23.10.06

HR as Risk Management
Tatyana Terehova
HR Solutions, Alinga Consulting Group

Risk Management and Performance Management are closely interconnected subjects.

Risk Management is the process of identifying and assessing risk and then developing strategies to manage risk. But where does risk come from and how is it to be managed? Of course, a market economy where natural forces are at play will provide plenty of risk on its own. However, most day-to-day, common risks come from “the human factor;” the fact that we and our employees are human and thus liable to make mistakes - mistakes that can cost our companies money. Although it is a source of risk, this “human factor” is not to be feared, but embraced. Through the proper management of human resources, though team work and communication, we can avoid human error and together work to place our companies on the path meeting our goals.

Performance management is a tool that can turn these risks into assets. Performance management includes interviews, evaluations, trainings, and other activities to ensure that the goals of the company and/or the individual employee are consistently being met in an effective and efficient manner.

People are the key to risk management. Why?

1. Risk management strategies are implemented through people.
2. Human resource failure can cause the best planned risk management strategies to fail.
3. Risk management depends on explicit duties specified in managers’ job descriptions, and delegating the power to manage risk using appropriate strategies. The 2006 Oversight Systems Report on Risk Management recently revealed that HR is the “weak link” for most companies’ risk management systems although executives reported across-the-board increases in enterprise risk preparedness between 2005 and 2006.

Human capital risks are still the most difficult to predict and deal with. Only 58% of managers are prepared for them, only 2% more than in 2005. Compare this with the massive advances we’ve made in strategic and compliance risk management. However, this disparity may be even more telling than is immediately apparent.

The problem is that critical human elements of risk management aren’t in place. The report also revealed that only 35% of the managers polled felt that their company had formally trained executives and managers to assess the probability of risk, and 55% of respondents said that there is no widely communicated definition of risk within the company.

If executives and managers are not trained in how to deal with risk, how can this risk be managed when it arises? I will hazard a guess that some of this new confidence shown by financial managers is not from the fact that they are better prepared, but that they feel risk is simply less likely to happen; this may be confidence stemming from our stabilizing economy rather than in our own abilities to manage risk.

This is an obvious human resources liability. A less obvious liability is that if our companies and our employees are not operating as efficiently as possible, we are losing money. Even if our companies turn a profit at the end of the year, even a large profit, we still could have made more and this should be counted as loss when it happens and as a risk before it happens.

Performance management helps us to manage both levels of risk. At Alinga Consulting Group, we have a regularly conducted performance management with great success. There are a few things to keep in mind:

1. Set transparent and reasonable goals. Every six months we set new goals for our company and new goals for our employees. We evaluate performances against the goals we had previously set. Each employee’s goals are clearly delineated in terms of professional output and development and all employees are informed what Alinga’s goals are and what will be necessary, as a team, to accomplish these goals. Employees should be involved in setting these goals so that they feel they have freely chosen them and had a chance to voice concerns that the goals might be unreasonable. However, goals should not be easy to achieve; they must be growth oriented. This is an excellent instrument for the employee to see the visually the results of his/ her effort at work. The information and communication is also useful to management when considering how and what raises or bonuses should be given and in explaining why raises or bonuses were or were not given. It makes the relationship between management and employee more transparent. A transparent, fair, growth-oriented relationship is also one that seldom entails much human capital risk.
2. To gauge performance and growth, an assessment report is filled out by the employee’s supervisor or supervisors to show the results of his/her professional effort, growth of his/her professional knowledge and how this relates against his/her period goals. Professional knowledge tests are also administered at least once a year to more objectively gauge growth in professional knowledge, including managing risks. Based on the results of these tests, you may consider giving additional training.
3. The employee is also interviewed by myself, the HR Manager, and his/her supervisor. This interview should be designed to not only ascertain the results of given period and to set new goals for the next, but also to allow the employee to share his/her ideas on how the company is managed and potential risks he/she sees facing the company. The employee’s suggestions and comments should be taken seriously and, whenever possible, implemented. The employee should be given credit for these innovations as a way to let him/her know that he/she is valued and an integral part of the company.

This is all, again, designed to make relations more transparent and stable and to help identify and avert risk. Obviously, to affectively implement this strategy, human resource management must be integrated with production, financial and marketing management and all managers must be involved in setting goals and plans. Internal communication is essential – and can be largely coordinated by the very important HR department.

This is helpful on a regular basis, but can be extremely helpful in the face of change: when a new investment is being considered, new product launched, or management changed. Performance management can help avoid labor risks in retaining and recruiting by providing continuity, documentation, and helping optimize training and development strategy.

With more information, we can more accurately predict and plan for risks. By recognizing that information is generated and used by people, we can draw more people into our efforts to gather that information and to disseminate the information risk management needs by implementing effective performance management. This all assures that our confidence in ourselves and our business won’t have to falter in the face of trouble, but instead only get stronger as troubles are avoided and overcome. That’s the power of the “human factor.”