How a Former CEO Built A World-Class Recruiting Department

This is a case study profiling the benchmark recruiting best practices and strategies of the Valero Energy Corporation. After a lengthy study that began in January of 2005, and after comparing it to numerous other recruiting departments, I have found it to be the most business-like recruiting function I have come across and one of the best overall in the world. Perhaps the reason their strategy and execution are so business-like is that their director of recruiting’s last job was being a CEO. Valero does so many things at the world-class level that it is hard to know where to begin. For example, their sourcing effectiveness metrics and reporting is simply the best I have every seen, and good enough to serve as an excellent tool capable of teaching others the right way to do metrics. Because there are so many things that could be covered by this case study, it will be broken into three parts covering their “business of recruiting” strategy, their best practices, and finally their metrics and results to date. A Recognized Leader In addition to the assessment that went into preparing this case study, the world-class efforts of the Valero recruiting team were recognized in 2005 by a panel of recruiting industry thought leaders that awarded them a prestigious ERE Recruiting Excellence Award. The ERE Excellence Award to a large extent validated the people management practices that helped Valero achieve recognition by Fortune Magazine as one of the best companies to work for in America. Fortune Magazine ranked Valero #3 on the list for large companies and #23 overall. They are the only oil company on the list. The ranking of Valero on the Fortune list is a stellar achievement given that few oil and gas refining companies have a positive image among the working population. The award also validated the notion that firms who adopt strategic recruiting practices and focus on driving corporate financial performance can also be viewed as great places to work. A Rapid Transformation Thirty months ago, Valero staffing was primarily paper-based, with no Internet advertising. It was so bureaucratic that 41 pieces of paper had to be touched to make a single placement, and seven HR departments were involved in every position filled. When Dan Hilbert joined Valero in a recruiting leadership role, he immediately began to abandon the historical HR processes and to implement his businesslike approach to reinventing the function so that it could process efficiently and effectively in the modern business environment. Valero excels in many areas of recruiting, but its primary differentiator is that the company takes a business-like, almost scientific, approach to recruiting. Most recruiting departments treat recruiting as an art. Valero, in direct, contrast utilizes and directly borrows from other successful business systems like supply chain, IT, Six Sigma, and process reengineering to craft a function whose performance can be measured (and improved) down to the minutest degree. Treating a recruiting function like an art has many pitfalls, but the primary one is that you don’t gain the respect of senior management, who live and breathe on data and on a disciplined approach to processes and results. Some have described the Valero Energy Corporation as a company “run by CPAs,” a perception that happens to be a accurate. The mentality that drives the overall business, one of the largest and most successful in the world by the way, is also a prime driver behinds Valero’s efforts to manage its recruiting “by the numbers”. By using a business process model, making data-based decisions, utilizing regression analysis, and converting results into dollars, the Valero recruiting function has lifted itself up to a world-class level of performance that is only reached by a handful of recruiting organization worldwide. This effort by their recruiting function puts them in the stratosphere of world-class HR departments with data-based decision-makers like Intel, UPS, and Microsoft. At the core of their recruiting strategy is what Valero calls a “talent pipeline model,” an approach to monitoring and guiding the efforts of the function, which I view as the only strategic solution for winning the war for talent. Many talk about adopting a talent pipeline model, but few ever reach it. Other companies that have mastered the art of adopting supply chain management practices in recruiting include FirstMerit Bank, Sun Microsystems, Microsoft, and a few world-class sports teams. An Example of Valero’s “Business of Recruiting” Approach Only a handful of recruiters I know understand the way boards of directors and CEOs talk and think. Earnings per share, for example, is universally accepted as one of the key measures of corporate success. Valero demonstrates its world-class business acumen by not just talking about earnings per share but by actually demonstrating how good and bad recruiting can actually impact Valero’s own earnings per share. A simple chart illustrates a business perspective and how they convert recruiting related activities to dollars, operating revenue impacts, and earnings per share. The Company and the Industry Valero Energy Corporation is a Fortune 500 company (#34) based in San Antonio, Texas. It employs approximately 22,000 employees worldwide and produced annual revenues in 2004 of nearly $70 billion. They are the largest oil refining company in North America. It has approximately 4,700 retail sites, which are branded as Valero, Diamond Shamrock, Ultramar, Beacon, and Total. Among its many employee perks, Valero has a no-layoff policy, great benefits, and significant bonuses. It is important to note that one of the things that make their benchmark practices even more spectacular is the fact that they were developed and implemented in the oil industry in San Antonio, Texas, one of the most conservative industries and locations when it comes to leading-edge HR practices. It’s important to recognize that Valero is in the oil business, an industry in which convincing corporate leadership to pay attention to recruiting and people issues is extremely difficult. I’ve had the opportunity to advise several Fortune 500 oil companies, and in each case I have found that HR fought a “battle” just convincing senior management that investing in HR was worth considering. On the refining side of the oil and gas industry, profits are primarily generated by process improvements, which help refiners produce more gasoline per gallon of crude oil, versus individual productivity gains on the part of the workforce. This creates a bias among many senior executives and paints a picture of HR practices as non-value add. The fact that Valero recruiting has gotten the attention of senior management through its approach speaks well of its director, Dan Hilbert, and his excellent team. Clearly Dan’s new way of thinking about recruiting as a business enterprise comes partially from his background in finance, business, and as a CEO. He summarizes his approach to recruiting in a simple phrase: “I absolutely think we are in a war.” Like most great recruiting functions, Valero aggressively “attacks” the talent process as if they are in a continuous but increasingly more complex “war for talent.” In short, they are fierce competitors. This is dramatically different from the more common and gentile “avoid confrontation within our industry family” approach that is practiced by a majority of firms. The Recruiting Strategy The foundation of Valero’s recruiting strategy can be summed up in a single sentence: “Run the staffing department like an industry leading strategic business function.” The fact that Valero calls their effort a “management framework for the business of staffing” makes them the very first corporate recruiting department that I have ever encountered in the corporate world to actually act like they were a business. The Valero recruiting strategy is not only the most business-like recruiting strategy that I have come across; it is also extremely aggressive. For example, one of its primary goals is to dominate the talent market in their industry. Given the size and power of some of their competitors, which include Exxon/Mobil and Chevron, most leaders would have accepted mere survival, let alone dominance, as a goal for the recruiting department. But setting the goal got people’s attention and put an end to the status quo. One of the reasons that the recruiting strategy is so aggressive is that their company’s overall business strategy is one of the most aggressive in the industry. Strategic Goals of the Firm and the Recruiting Function In line with the overall approach of aligning recruiting with the business, the basic recruiting strategy was designed specifically to complement and build on the “corporate success tenets” at Valero. Those overall corporate success tenants are:

1. Anything short of industry-leading operational excellence is a failure.
2. Anything short of market dominance is a failure.
3. Being and acting smarter than the competition is the expected norm.
4. Professionalism, image, and ethics are vital.

The recruiting tenets and goals are:

1. Dominate industry labor supply chains for the next three years.
2. Build a staffing department that is the preeminent talent acquisition department in the industry.
3. Be considered strategic and an extension of business units.
4. Support strategic objectives and meet rapidly changing business objectives and competitive challenges by being instantaneously scalable.
5. Be cost effective.
6. Provide expert consultation.
7. Tailor services to each manager’s unique needs, minimizing each hiring manager’s time and efforts.
8. Continuously improve services and products by understanding business, departmental, and budgeting requirements.
9. Amass and retain top talent.

An Adaptable Supply Chain Model In a business world where mobile phones are obsolete within six months, every process must improve at an incredibly fast rate in response to competition and environmental changes. Valero’s strategy is forward looking, and the force behind that approach is their leader’s belief (which I fully agree with) that the staffing industry as we know it today will be forever changed within the next two to three years based on the convergence of three major events:

1. The globalization of markets and supply chains
2. The increasingly rapid pace of change driven by technology
3. The mass exodus of skilled knowledge workers resulting from the retirement of the baby boom generation

The basic foundation of any supply chain/pipeline model in business is having the right product, in the right volume, in the right place, at the right time with the right quality. In the business context, various suppliers are utilized so that the company can rapidly change and scale to meet rapidly changing business needs. Valero takes this well-established model, which has made billions for benchmark firms like Wal-Mart and Dell, and utilizes it in the recruiting function. Although it might seem difficult on the surface to have the right people with the right skills in the right place at the right time, it is the same type of problem as getting computer parts to the right place at the right time at Dell. One should get over the fact that using a supply chain model might seem to some social worker types to “dehumanize” recruiting: What it actually does is insure that worker skills are utilized so that they can get their bonuses and that there are no unnecessary labor surpluses, which has the impact of protecting individual workers jobs. The supply chain model turns the recruiting function into a profit center that requires the same accountability and metrics as any business profit center. At Valero, they use the term “labor supply chain” as the title of the recruiting process. This is an example of utilizing business processes within HR that every department should follow. I have written extensively in this area and Valero’s experience shows that recruiting can become a talent pipeline. Some recruiting executives have begun to say that they utilize the supply-chain model, but upon examination, I have found that 99% of them are not really talent pipeline models (HR people seem to love buzzwords). The primary difficulty of implementing a labor supply chain model is that most people in recruiting and HR do not really understand business processes and how they operate. In fact, one VP at Sun Microsystems told me that he couldn’t successfully get HR people to operate in the supply-chain mode, so he walked over to the “business” supply chain office and recruited away several staff members to do the job. Labor Supply Channels The labor supply chain model at Valero is designed to ensure that recruiting can rapidly change and scale up or skill down to meet new business objectives and competitive threats. Their recruiting model can be classified as an “adaptable model,” while most recruiting models are fixed. Their model is designed to rapidly shift between the various “categories” of the available sources of labor, depending on which combination best fits the business need at the time. Valero’s director of recruiting puts it so well when he states: “This is a paradigm shift in the industry. I now have two jobs. First, I manage Valero’s labor supply chain. Second, I manage Valero’s internal recruiting department. As internal recruiting manager, I am constantly in competition with other suppliers of labor at Valero, and our success is judged by how well we compete against the other suppliers of labor. We know exactly what we do well and what we do poorly, just as I assess every other labor supplier.” What he is acknowledging in this quote is that the recruiting function now must become competitive and compare itself to other sources of labor. This is an unusual but exciting approach that, in my experience, only Microsoft has implemented across all business units in their organization. Both recruiting and hiring managers must understand the advantages and disadvantages of each category and “type of labor” before they pick which one is most appropriate for this specific business need or business unit’s business cycle. For example, some types of labor are:

• Cheaper
• More knowledgeable about the corporate culture and processes
• More easily “released”
• Harder to retain or capture knowledge and intellectual capital from
• Highly skilled for short term, “one time” needs
• Skilled in non-core competency areas of the firm

Valero’s labor supply channels are categorized into four areas: FTEs, temporary, BPOs, and alternative sources. Some of the various competing sources of labor and talent within those categories that Valero’s recruiting management must consider as competing sources include:

• Centralized recruiting
• Succession planning
• Employee development
• Employee sourcing (employee referrals)
• Internal transfer systems (internal job-posting systems)
• Third-party agencies
• Talent from acquisitions and mergers
• Contract labor
• Part-time labor
• Outsource vendors
• Offshore labor or BPO
• The competitor’s workforce (for poaching)
• College grads or interns
• Foreign visa holders
• Professional services
• Software or hardware substitutes for labor

It is important to note that the effectiveness of an adaptable sourcing model can be severely limited by the lack of aligned management processes, weak or nonexistent performance metrics or rewards, and antiquated technology and databases. Unfortunately, Valero, as well as numerous other firms, have found that many vendors and small- and medium-sized third-party agencies are either not equipped for or not interested in operating in a “business of recruiting” mode. These limitations, and their occasional outright unwillingness to change, will mean that these recruiting vendors and suppliers will be dropped from the labor supply chain in a manner similar to how Wal-Mart “unfeelingly” drops suppliers that fail to be on the leading edge of change. The Valero models illustrates how the age of doing business based on “relationships” is rapidly giving way to an age of doing business based instead on financial, business, and supply chain principles and practices. Although many “I refuse to change, so don’t bother me” professionals will whine and complain about this revolution, it will not slow their inevitable demise, just as “slow to change” businesses have been and will continue to be supplanted by the largest employer in the world, Wal-Mart. In fact, the hurricane in New Orleans is an excellent example of how supply chain triumphs over relationships and bureaucracy. There is almost universal agreement that the organization with the fastest effective and large-scale response to the needs of the survivors was Wal-Mart, not FEMA, two “vendors” that rely on relationships and bureaucracies respectively. Quantifiable Impacts Although I will cover the many accomplishments and the significant results produced by Valero later in this case study, I have decided to include a snapshot of some of the immediate results reported by Valero so that you can see how the recruiting strategy that I have outlined here has produced some dramatic results.

I have written extensively about how few recruiting functions are truly strategic. Any business executive will tell you that if you are doing strategic things within the corporation, you should be recognized either in the annual report or at the annual shareholders meeting. In the last case study I did of FirstMerit Bank, I mentioned how they were the first recruiting organization to be invited to speak at the shareholders meeting. Valero Energy’s senior executives have also recognized the strategic importance and business impact of recruiting by including two pages on their efforts in the company’s annual report ó a major accomplishment by any standard, and one that is seldom even accomplished by entire human resource departments. Coming next week, in Part 2 of this series, a review of the best practices in recruiting at Valero. Note: I have never had a financial relationship with this or other case study firms (although Valero staff does admit that they are avid readers of my articles).