Ensuring People Risks
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Ensuring People Risks
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© The Z/Yen Group of Companies 2008
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Michael
Mainelli, Z/Yen Limited
[A version of this article originally appeared in "Ensuring People Risks, Rewarding HRM: Proactive and Reactive Link of HRM to Business Strategy", Journal of Professional HRM, pages 3-8, Croner (March 2000).]
At times, HRM must be re-active, dealing with problems or opportunities as they arise, yet leading thinkers stress the importance of being pro-active, helping to shape the strategies of the organisation. A pro-active role means identifying, analysing and implementing solutions to problems and opportunities before they arise. How can these two roles be reconciled? What mechanisms can ensure that reactive and proactive roles support the business strategy? Everyone Loves HRM It would be a strange automotive company that said, "our business is automobiles, which are so important to us that we have centralised all decisions about automobiles". It would be an equally strange company that said, "finance is so crucial to all our decisions that all financial decisions will be made by the finance unit". So why is it that in an era where "people are our most important asset" and "everyone is in the people business", we see HRM units fighting the impossible battle of imposing centralised HRM. Shouldn't we ensure that every manager is equipped to use HR effectively in his or her contests. Shouldn't HRM units be fighting the corporate battle alongside their compatriots in the organisation, like medics in the trenches within a medical corps, rather than far behind the battle lines in a quiet, rural hospital? Shouldn't HR Professionals' contributions be assessed by their fellow soldiers, not some four star general sitting comfortably back at corporate headquarters? Noble sentiments surely - but practical sentiments only if we can measure the value of HR in the trenches? David Hussey put forward eight Myths about HRM [Hussey, 1996]. As evidenced by ever-more-common, fond interpretations of the HR acronym, e.g. "Human Remains", it is no surprise that David's eighth, final Myth was: "Line management knows that HRM is a valuable, value adding strategic partner which plays an irreplaceable role in the management of the organisation." Although the following fictional, lunchtime conversation between an Operations Manager and an HR Professional was written with HRM in mind, it could have been adapted to many head office functions: HR Professional: "Oh, you might be interested to
know we're conducting a strategic review of the role of HRM at head
office." Surely, 'Tis Better To Proact Reactively than To React Proactively? "Reactive" has become the ugly sister word to "Proactive". At times, though, "reactive" is fine. Sometimes things just need to get done. Sometimes things are so uncertain that it can be better to do nothing, just react. Clearly, "proactive" implies that, in some way, we have control over our environment. While proactive seems desirable, it can be a dangerous illusion in a world where uncertainty reigns. Proactive projects have a tendency towards the grandiose - the Sorcerer's Apprentice projects that we can't remember why we began, but now can't stop. On the other hand, just sitting back and "taking it as it comes" is to ignore the power of vision, commitment and organisation. When we look at linking HRM to the business strategy, we must ensure that we include the reactive and the proactive - both roles have an important place. Too frequently, HR units scurry about doing their master's bidding, like a bunch of presidential aides who, being close to power, get carried away by the illusion of having power. If the Chief Executive asks them to do something, it must be certainly be assumed worthwhile and in the best interest of the organisation. They rarely see themselves as others do. When times are good and the Chief Executive hobnobs with his or her fellow wizards in the boardrooms and dining salons of the corporate world, he or she adores the social cachet of phrases such as "I'll have my HR bods look into that idea" or "With all the demographic changes and lack of IT skills in the economy, I keep my HR team busy just checking out all of the fringe opportunities". When times are bad, HR units are just an expensive overhead. HR units are particularly expendable when their sponsor needs to show the ability to take cuts him- or her-self. We must also not confuse being at the proactive phase with being proactive. Hussey's second Myth: "if HRM is allowed to be proactive when new corporate strategies are considered, this automatically means that all HRM activities will become business driven." Too often a proactive project or sub-project gets underway, but the bulk of HRM continues plodding along in an unmeasured state. While operations managers who participate in the proactive, planning phase take responsibility for the outcomes, HRM often settles for "facilitating and supporting the strategy", "developing a human resources sub-strategy" or other non-commital, non-measurable input. Strategic Hierarchies Strategy and strategic planning are involved, and involving, subjects. This paper focuses on linking HRM to the business strategy. It may be helpful to apply a simple, generic model of strategy to the remainder of the paper, five questions and a three phase planning cycle. The five basic strategic questions are:
The three cyclical phases of strategy are planning, implementing and evaluating. The frequency of this cycle is increasing in companies for a variety of reasons - a belief in an increasing rate of change, increasing uncertainty, changes in strategic fashion. In the past, strategic planning retained an air or aloofness, even a touch of academia within the corporate world. Today strategic planning is seen as a key, but routine, function of the Board. Strategic planning is less frequently led by a specialist unit and more by the Board executive supported by a specialist strategic unit. The link between planning and HRM is well-developed, particularly as boards have increased HR representation. This established link has led to Hussey's first Myth, "if the top HR Manager is on the Board, this is enough to ensure that HRM is business driven." Below we examine alternative ways of implementing the next two phases of strategy - implementing and evaluating - although much could be written about HR and strategic planning. A good place to start looking for alternative ways to implement and evaluate strategy is to consider four key reasons organisations do anything - it's a money-maker; it's politically expedient; it's legally required; it's essential - e.g., respectively, sales commissions, much public relations, most health&safety, toilet cleaning. Looking at HRM, the last two reasons probably don't feature in this discussion. HR is unlikely to be legally required soon, despite some looming EU clouds. Without HR, firms hardly grind to a halt. In fact, there are large numbers of successful, fast-growing organisations which shun all formal HR functions. So HR units need to bind themselves tightly to money-making or political expediency. Too often HR units choose political expediency. Yet can we find ways to link HR with money-making? Perhaps a few detailed examples of how HR can help line managers make or save money may bring the measurement of effective HRM to life:
No Guarantees - No HR Value The key items in the four examples above are that HR has measured what it can do, measured what it did and shared the rewards with the operation it has helped. The list of possible measurables can continue, e.g. HR and an innovative recruitment method, HR finding and pre-qualifying recruits in advance of direct business requests, HR indemnifying the organisation centrally that following proper procedures will lessen industrial tribunals, HR indemnifying a manager financially against industrial action. What makes measurement difficult in the above examples for some people is that the measures involve recognising risk. Further, risk in the above examples will be difficult to quantify in advance. On the other hand, while recognising that risk complicates measurement, the presence of risk does not invalidate measurement. Risk management is a constant factor in managers' lives, arguably the reason managers are employed and given responsibility for other people's capital is to manage risk. Subjective measures of risk by managers can be used - much traditional insurance relies on subjective measures, "experience", when statistically valid information is only partially available. An HR professional, as any professional, should be able to provide non-professionals with risk assessments and measurements, not just opinions. There are a number of possible models for HR unit measurement. Few existing models put a strong emphasis on money, possibly because direct contribution to performance is a tough measure, as anyone who has set sales commissions knows. In practice, the first two of the following five models are common and they both typically result in a central, politically-driven HR function:
The biggest transition in the above models is from the third to the fourth. The risk management unit model already exists in some large corporates and is naturally progressing to the risk/reward model. The risk management unit model does couple the HR unit with the business strategy and a key reason for existence - making money; the risk/reward model even more so. Risk/reward models are used in some of the larger multi-nationals, particularly those which have evolved structured finance operations yet realise the importance of implementing sound strategic thinking. Results have been largely positive, sometimes very positive. However, some hard-won lessons show that risk/reward models require sophisticated management, need a management team with a keen eye on increasing shareholder value and must be led by a politically-astute head who knows how to say "no" to other directors through 'price' mechanisms. Ensuring the Strategy is Met The risk/reward model began over 150 years ago as a mutual insurance model in a number of areas such as shipping, health and trade. Interestingly, some of the first risk/reward models were based on 19th century HR issues in organisations such as the factory mutuals. These factory mutuals formed a group of 40 non-profit risk management firms in New England factories which were admired by trades unions because they strove to reduce risk and injury to workers. Today most multi-nationals and many large corporates have established risk management units, often very insurance focused, running their own internal mutuals. Recently, some of the leading corporates have moved markedly from having the risk management unit handle commerciably insurable risk, e.g. fire, theft, employer's liability, to managing less quantifiable direct business risks as well, e.g. brand damage, loss of ISO9000 group certification or contract delay. A very few have merged the risk management unit with the central capital allocation function to form risk/reward units which function as structured internal investors, fitting the management internal systems to the corporate strategy. It is not all finance. One British corporate is looking at handing the management of Investors in People (IIP) compliance to the risk management unit. As managers in the corporate need to 'cut corners' in IIP to achieve their business targets, their 'premia' will rise and their ability to meet targets impacted appropriately - markedly for some, hardly at all for others. As managers fully comply with IIP, their premia will fall. The board sets an overall risk profile (e.g. loss of IIP will cost us 3% to 6% loss in productivity and 2% loss of turnover). The risk management unit distributes that risk around the organisation and reports back to the board, over time, on the accuracy of its distribution and assessments. Managers can make decisions about the balance of effort they put into all corporate initiatives, but have the consequences brought back to them in terms they understand - the bottom line on which they are measured. Mandatory corporate schemes attract suitably high premia, yet the corporate centre cannot over-apply 'mandatory initiatives' because the centre too can see the risk and cost effects. Some generic thoughts on risk/reward management can be explored in Mainelli (1999), but the following diagram attempts to show schematically how these internal mutuals, these risk/reward management units, work:
The key features of the HRM risk/reward model are a central unit which:
HR Union Risk/reward models strongly connect HR with the corporate strategy. They also connect HR strategies, policies and procedures with line managers - uniting managers HR adherence and decisions with bottom-line results. Risk/reward models put HR managers in the front-line being measured with their fellow managers. It is difficult to discern the longer-term alternatives to risk/reward management. The era of large corporate centres has gone. Organisations have moved to business models where the 'system' encourages appropriate behaviour in a unit, or the unit is eliminated. HR professionals need to encourage the formation of appropriate HR systems within the organisation that demonstrably prove the HR link to the business strategy - uniting HR with shareholder value. In summary, we believe that:
HR units will never have an easy ride. Few operational directors want anyone second-guessing their decisions. At the same time, few HR units want to spend their time devising unused procedures or exhausting strategies to justify other people's gut feelings. Unless the HR unit wishes to remain the Chief Executive's lapdog, it must stand up and state how it proposes to measure its own success in comparison with the rest of the organisation. Publicising a clear measure of success, and meeting it, attracts political power in its own right. If there is a corporate political strategy lesson for HR units, it must be to agree with the organisation a rigorous way of measuring their own contribution to corporate success. If there is a lesson for head office contemplating the future of HRM, it must be to dispel Hussey's fifth Myth, "Evaluation and performance measures are too difficult and expensive for HRM activities, and HRM does not need to be subject to such disciplines." References David Hussey, Business Driven Human Resource Management. John Wiley & Sons, 1996 [enjoy Myths 3, 4 and 7]. Michael Mainelli, "Organisational Enhancement: Viable Risk Management Systems" (2 parts), Kluwer Handbook of Risk Management, Issues 27&28, pages 6-8/2-4, 16 April 1999, 12 May 1999, Kluwer Publishing. Michael Mainelli is a Director Z/Yen Limited, a former Vice-Chairman of The Strategic Planning Society and a former Director of the Defence Evaluation and Research Agency. Ian Harris is a Director of Z/Yen Limited whose HRM work with several leading organisations, e.g. Ideal Hardware, is recognised as leading the field. Z/Yen Limited is a risk/reward management firm which uses risk analysis and reward enhancement techniques to improve organisational performance. Z/Yen has advised many organisations on the role, structure and measurement of HRM units and risk/reward units. |
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