Regardless of how automated or technology-focused the current workplace is, the most valuable asset for any given organization is still the same: people! In fact, failing to properly manage human capital risks may be the easiest way to hurt your business. The financial impact as well as the price to pay at the brand, reputation and energy level that come with such a failure are enormous.
Although most managers are aware of that, there is only a small portion of companies that have a clear strategy regarding human capital risk management. Let’s see how to identify and start managing those risks effectively.
Understanding human capital risks
The umbrella covering human capital risks is broad. In fact, anything ranging from hiring the wrong people and failing to retain talent to unexpected accidents and inadequate attrition falls under that umbrella. Because of that, our understanding of this matter may well start with a brief definition of human capital.
In general terms, human capital is “a measure of the economic value of an employee’s skill set.” The term was coined in the 1960s by the economist Theodore Schultz who believed that human capital was like any other capital: “it could be invested in through education, training, and enhanced benefits that lead to improvement in the quality and level of production.” Anything that interferes with the health of that investment is a risk.
Following that idea, the British multinational corporation AON states that human capital risks can be defined “as events and employee behaviors that occur both within and outside the workplace that can affect employee productivity and/or otherwise affect the organization’s operational and financial results.”
While that is a pretty straightforward definition, it is easy to see that there are lots of things that can be considered human capital risks. Because of that, having a structure that allows you to classify and divide such risks is probably the first step to take when dealing with the complexities of human capital management.
AON, for example, uses a structure based on the life cycle of the employee to assess risks such as talent retention, absenteeism, employee engagement, legal compliance and low productivity. Similarly, the Lowers Risk Group, a provider of risk management solutions, has identified five critical areas regarding human capital risks: complacency, turnover, occupational fraud, catastrophic workplace events and negligent hiring/retention.
If they become real problems, some of the risks mentioned above can have devastating effects. For instance, when it comes to high turnover the Lowers Risk Group states that “companies typically pay between 25% and 250% of an employee’s annual salary to replace that employee.” Likewise, poor human capital risk management can increase disengagement, deteriorate morale, affect productivity and hurt corporate reputation.
Implementing a management strategy
Once your company has chosen a framework to identify potential human capital risks, it is time to move to the next phase, which consists in implementing a strategy of best practices to tackle those risks. This is the part where most managers and companies fail especially because of the lack of commitment of the employer and the proactive mindset that it requires to be effective.
In fact, rather than wait and react to problems when they unfold, managing human capital risks requires a comprehensive approach based on prevention, readiness and a strong commitment with your workforce. For instance, if you want to effectively manage human capital risks such as high turnover and talent retention, you need to create a checklist for your organization that includes some of the following tasks:
- Establish appropriate and fair compensation.
- Listen and pay attention to employee’s needs and concerns.
- Promote employee engagement and ownership.
- Define clear career paths.
By taking care of that, your company can significantly reduce the likelihood of facing a high turnover or struggling with talent retention. Along those lines, you need to implement similar checklists across all the areas of your organization that are sensitive to human capital risks.
While doing that, you will probably become even more aware of how much the success of your business depends on your own willingness to “pamper” your employees with tools, training and incentives that make them happy in the work place. Happier employees are more productive and committed! As stated in an article on Investopedia, “an organization is often said to only be good as its people. Directors, employees and leaders that make up an organization’s human capital are critical to its success.”
Considering all of the above, we can go back to our first question: is your company ready to manage human capital? Do you have in place a clear strategy to deal with things like undesirable turnover, skill gaps or leadership shortage? If you answer is no, then it is time to switch your corporate mindset and adopt a committed and proactive approach that allows your company to build a solid strategy for managing human capital risks.
Feel free to share your thoughts and comments below: any lessons learned (the soft or hard way)?
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