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Devising risk management in human resources

Last updated: 31 May, 2011
Bhima Rao

Planned approach It aims to identify, assess and resolve risk items before they turn threats to organisations

Risk is defined as the “perceived extent of possible loss”. It may be a small or a big risk? It varies from situation to situation. Risk is a part of personal and business world.
Understanding risk is the first step in risk management. The risk assessment tool is known widely and used effectively in project management and execution, finance and accounts, manufacturing, and marketing. Risk involved in Human Resource Management function and its assessment is yet to take a firm root. Formal risk analysis and risk management in HR can help to evolve strategies to minimise the disruptions of plans, control cost and control loss.

HR audit is the first step to understand the risk involved in daily HR function and in long term HR plans. HR audit is not only conducting Labour compliance audit, as it is done in most of the Garment Industries and in MNC companies. Assessment of risk due to non-compliance of labour laws is only one part of the HR function. The need of the day is to assess the risk in the entire gamut of HR function and in relation to the objectives of the organisation. How to assess the risk of HR function, analyse and estimate the risk which would impact business results and managing the identified risks successfully is a new challenge to HR professionals.

Risk management

“Risk is the threat that an event or action will adversely affect an organisation’s business objectives and business strategies.” Risk Management is the process of protecting an organisation from financial loss and controlling risk at the lowest possible cost. The goal of Risk Management is to identify, assess and resolve risk items before they become threats to assignments or to the entire organisation.


HR deals with the most valuable resource of the organisation and it is crucial that it becomes a part of the total Risk Management. Once HR becomes the part of risk management programme, it will allow using human capital to pursue the company’s strategic goals more systematically and help HR become a strategic business partner.

In the last two years, the HR function has become more reactive by helping business leaders cope with the abrupt downturn. Now the business is picking up and hiring activity is in full swing. In today’s climate, HR faces extraordinary demands to be effective, efficient and most importantly, responsive to address changing organisational and business realities. HR professionals need to become champion of high-performance which adds measurable value to both the top and bottom line of business, employee satisfaction and retention of talent. It is not easy to jump to the entire new area of assessing HR risk areas. One needs to work systematically, change the mindset from traditional HR role and embrace new ideas.

There are two types of roles in Risk Management. People are a source of risk. Shortage of right kind of employees at a right time, attrition of experienced employees, employee leaving after completion of a one-year training programme, employees doing sloppy work due to lack of competencies, handling customers very badly, an employee unwilling to take on additional responsibility or high absentee employees.

People are important in handling risk. People using their skill to solve unexpected problems, employees going the extra mile for the organisation, an employee becoming multi-skilled, redesigning his own job to avoid unnecessary delays in getting work done, or evolving new process to resolve the problem or an employee persuading a talented friend to apply for a position and join the organisation.

Assessing risks

Undoubtedly, HR function carries risks. Identifying threats in HR function and how it is going to impact the business results, reputation of the company and future business is essential. Are the threats looked in a routine manner or a focus is given to understand, assess, categorise the threats based on the impact, quantifying the threats affecting the organisation is the most critical and difficult task. HR professionals very rarely approach this important area systematically. Few of the threats facing HR function and how it impacts the business results are :

- Workforce planning: Job analysis and job descriptions

This is the basic function of any HR department. Neglecting or undoing in this area results in not having required manpower at the right time. Job analysis and job descriptions are two important attempts to allocate the jobs and selecting a right person for a position.
They are important for conducting performance evaluation of employee. If it is not done properly it brings disorder and accountability of a person. New Organisations does give importance for Workforce planning: Job analysis and written down job descriptions are communicated to employees and risk is avoided in the initial stage itself.

- Recruitment and selection

 Executing action plans to ensure the organisation is not left with a shortage of qualified workers is one of the biggest challenges today. In BPO, Software companies the business loss due to non availability of employees can be easily calculated based on loss of revenue per employee. Similarly, in garment industry absence of employees brings down the total production of one line or batch. HR is creating big risks to organisation by not ensuring the right number of employees at a right time. If the risk analysis is carried out on a regular basis, the quantum of loss or risk involved can be understood and possible corrective actions can be initiated.  

- Performance appraisal

It is essential to have a well designed performance appraisal system. Whether goal setting is done systematically, appraisals are done timely, documentation is done properly, reward is linked to actual performance? Ineffective performance management system can result in a lack of good formal and informal feedback from managers to employees, minimal employee development and low employee engagement. Evolve, implement and institutionalise the performance evaluation system is the major responsibility of HR. If not implemented properly, the risks are manifold and  directly impact the morale, motivation and productivity of the organisation.

The above three areas are critical HR functions which are also major risk areas for any organisation. Other areas which may fall in either major or minor risk zone depending upon the organisations and situation are: Induction/Orientation, HR Policy and Procedures, Compensation and benefit,  Learning and Development, Employee and labour relations, Labour law compliance, Safety and health program, HR Service Delivery, Retention and Management succession.

Quantify the Risk

HR department shall run through a list of risks and to see if any threats are persisting. Thereafter, review the systems, structures and analyse risks and see whether any vulnerability persists. Take the opinion of others too, who might have different perspectives. The next step is to work out the likelihood of the threat being realised and to assess its impact. Lastly, make the best estimate of the probability of the event occurring, and multiply this by the amount it will cost/quantify the risk to set things right if it happens. Risk impact can be categorised at four levels:

Catastrophic: Huge financial loss, Rs 1 million or more, serious reputation loss or fine by regulator, Failure of major new product, Operational process problems affecting quality and delivery, etc.

Major: Major financial loss Rs 5,00,000 or more, Reputational loss, production loss due to break down, strike, etc.

Moderate: Monetary impact resulting from legal action or loss of productivity. Moderate adverse impact on the health, welfare and safety of employees or causing unexpected expenditures due to accidents, etc.

Minor: Relatively low or no monetary impact or loss of productivity. Mainly the practice does not constitute a best management practice and may bring dissatisfaction.

Once risk is identified and understood, adopt cost effective methods to mitigate the risks and on a time bound basis. Strategies to manage the risks need to be evolved internally, through use of existing unexploited resources effectively, improving the methods and systems, change the accountability of persons by effective internal control. Lastly, bring in additional resources to overcome the risk.

Once risk analysis and management actions are initiated, it is essential to conduct formal reviews and analyse the results. HR has often been considered a “soft” area, and many have not understood the inherent risks involved with this function. The need has come to add total HR function to the organisation’s regular audit cycle which is overlooked till now by HR professionals and the top management.

The writer is a Management Consultant & HR Trainer. Email: bhima26@yahoo.co.in

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