Only 16 percent of executives feel comfortable with the amount of technology talent they have available to drive their digital transformation, according to a 2023 internal McKinsey survey of 40 executives across sectors. The same survey found that 60 percent of companies cited the scarcity of tech talent and skills as a key inhibitor of that transformation.
The talent gap was also a central theme at our latest Tech Talent Roundtable in Frankfurt. This event, the third in our Tech Talent Roundtable series, brought together senior HR and IT leaders in Europe from across sectors, including technology and the media, energy and materials, finance, and the public sector.
While layoffs by major technology companies may have temporarily increased the pool of available tech talent, there is no evidence of a systematic narrowing of the gap between supply and demand. Results from the survey referenced above indicate that based on current trends, demand for tech talent is likely to be two to four times greater than supply over the coming years. Within the European Union alone, the tech talent gap could be 1.4 million to 3.9 million people by 2027.
Could gen AI be the solution?
Over the course of the roundtable, gen AI was repeatedly mentioned as a possible solution for the tech talent shortage due to its potential to increase workforce efficiency. Gen AI can improve product manager productivity by 40 percent (where the process of requirements specification is sufficiently automated), for example, and can halve the time it takes to document and code. So far, however, this potential has been realized only by leading companies that have invested in a significant degree of automation; most companies have yet to see efficiency improvements at this scale.
Despite the efficiency-improving potential of gen AI, there is currently no evidence that the technology is leading to a reduction in demand for tech talent. On the contrary: We see that the demand for technology talent has increased as companies invest in preparing the technological backbone needed for the effective deployment of AI tools. Roundtable participants noted that resources freed up through the increased efficiency of technology teams have mostly been redeployed to delivery teams, allowing these teams to expand their outputs.
In addition, the spread of gen AI has generated further demand for a subset of skills and talents. The full potential of gen AI can be realized only if it is both embedded appropriately and used effectively by a significant proportion of the workforce. These requirements did not apply to previous technologies, which means that a significant number of employees—many of whom may have limited technical knowledge—may need to be reskilled or upskilled. Many of the tools and output created by gen AI also need to be managed or interpreted by humans, which imposes additional talent needs. Currently, therefore, gen AI appears to add to rather than relieve the problem of talent shortages.
Companies will need to take a holistic approach to meeting their talent needs
There will be no magic bullet solution for the current talent shortage. Instead, companies will need to address the issue holistically. In doing so, they could draw on four separate levers (exhibit).
Traditional workforce levers are unlikely to provide the whole solution
In the past, many companies could meet their talent needs using a combination of two of the four levers: buying and outsourcing. Both levers will still be helpful, but they are unlikely to be enough in the current market.
- Outsourcing can increase headcount but will not grant access to the full range of required skills. While outsourcing the IT workforce is a common practice, it typically leads to a high turnover rate as newly upskilled workers find more lucrative or permanent positions elsewhere. In addition, relatively low per diems have decreased the pool of talent available through outsourcing; highly skilled talent—and talent that possesses unique or high-value skills—may not always be available. Therefore, while outsourcing can still be the right solution in some situations, such as when additional resources are required on a time-limited basis, it will not always be the case.
- Buying talent is challenging given the current tight labor market. High demand has considerably increased the cost of the limited supply of tech talent, which means companies are unlikely to be able to buy their full range of talent needs. They should, however, continuously scan the market for new hires. They will most likely be successful if they focus their search around a well-defined set of key talent needs. Companies will also need to be innovative in their search methods: Roundtable participants indicated that job ads are falling out of favor for tech jobs and that talent acquisition now often takes place through social media platforms and relevant technical communities. One leading electronics company, for example, has posted a series of recruitment ads for junior tech talent on Instagram.
Reskilling, upskilling, and partnerships can help close the talent gap
As the gap between the supply and demand for talent widens, companies are increasingly focused on building the right talent or partnering to access it.
- Building skills within the existing workforce should be a key element of any talent strategy. Most companies will be unable to close their talent gap without investing in reskilling or upskilling their existing workforce. For example, a recent survey of executives found that most plan to increase their pool of gen AI skills through training existing employees, rather than through hiring or contracting, because these skills will need to be embedded across most roles. Measuring the current level of workforce skills has historically been challenging, but new tools have made it much easier to both create this baseline and assess current ways of working. In addition, the results of these inventories of skills often reveal a number of existing employees who possess in-demand skills they are not currently using. Efficient use of the existing workforce based on their skills profile can significantly decrease the degree of reskilling required.
- Partnering can offer greater access to key skills than traditional outsourcing. Large system integrators generally have access to a large workforce that can be part (though typically not all) of the solution for the talent problem. Partnering with such organizations can help alleviate the issues of turnover and quality of talent that can make outsourcing problematic. Talent is less likely to leave, for example, if the partnership agreement that brings them into a company specifies that they will receive training and coaching or will be eligible for promotion. The key challenge is typically to craft an agreement that reflects a true partnership, because doing so requires the two sides to be open to a different approach to both the content and terms of the contract.
Getting started
While the ultimate solution for filling talent gaps will likely involve all four levers, the immediate issue for many companies is how to get started. The first step will be to develop a clear view on each of the following:
- the skills and level of capacity required to drive the desired digital transformation
- the skill profile of the current workforce
- the talent pool available from current vendors, as well as any challenges related to existing relationships with those vendors
Taken together, these elements will give companies a rounded view of where they are and where they need to be.
Demand for technology talent will exceed supply for the foreseeable future, and the talent gap is therefore likely to continue to be a major topic during future iterations of our Tech Talent Roundtable. However, companies that work to develop a clear baseline of their current situation and strategically employ a combination of all four workforce levers will be able to secure the talent they need.
Anna Wiesinger is a partner in McKinsey’s Düsseldorf office, Henning Soller is a partner in the Frankfurt office, Nadja Stark is an engagement manager in the Berlin office, and Thao Dürschlag is an associate partner in the Munich office.