Human Capital Risk Management-What’s Missing?

Tony Ridley

 

In spite of the considerable investment and development around the preservation of assets and the mitigation of risks across conventional corporate assets such as facilities, information, equipment and products, the same methodology and motivation remains far less advanced in regards to human capital.

Before any organization even explores risk management strategies for their human capital it is fundamentally important that they first determine the value at risk. Not only is it a case of valuing the contributions of the individual or groups of personnel but differentiating the value in which they contribute to the company, whether it be through the provision of specific skills and services or the commercial value they present the company. These distinctions also need to be made between job functions or management/executive levels. No two individuals are contributing to the company in the same manner, much less two diverse business functions.  How many companies even know this definitive financial value of their people?

Following the basics of valuation, and any other unique considerations that the company may have (mobile work force, fixed laborers, knowledge capital, research and development) a unit cost can then be applied for prioritizing strategies or expenditure. For example, an individual that reflects a unit cost/investment per hour of $1 will be less likely to addressed as a priority when compared to an individually that presents a unit cost/investment per hour of $100. However, if there are significant numbers of the basic unit cost of $1 at risk, that group as a whole may be a greater priority than that of a single or limited $100 per unit cost individual.

Threats and residual risks associated with human capital are many and varied. Over time a detailed and thorough analysis can be conducted to determine the probability, velocity of onset and other governing factors that will provide a single or annual loss expectancy to the company. A single loss expectancy, such as death, may cost the company significantly more than just the forecast value identified in the first stages. Conversely, an annual loss expectancy, especially in light of the fact many companies are unable to even quantify this loss, may equate to millions of dollars in lost productivity, administrative burden or opportune costs.

To truly understand or appreciate the current or potential losses to a company through their human capital it is imperative to model the disruptions and time loss (inclusive of management and departmental support) to a cellular and group level. If someone falls ill, how long are they unproductive? What does it cost the company? Should the become a victim of crime or their business activity disrupted due to a natural disaster, what is the cost to the company? When applied to our entire human capital asset base, what is our single and annual loss expectancy?

“You can’t improve what you can’t measure” If you are making a truly informed decision on where your assets are distributed, you can then make informed decisions around strategies to preserve their value. You also enjoy the benefits of comparative investment/management. Most companies are surprised to discover that despite their commitment to their people, they actually devalue their contribution by not acknowledging them as an asset and preserving it accordingly. Are you one of those companies?

Companies that have undertaken to approach the management of their human capital consistent with other corporate assets have found the process highly rewarding and very confronting. Conversely, those adverse to such strategies or behind the curve continue to loose more money than the cost of such preparation and mitigation. They too find over time that penny wise turned out to be pound foolish.

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Comment by Lawrence Carsom on January 30, 2011 at 8:46pm

Wk Chan

 

You do pose some interesting yet “Classical Belief Systems” (archetypes)  that left exclusively by themselves, will never serve to assist humanity to evolve to its full potential.  And we are all doing that.  Please allow me to explain.

 

IQ – as you know Wikipedia tells us that “The term 'IQ,' comes from the ... "German Intelligenz-Quotient, was devised by the German psychologist William Stern in 1912."  However today it is well recognized that EI (Emotional Intelligence) accounts – per a number of current research reports for over 67% of an organization’s success attributes (drivers).

 

(See “Emotional Intelligence … Why It Can Matter More Than IQ” by Daniel Goldman; and see “The HR Scorecard” by Becker, Huselid & Ulrich (Harvard Business Scholl Press) and also please do not forget David Maister’s “Practice What You Preach” a prenominal piece of EMPIRICLE based human metric algorithms.

 

Wk, I truly love your passion, your language skills in transforming your thoughts into exquisite word tapestries of meaning; and your focused certainty of conviction.  And more than all of those abilities that you have assembled in one fantastic smorgasbord, I love your spirit’s quest to go out in on a self-liberating exploration … a curiosity quest … to discover, experiment with and then understand how mankind can learn how to train his belief convictions instead of the opposite.  The world desperately needs your passion, clarity and innate need to share "that which works."

 

In my way of current thinking …The “Entire World” desperately needs such a liberating passport.  Unfortunately however, it’s our beliefs that have us in their myopic tunnels of conviction.  They control not only our beliefs, but also our thoughts … thus our emotions … and therefore all of our behaviors we do unto each other and ourselves.

 

SUMMARY

 

Thus it is my current position of thinking … that reminds me that risk is sired by only two parental states of being:

 

1)      I Don’t Want To (An EI emotional state or lack thereof (EI) where my mind is already made up … in a static mind state of conviction) or …

 

2)      I Don’t Know How to, i.e. IQ

 

And when I don’t want to … know how to … because my beliefs do not want foreign strangers (polar and/or new belief systems) taking over there territorial claims … guess what happens to my evolution.   

 

Welcome to this world’s “cultural mind set” … of fear … of greed … of self-centeredness and the horrific life sacrificing of human bodies on the bloody battle grounds … all so that these belief systems … can continue to control our life’s destiny.

 

Pogo told us all that "We have met the enemy and he is us."  Well, he was close but he as many others still misses the mark by miles.  Our enemy is our ignorance of who we are … and thus if a fit of fear and states of “Identity Isolation” … we have ALL adopted a host of alien foreigners as our identity … convicted thought transporters …. and thus we will and DO … defend and protect them with our very lives. 

 

How does the world define stupidity?    Does it really i) want to know … ii) how to find out?   Lets all take a long and very careful look at … “the conviction of certainty.”  What truly is risk … opportunity … and their nature within a home we currently call the Uni-versus.

 

Lawrence Carson

 

Boise, Idaho

Comment by Marcel Wiedenbrugge on January 30, 2011 at 7:29pm
I totally agree about understanding human behavior is fundamental to understanding how organizations function. Ultimately, I believe that soft factors are more important than hard factors when it comes to human performance. How happy are people to work for a certain company and how does that translate to efficiency, performance, profitability and customer satisfaction.

As humans can make or break a company, we can save ourselves a lot of complex systems by setting our core values right and make sure that those values align the values of people that are working for a company.

It might be sufficient to measure the NPS (net promoter score) for employees of a company. Would your personnel recommend your company to others? Being successful in the long run relates to a company's ability to create a customer centric, collaborative, creative, adaptive / flexible, entrepreneurial and open culture. As long as you are better performing than you main competitors and you manage to keep your customers loyal and buying again, you simply don't have to worry about human capital risk management.
Comment by wk chan on January 30, 2011 at 7:37am

 

Hi Lawrence,
a) "identify, attract, and return" 
The assessment is normally based on IQ to predict how an individual will perform in a number of different cognitive domains although such cognitive abilities, along with social and psychological, have limited relevance to performance. 

b) Human Metrics 
Understanding human behavior is fundamental to understanding how organizations function. The usefulness of any model of human nature depends on its ability to explain a wide range of social phenomena, and the test of such model is the degree to which it is consistent with observed human behavior which is difficult thereby limits the explanatory ability of a model. You can only have a set of characteristics that captures the essence of human nature for specific pursuits, serving as decision guide in specific circumstances. Also, is hard to monetize eg the impact on potential "reward" cannot be easily determined. With respect, I declined to agree with you that staff cost Cannot be Managed and Controlled without Human Metrics.

c) Characteristics of Star Performers are :-
i) cognitive abilities such as IQ, reasoning and creativity
ii) personality factors  - self-confidence, self-actualization, perseverance, ambition, and the ability to control his destiny, 
iii) social factors - interpersonal skills and leadership, and
iv) a small element of luck

Comment by Lawrence Carsom on January 29, 2011 at 7:12pm

Lawrence to Wk Chan,

 

I can and "do" understand the basis from which you share your experiences, i.e. there is no one generalization that cross functionally applies in all cases."

 

However it is also true that your item a) below says "identify, attract, and retain the best people."  However, that "Presupposes One Knows the Measurable Criteria" that Defines what  "The Best People" are. Hmmm????

 

I would like to suggest three practical items for all of our serious consideration:

1 – If you do not measure it … YOU cannot manage it … and it thus controls you.

2 – Human metrics (the want to and know how to) Drives the Financial Metrics in commerce.

3 – I suggest you get your hands on “Practice What You Preach” by David Maister. In this book you will find the Precise Algorithms that I think all seekers of becoming World Class Leaders … desperately need to discover … apply … and see the results for one’s company … and this world.

 

And finally … we all … Yes ... the entire human race … need to learn to acquire the self-improvement skills of “Meta Cognition” … i.e. … the ability to manage our beliefs systems (culture) that controls our thinking and emotional states of being .... as opposed to THEM managing us in our Plato’s Caves of Ignorance.

 

Best Regards in our new ways of thinking "Out of The Box" of Conviction. (In prison-ment)

Comment by wk chan on January 29, 2011 at 4:37pm

With respect to Tony, I would say that the notion of a high performance work system (high involvement and high commitment) by benchmarking work practices for workers in an organization that leads to superior performance is fundamentally Flawed. Even if a set of context-delineated practices could be agreed upon, there is a problem that data which does not account for variations in how the same practice is implemented can never be totally trustworthy. And, how such practices as appraisal and merit pay are actually implemented varies enormously, leading to very different impacts on employee trust, satisfaction, commitment and performance. At best, there only serves as more descriptive and more useful tool in helping to identify the main thrusts in a particular HR system and should be rest on studies. Henceforth, at Co's level, there is clearly a need for caution with over-generalized claims of economic benefits.

For Companies with operations regional or multinational in scope, Diversity Strategy which is a combination of talent strategy and marketplace strategy, should be the focus as its goals include :-
a) identify, attract, and retain the best people, and
b) create a workplace culture where they can maximize their performance.

Much as we would like to think the world as global from a product and service perspectives, if we manage workforce that way, we'll end up mismanaging !!!


 
Comment by Lawrence Carsom on January 28, 2011 at 5:30pm

Life is simple, if you seek to see it that way.  Life is very complex and messey if you want to see it that way. As an example of the former, here are a four very simple algorithms (Latin > “Principiums”) that run the universe.

 

#1) <>   Universal Change is Constantly Changing

 

#2) <>    Change – Risk = Opportunity

                (The optimal business executive’s metrics driven dashboard)

 

#3) <>   It’s Human Metrics the Drives “ALL” … Financial Metrics

 

#4) <>   Risk = The Lacking (Core Commitment + Core Competencies)

 

The above is a gift from me to you.  If you don’t readily envision how to use these Eternal Principiums … see #4 above ... and smile. It doesn't cost ANYMORE.

 

LCarson@ATICA.US

Comment by Marcel Wiedenbrugge on January 28, 2011 at 4:57pm
I absolutely agree with you about the importance of human capital. This fundamental asset is in my opinion often highly undervalued.

However, how do value human capital? For example: an experienced service employee who has build excellent relationships with many customers or a fresh out of school service employee who is eager, unexperienced and relatively cheap? Or that highly intellectual R&D manager, but with a lack of social and teamwork skills. The replacement cost + a percentage for the number of years of experience? The basic understanding that getting (hiring), keeping and growing (training + education) personnel is as important getting, keeping and growing profitable customer relationships, could already mean a big improvement.
Comment by Dr. Tony de Bree MBA on January 28, 2011 at 4:49pm

@Tony, I think that you have got it the wrong way around. The first thing any company shoudl do is to identify which people are their critical intellectual capital in terms of unique knowledge and experience compared to competitors within and outside their company. The second important issue is if the organsiational design of the company concerned makes sure that this intellectual capital is leveraged to the full by providing the appropriate organisational context.

That is also the basic reason why especially large organisations struggle so much with social innovation and to become customer centric.

 

Kind regards,

Tony de Bree

@diaryofabanker

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