilities in excess of their occupational requirements (over-spec personnel). This phenomenon is seen most often among employees in their 40s, followed by those in their 30s, showing that companies are struggling to make full use of the capabilities of prime working-age generations.
Source:  “Internal Personnel Mismatch Survey” - A New Human Resources Management Model for Evolving Human Capital Management

We believe that these mismatches are due in large part to the long-established employment practices at Japanese companies (seniority-based assignments and the custom of cross-departmental transfers stemming from life-long employment). Departments that need people lack them, while people stay on in positions that have become redundant. Such inefficiencies in assigning human capital are pushing down productivity across Japan.

Some Japanese companies have made progress on introducing a “job model” of employment common across Western countries to address human resources mismatches. A job model is a method of human resources management in which job descriptions clearly state the skills and roles expected of a position, and personnel are appointed or hired who match those requirements. In Japan, however, this does not necessarily function as intended. Behind this lies the fact that just converting the system to a job model does not prevent human resources from becoming stagnant due to low employment mobility as a feature of Japanese employment culture and a lack of an “up-or-out” culture at Japanese companies. Because Japanese companies traditionally also have ambiguous scopes of duties, leading to a tendency for them to seek “jack-of-all-trades” employees who take on a wide range of roles as generalists, they also tend to be unaccustomed to clear job definitions. Thus, methods of looking at people based on the skills and roles demanded by their current occupations have not effectively taken root, and we often see an issue in companies failing to make effective use of skill data, even after going to the trouble of collecting it from internal and external sources. Put simply, it is not realistic to move from a traditional membership model to a job model all at once in Japan. Instead, what is needed is transformation of human capital management in a way that aligns with conditions specific to Japan.

Leaving human resource mismatches in place contributes to reductions in corporate competitiveness and lowered values for human capital, thus inviting the risk of a fall into a serious negative spiral. At present, companies often get by with inefficient increases to headcount (lowering productivity) due to lacking the people they needed, and see talented but underutilized personnel leave. By leaving imbalances between labor shortages and excesses unaddressed and allowing labor costs to swell, companies invite declines in the efficiency of their labor deployment and falls in employee engagement. Feeling a sense of urgency around this, recent years have seen many companies turn their attention to the importance of human capital management and advance measures in this area. They are, however, running into the limitations of simply extending their existing models, so what is needed now is new models that involve fundamental transformations of those ideas.

Capabilities-Based Human Resources Management is specifically made up of the following five processes (see Figure 2).

The first task is to firmly link HR strategy to corporate and business strategy. Based on the future business vision, the company derives the capabilities that will be necessary for it going forward. Taking into account market and technological trends (the development of DX, etc.), the company then clarifies the skills, knowledge and roles that will be necessary for the future. Companies would consider their business portfolios and HR portfolios in a joined up manner, saying, for example, “if we are to expand our xx business in five years, it will be important to have data science or global sales capabilities.” By having top leadership and human resources share such hypotheses around capabilities, companies can embed HR strategy into corporate planning.

Next, companies take stock of their human resources centering on the capabilities they have deemed necessary. They create talent portfolios that surface the extent to which they currently have talent internally, its quality and its volume. This can be said to act as the equivalent of a business portfolio for human capital. Based on this shared information, leadership and business departments can engage in dialogue, arriving at a common understanding of their current weaknesses and their vision for the future. By ascertaining, for example, that the company “is lacking digital personnel” or that “there is an excess of people with a certain skill that is in demand at another department,” companies can start from the gaps between their as-is personnel assignments and their to-be personnel compositions to formulate specific headcount plans. What is important here is for the talent portfolio to be interlinked with other HR policies such as hiring, training, assignments, evaluations and conditions. Companies should optimally deploy internal human resources by making sure that hiring planning works in coordination with development planning and transfer planning, rather than beginning and ending with a one-off hiring plan.

Companies should seek to create markets internally that raise talent mobility. Specifically, by putting in place internal recruiting, internal second job and job matching systems, companies can offer employees opportunities to take on a variety of positions in the company. This allows companies to create an environment where if employees notice that there is a mismatch between their role and their skills (i.e., a situation where their skills are being under-utilized), they can put their hands up for new roles or undertake reskilling. For example, companies could put in place internal job advertisement platforms and present “attractive internal openings,” enabling employees to search internally for positions that fit with their career aspirations. Companies should also put in place internal “people manager” or “internal agent” roles and develop personnel who take on the task of mediating or supporting the careers of internal human resources. The key point is that companies should convey internal information in an open manner, eliminate opportunities for superiors to hold back employees or show evaluation bias, and put in place mechanisms to fairly match people to roles. If such an internal market is able to function effectively, then companies will be able to address mismatches between departments with labor shortages and excesses, while also allowing them to more optimally deploy talented personnel.

In cases where it is impractical for companies to fill all the capabilities they need internally, it will be important for them to seamlessly connect with external human resources markets. Depending on the capabilities needed, companies can incorporate the utilization of external resources into their planning, including strategies to supplement their human resources through career hiring, subcontracting, business alliances and outsourcing.  The key here is to define an attractive employee value proposition (EVP) for the personnel the company is seeking and to broadcast this to the market. By spelling out what vision the company has, and what opportunities for growth and compensation employees can receive, and by conveying this internal and externally, companies attract talented people from the human resources market. As an example, at a major logistics company, we developed bold branding measures to secure DX personnel, creating a branding message of “do interesting things with digital technology at XX,” refurbishing the companies recruiting site and launching a specialized personnel community. By thus improving the company’s external appeal while also linking these measures up with their internal talent market, we can strategically combine internal development with external recruitment to realize an optimal HR portfolio.

The final process is viewing investment in human resources as investment of capital and introducing systems for monitoring the outcomes of such investments. Under human capital management, companies should view personnel spending and development spending not as costs but as investments for the future, and measure the impact of these investments through indicators that directly tie into key goal indicators (KGIs). Specifically companies need to set key performance indicators (KPIs) such as, “how many personnel do we have with the capabilities we need for business areas where we want to strengthen?” and “how much have we improved the mismatch rate through our internal matching measures?,” then employ a PDCA cycle to test the effectiveness of what they are doing. This means managing these efforts in the form of a balance sheet that surfaces the extent to which the workforce is being enhanced through capital invested and how well improvements in the talent portfolio are tying into profit and productivity. Through such monitoring efforts, companies can keep a continuous eye on whether their human resources investments are working, quickly reflect this in their measures and improve the effectiveness of their human capital management.

Each of the five pillars described above are efforts that need to be advanced in unison by top leadership, business and human resources departments. By creating a series of workflows in the form of combining corporate and HR strategy, promoting internal and external labor mobility and testing investment impact based on data, Japanese companies can begin to transform themselves into organizations that get the most out of their human capital. This would represent a true paradigm shift from “person-dependent ad hoc assignments” to “capability-based strategic assignments and development.”