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Risky business

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When employers hear the term risk management, they more than likely think about identifying, assessing and prioritizing areas of financial risk arising out of such things as a business acquisition, major purchases, equipment failure and/or the crash of a major information technology support system.

Risk management has gained a good deal of momentum in the last number of years, such that national standards have now been set and specialized training is available. National and international organizations have formed, new job roles can be found in many industry sectors and employees are striving to attain professional designations.

And while employers know, understand and accept that employees and their intellectual knowledge are a critical organizational resource, many pay little or no attention and rarely consider this so-called human capital as a key business risk. Yet, since the field of human resources is so broad, risk can be found in several areas. These areas include talent management and succession planning, ethics and corporate culture, regulatory compliance, pay and performance alignment and employee development. The U.S. Conference Board, for instance, rates talent management and the loss of key talent as the highest ranked of HR risks.

According to Peter Cappelli, a well-known Wharton University professor, the concept of human capital as a significant risk has been demonstrated time and time again, and he cites several recent business catastrophes as examples. One, the 2010 explosion of the deep sea oil drilling rig off the coast of Mexico, was the result of an organization culture that undervalued safety, thus allowing human error to cause the tragedy that resulted in the loss of 11 lives. So what exactly are the elements of human capital risk and what can be done to mitigate the impact on an organization?

Since leadership starts at the top, the first key human capital risk relates to strategic human resource issues. For instance, if there is poor alignment between business and human resource objectives, so-called disconnects will occur within the business that not only will create disharmony, but may well reduce consistency of ethical behaviour among senior managers. It will also create inconsistency in recruitment and retention, which in turn creates a loss of intellectual capacity and may also hinder the ability to recruit talented individuals. Strategic human capital risk also refers to legislative compliance and managing through mergers and acquisitions.

Secondly, leadership and employee behaviour are also a major human capital risk. Unethical behaviour may be rampant within an organization, which in turn causes low morale, employee turnover and perhaps loss of customers and vendors. When morale among employees is low, the organization is susceptible to unionization, poor attendance, sky-rocketing sick leave and increased workplace accidents.

Thirdly, a key human capital issue is the nature of skill gaps within an organization. If there is a shortage of critical skills, production and/or service are affected, resulting in financial losses. Gaps prevent organizations from reaching their business goals and may force a reliance on an external temporary workforce that in turn may increase overall costs of doing business.

Fourthly, the ability to recruit the right employees at the right time for the right skills is also a key human capital issue. Ineffective definition of the skills and selection criteria leads to poor hiring results that in turn lead to voluntary turnover and/or unpleasant and costly terminations. Similarly, poor recruitment processes also create the same negative results.

Fifth, but equally as important as an area of human capital risk, is the issue of compensation and benefits. For instance, many organizations lose their top talent because of internal pay equity issues while others cannot or will not set their pay ranges at the local market rate. Still others might promise bonuses but never deliver. While pay issues are only one reason people leave an organization, it can certainly cause a good deal of discontent and low morale.

Managing human capital risk is no different than managing any other risk, be it a financial matter, a production issue and/or disaster recovery of your information technology system. You need to examine the human-resource issue confronting you and determine the impact on the organization. Determine if the impact is immediate or long term, if/when the situation is best addressed and then examine strategies to mitigate the risk.

Mitigating the strategic risk of low morale and a negative culture might require that you hire completely new executive leadership -- an individual and/or an entire team that can turn your organization into a high-performing entity. These new leaders will need to examine the entire organization and seek out the pockets of HR issues that create both short- and long-term risk.

A strategy to mitigate a common staffing risk referred to as "wrongful hiring" that causes high turnover within a certain job sector could be to conduct a thorough analysis of job tasks and the skills required of a high-performing employee. These skills should be combined with character traits that will ensure more effective identification of the right type of candidate.

Many organizations apply a training and development strategy that serves to overcome several risks such as skill gaps, employee behaviour and employee wellness. Training is also used to diversify risk as employees who are cross trained to undertake a variety of roles often experience increased job satisfaction and will remain loyal to an organization in times of challenge.

Innovative organizations will take a so-called hedge approach to human capital risk management. This simply means they will create programs such as internships that enable new entry employees to work with the employer to see if there might be opportunity for a longer-term relationship.

Compensation is one of the most challenging of human capital risks, especially if an organization is not in a position to increase their pay levels due to a challenging financial situation. However, if the financial reward is perceived to be disconnected to the level of performance, employees will feel their "psychological contract" has been broken and dissatisfaction will result. Therefore, tough as it is, an organization must make special effort to mitigate this risk. Many organizations are creative when dealing with this risk; for instance, they may apply a year-long flextime policy, increase vacation time, or create shorter summer hour schedules with time being made up during busy seasons.

Risk management strategies are not simply for those hard-core technical and operational challenges, they must also be applied to your human capital resources. Failing to do so will create the problems that can literally sink your organization and ruin your reputation as an employer.

Source: Be a Ringmaster of Risk, Consider human resource strategy as risk management, Wayne F. Cascio, SHRM, April 2012.

Barbara J. Bowes is president of Legacy Bowes Group, a Talent Management firm. She can be reached at barb@legacybowes.

Republished from the Winnipeg Free Press print edition June 16, 2012 H1

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