HR issues are of growing importance in the Middle East as economies founded on petro-dollars restructure and localize their traditionally expatriate-heavy work forces. Some countries are becoming financial service centers, holiday and medical tourism destinations, and trading and shopping hot spots in readiness for when the oil and gas finally run out.

This development is particularly noticeable in the Gulf Cooperation Council (GCC) states - namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

In the past, HR here mainly involved relocation planning for foreign workers and deciding on what currency to pay their tax-free salaries, but those days have long gone.

Although the fundamentals of the regional economy are still strongly supported by oil, those countries that never had much in the first place - such as Bahrain, the UAE and Qatar - are leading the race to attract appropriate talent for their high growth industries.

The challenge is that Middle East markets do not yet have all the structures in place to feed sufficient local talent into the talent supply line. The good news is that, in the Gulf, they do have plenty of financial resources to build the structures quickly.

Vivek Chachra, Hewitt's Consulting Business Manager for the Middle East, says, "In the GCC countries, there is a growing focus towards the establishment of educational institutions, specialized universities and training schools to develop and promote key skills and expertise, hence the need in identifying and developing capability at school and college levels."

This process is part of a policy known locally as 'nationalization', which shouldn't be confused with the same term once used in Europe for state ownership of key industries. What it signifies is 'localization' - replacing brought-in foreign talent with homegrown talent wherever possible. Qatar, for example, is reinventing itself as an educational center with a collection of well-equipped colleges called Education City and a science and technology park.

Dubai, the best known of the seven Emirates, recently opened a stock exchange to complement its already thriving luxury resort industry. These sectors will need plenty of local talent as well as foreign experts if they are to compete successfully with other markets in the long term.

A High Growth Region

The size of the GCC economies has grown by 74 per cent to approximately US$610 billion, with Gulf GDP growth far out-pacing world average GDP growth since 2002 according to research by the Kuwait Finance House in 2007. Real GDP increased by a regional average of 6.3 per cent in 2006, the best performance in more than 10 years. High oil prices boosted regional liquidity, which in turn fuelled a boom in the local stock and real estate markets. Economic liberalization in some countries has led to privatization of key industries, further fuelling growth.

"The growth seen in the key Asian markets, especially India and China, is likely to be seen here too," observes Debabrat Mishra, Hewitt Associates' Business Leader for Consulting.

"We are not yet sure though how different it will be for businesses in the Middle East to move on this growth curve, given that in the Gulf in particular there are companies that are flushed with funds and are therefore in a position to invest much more in organizational systems and capability development."

Growing Significance of HR

In this macroeconomic climate, HR has moved from a background support function to a front line strategic role. It supports business transformation, including the re-engineering of processes and strategies. Progressive organizations - whether locally based or from outside the region - find HR even more important as the region's economies compete with each other in overlapping sectors such as financial services and tourism and with other emerging markets such as India.

Jobs in Many Sectors are no Longer Open to Expatriates

Oman: The number of expatriates in the private sector fell by about 24 per cent between 2003 and 2005. Saudi Arabia decided in 2003 that its foreign workforce would be reduced by more than half in 10 years. As part of its "cultural diversity policy," the United Arab Emirates announced a reduction in Asian visas starting in 2003. In 2006, GCC ministers of labor and social affairs recommended a maximum six-year uninterrupted legal stay, tougher recruitment conditions, deporting surplus expatriate workers, and making renewal of residence permits more difficult.

Focus on "Localization" in Changing the Talent Pool and Mix

The GCC countries remain major recruiters of outside labor and talent. In Qatar and the UAE, almost 90 per cent of the population is made up of expatriates, though many are low wage workers from lesser-developed Asian or Middle Eastern countries employed in sectors such as construction and domestic service. Mid-level managers and technicians are often expatriates from India, Pakistan or Sri Lanka. At the high end of the labor market, senior managers with regional responsibilities are often recruited from the European Union (particularly the United Kingdom, France and Germany) and from North America.

In the last five to six years, though, unemployment levels among the indigenous population have reached unprecedented levels, encouraging governments to adopt localization wherever possible. Many companies now have policies stating that the number of expatriate employees should not rise above a certain level.

At the moment, expatriates make up an average of 65 to 70 per cent of the entire workforce in the GCC countries.

Under the localization policy, the target is to reduce that average to 50 per cent, which will put a major squeeze on the local talent pool.

The Right Talent, at the Right Price

Employee retention is an inherent problem in the Gulf countries because of the high number of expatriate workers. Most of these foreigners view their stay as a temporary posting of three to five years rather than as a permanent career move. Employers will have a difficult balancing act between encouraging the right expatriates to stay (e.g., ones with the skills necessary to build an advanced economy) and developing sufficient local talent.

In the short term, the retention of key expatriates in particular may require additional spending on pay and conditions packages.

Growth in Compensation Levels and People Costs

The fact that demand for labor has outstripped supply has created pay inflation in some sectors - especially those that rely heavily on local talent such as the tourism industry. Other inflationary pressures associated with fast economic growth are also present. In the UAE, housing costs have shot up. In spite of government intervention and new property coming on to the market, the much-anticipated cool-down is yet to happen. Qatar experienced a surge in rent prices between 2004 and 2006, partly influenced by the Asian Games. Prices have still not come down, despite houses in the former Games Village coming on to the market.

One of the traditional attractions of the region for expatriates was that their net income was significantly higher than at home, thanks to excellent salary packages, low or zero tax rates in the Gulf countries, and a relatively low cost of living. These pull factors are no longer so important. Continued weakening of the US dollar against many currencies has led to a steep decline in real income and purchasing power for many expatriates. Companies are forced to pay higher packages to employees to make them stay. In the past two to three years, other emerging economies such as India have become more attractive to the same talent pool.

The political and military crises in parts of the Middle East have also had some impact, especially on western expatriates. As a result, employers are forced to spend more on salaries, often including a 'hardship premium' to attract key talent.

Personnel costs have been rising steadily over the last few years and the challenge has been to justify those extra costs by creating stronger business growth. An analysis of 15 companies across varied sectors in the Middle East region also suggests HR costs have been growing much faster than operating expenses. The ratio between the percentage rise in HR costs and that of operating expenses has increased from 0.57 in 2003 to 1.08 in 2006.

Until the local talent supply increases, highly skilled foreigners are likely to continue commanding high salaries. In the short term, localization has even fuelled a rise in local salaries to match those traditionally paid to expatriates. In order to mitigate these human capital costs, employers will need to build engagement among employees and improve retention rates among this precious resource.

Evolution of Leadership and HR Programs to Drive Employee Engagement

Employee engagement scores calculated by Hewitt Associates across companies in the Middle East (in this case Qatar, Saudi Arabia, Jordan, the UAE, and Kuwait) averaged only 47 per cent - substantially below the Asia-Pacific average of 56 per cent and the global average of 58 per cent.

"In the Middle East, the concepts of Best Employer or 'employer of choice' are relatively new. HR's focus is to help organizations develop their people management capabilities to the best global standards quickly," says Mishra.

Family-run conglomerates as well as foreign companies are realizing the power and relevance of strategic HR interventions in improving engagement and retention, showing increased willingness to develop and execute effective HR policies to ensure talent supply issues don't jeopardize long-term growth.

Rising to the Challenge

The GCC countries in particular have tremendous potential to redefine their roles in readiness for the day when oil and gas are no longer the pillars of the regional economy. The area will need to change, though, from a buyers' market into a growers' market as far as talent is concerned.

"All elements of HR will need to play a part in this growth story," Chachra sums up with conviction. "Operational excellence will be as critical as people management if the Middle East is to have both sustainable development and sustainable success."