Want to help HR move up the food chain in your organization? Get involved in your human capital risk management, argues guest poster Marco L. Padovani. ________________________________________________________________________
At the executive levels in organizations, risk management is an important task. But even though human capital makes up a significant – if not the most significant – portion of an organization’s assets, it typically gets less attention when managing risk, especially if we exclude key person insurance for senior executives.
In its essence, risk management is simple: For each possible future occurrence, estimate the probability of the event occurring as well as the cost (or positive return) if the event happens. Then, for those events where the probability and/or cost are too high, take action to address one or the other.
Key person insurance is a financial risk management action – the insurance policy’s payout will cover the estimated loss to the organization if the key individual dies or departs. But key person insurance does not mitigate the risk by reducing the possibility of people leaving or by reducing the operational consequences of them leaving. It just compensates the company for the estimated loss.
Operational risk management, on the other hand, focuses on reducing the probability of events occurring or reducing the organizational consequences if the events do occur. For instance, cross-training people can reduce the problems if critical personnel depart. Similarly, keeping key people more engaged and satisfied can reduce the probability of them leaving.
So what’s HR’s role?
So what can HR do to contribute to corporate HR risk management practices, especially with non-executive employees? The starting point, as indicated earlier, must be the identification of possible risks – i.e., people whose departure is likely and/or might be problematic for the organization.
Therefore, let’s look at a simple set of HR metrics that are relatively easy to implement and, in one form or another, can be useful at all levels in a company. As part of your regular review processes, start by having each manager also answer the following three questions about each of his or her direct reports.
- V – How valuable is the person? (Consider this from a perspective of the person’s engagement, intelligence, work ethic, performance, etc., but not necessarily job knowledge and skill.)
- S – How much of this person’s departmental and functional job knowledge is in a personal “silo,” i.e., is not cross-trained to others? (Consider the value of the person from the perspective of knowledge or skill that would leave the organization if the person left.)
- D – What is the likelihood that this person might depart in the next 12 months?
The combination of the first two is the overall worth of the individual (how difficult would it be to comparably replace him or her). One measure (V) is the inherent value of the individual while the other (S) is the structural value because of organizational factors. The last factor (D) addresses the probability of the person’s departure.
When asking the above three questions, record the answers using on a 1-to-10 scale, with 1 being the lowest and 10 the highest.
Caveat: We recognize these ratings are imperfect measures as well as understandably rough guesses, but that’s OK. We live in an imperfect world. We can still use the information available to us and we do the best we can.
In this case, we will use these answers (and the metrics based on them) as guideposts, not as absolutes. The intent is just to identify possible areas of risk so that we can then consider possible courses of action that might reduce those risks.
Moreover, once we start collecting ratings such as these, we can work on improving their accuracy for future ongoing analyses. For example, we can use metrics such as employee engagement to help predict the probability of employee departures (and even employee value).
A simple formula
Let’s define a simple metric based on those simple questions to estimate risk. Just multiply all three ratings and divide by 1000. (We divide by 1000 so that the resulting metric remains between 0 and 10.)
This gives us the overall risk for a single person. If we want to look at the risk of an entire department, just add up the risk values of each person in the department and divide by the number of people.
This, of course, is a simple equation that does not necessarily scale up the organizational chart. For example, a higher level executive might have one department with more risky people than another department; however, the second department might be more essential to the executive’s overall performance. But this is easily resolved by weighting the risks of each department differently to come up with an overall risk for the executive.
So what can you do with metrics like these? At a minimum you can begin the discussions about the human capital risks present in the organization. You can also identify the areas of highest risk and then begin to implement targeted cross-training programs or employee retention programs to alleviate those risks.
Marco L. Padovani is a systems developer at PDS, a leading HR, payroll and benefits software company based in Pennsylvania.