How to Optimize Your Human Capital Risk
The idea of uncertainty and risk have become hot topics in the current climate of economic and political surprises across the globe. How can we plan in a world where it might seem as if predicted outcomes don’t occur?
In a recent webinar hosted by RiseSmart, “How to Risk-Optimize Your Human Capital Strategy”, I offered a few ideas to help people in the HR industry deal with risk, particularly risk in people. During the webinar, I included examples of organizations that embody the principals of risk optimization. I also touched on the topics of the impact of a changing work market, a changing ecosystem of work, and how that might play into your efforts to help not only minimize the risk, but really optimize risk for your organizations.
The following is a short recap of some of my comments regarding the environment around risk and some new approaches to employ when thinking about risk.
Volatility. Uncertainty. Complexity. Ambiguity (VUCA)
There are some popular ways that people talk about dealing with VUCA including:
- Considering a greater vision beyond the current uncertainty.
- Trying to understand more deeply when we have uncertainty.
- Trying to make sense of chaos.
- Finding ways to be more agile.
While these are all good strategies, I’m going to be talking more about agility and the concept of being more accepting of risk and how we deal with it. One way to get your arms around this idea of uncertainty is to accept that we’re going to have change and accept that there’s going to be uncertainty. The things to recognize are the recurring themes within uncertainty.
Social and organizational reconfiguration
There are a few social trends that are driving the total organizational transformation. The first of these is the expectation of increasing transparency forcing the organizational boundary to be far more transparent, far more visible. Good examples of transparency are sites like Glassdoor where anyone can find immense amounts of information about organizations, what they pay, how people who work there feel, and even interview questions. The social configuration is shifting in a sense that the power balance and the decision making is often more diffused.
We’re seeing that the whole idea of an organization as a box within which people work or within which certain people exist is changing. Inside and outside the organization, how we work and interact with brands has changed due to:
- Electronic communication and collaboration
- Web access to organizational structures and information
- Social networks instead of hierarchies
- Contracts instead of long-term employment agreements
- Virtual workforces
All-inclusive global talent market
There is a new notion that work can come from anywhere and go anywhere. This doesn’t mean the end of jobs as we know them, but certainly there is a progressive increase in the kinds of work that can be done in ways that don’t necessarily involve a regular, full time, long-term employment agreement. Some trends in the global talent market include:
- Ethnicities becoming talent majorities
- Multigenerational workforces
- The Gig Economy
How do we offer a work arrangement for people who have greater longevity or for the different generations in the workforce? In this new environment, we can form boundary-less partnerships and networks to get work done.
Changing how we think about risk
Change your approach to human resource strategy from the perspective of risk reduction, to the lens of risk optimization. Typically, HR folks, boards, regulators, and investors focus on minimizing the chance that something bad will happen in operations and individual interactions with people.
In hiring, we need to prevent the chance that we hire unsuitable, unsafe candidates or that we’re liable for wrongful hiring. These are all important, but you can see the theme. Our approach to risk has been predicting what bad things can happen and then planning for ways to prevent bad things from happening through risk management.
In other disciplines, such as investment, risk is viewed differently. Not as “How can we avoid risk?”, but as “How do we find opportunity in risk?”. The idea is that not only is there value in preventing the bad things from happening, but there’s also value in accepting risk in order to take an opportunity in order to put us in a position where something good could happen. That’s a tradeoff that very often doesn’t get a lot of discussion in organizations.
In order to put yourself in a position for higher returns, you must accept a position that has some risk at the downside. If you want to minimize the downside, then you minimize some of the upside. Risk optimization means striking a proper balance between putting ourselves in a position to take risks when the return is worth it and not always simply preventing and avoiding risk.
Retooling Mental Models of Human Capital Risk
The traditional HR approach to human risk capital includes:
- Minimize the risk of unprepared talent by developing generic competencies.
- Place top performers in every position.
- Minimize employee dissatisfaction by agreeing to customized deals.
- Minimize the risk of inequity by doing the same thing for everyone.
By looking at how other teams and departments view risk and respond to it, HR can improve performance while optimizing the risks inherent in human capital management.
Lessons from operations management
In the world of operations management, the idea isn’t that every machine or every part of the supply chain or every element of a product has to be absolutely perfectly reliable or perform the best. We set the performance level of the different parts of a process or product with a performance tolerance. We take some risk that something might fail if the cost of making it foolproof is too high. So, we put ourselves in a position to have the benefit of lower cost by taking a little bit of a risk that something might fail.
The implication for HR:
“Can we segment our workforce? Can we segment our work by those positions where we could take a bit of a risk and those positions where we can’t?”
If you want to give people stretch assignments, then you’re automatically having a discussion about, “How much risk of poor performance are we willing to take to get the value of stretching someone in something new?” We’ll almost always not want to bet on poor performance and we’re going to probably put some risk mitigation factors in there. But, if you put someone in a stretch assignment, it almost by definition means that you’re trading off the idea that there’s a chance they’re not going to do so well so that they can learn. This is a great example of balancing risk properly.
Lessons from marketing
We can say we want to give a customized deal to every employee to minimize the risk that people are dissatisfied with the rewards that they get. But, in marketing, that’s not what they do. They don’t say, “Every customer must be perfectly satisfied and we want zero risk of any customer being dissatisfied.” What they say is, “Let’s mass-customize. We’ll create enough variation and enough customization to capture, let’s say, 80% of our customers and we understand that there’s some risk that it won’t be enough for some.” And the thing is to strike the right balance rather than just say, “Minimize the risk of a dissatisfied customer.” We can do that in HR as well.
Lessons from inventory management
In HR, the goal is often to minimize the risk of employee shortages or turnover. Yet, inventory management operations would say, “Sometimes we allow for the risk that we’ll run out of inventory. It pays off when it’s too costly to try to prevent it and when we can have alternatives to bring inventory in.” In the same way with people, we might run the risk of employee turnover in those places, or we can put an alternative in place where we can fill in or where we can tolerate turnover. Yet, most leaders think minimizing employee turnover is what I mean by risk management, but it’s a very costly thing to try and do that all across the organization.
Yes, the world is uncertain. There’s a lot more risk out there, a lot more uncertainty and a lot more lack of predictability, but there are disciplines like finance operations, marketing, and inventory management that have principals that have helped them manage in a world where optimizing risk is the idea rather than just trying to prevent all risk, which is probably increasingly impossible.
In the second half of the webinar, I address how workforce changes and technology will affect organizations in the future and how organizations can rethink their employment boundaries to take advantage of opportunities.
Watch the full webinar HERE.