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Reassessing HR Risk Management

Business leaders are starting to make strategic HR risk management a core part of their talent management agendas, from daily hiring activities to managing critical business events like M&As.

Thursday, November 29, 2012
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Historically, "HR risk management" has largely been a defensive and tactical domain, mostly centered on compliance-related activities, programs and accountabilities. Without question, legal and operational cost avoidance in areas such as EEOC/OFCCP, sexual harassment, equal pay, OSHA and SOX are all important to an organization's well-being. Non-compliance in some of these areas can result in penalties and fines, as well as business-sustaining government contracts http://www.hreonline.com/images/104774047ReassessingHRRiskManagementI.jpggoing away.  

Since it may not be intuitively obvious how SOX bears major relevance for HR professionals, here's a quick primer: SOX Section 404 relates to central repositories of documented company processes and HR is involved in many of those processes, from payroll to pensions. Additionally, Section 409 requires real-time public disclosure of financial or operational changes that might have a material impact on a company's bottom line, including the departure of top executives, government fines or penalties, employment lawsuits, revision of benefits programs, new labor contracts and so on.

Beyond the potentially hefty fines and penalties assessed in the above arenas, there's also the real possibility of downstream impacts to the organization that can easily be more harmful than the fines themselves; e.g., reputation damage, difficulty in recruiting and/or retaining top talent and employee-engagement downturns (impacting productivity including revenue-generation).

Notwithstanding all the reasons to take "HR-related compliance" very seriously, it is still hard to argue that major competitive advantage will come from performing HR compliance better than industry counterparts. Conversely, pursuing opportunities at the more strategic end of the HR risk management spectrum can often lead to major competitive advantage and significant value creation.

Evidence of strategic HR risk management becoming more of a corporate focus likely started in the '90s when merger and acquisition activity was reaching unprecedented heights. It was during this time that corporate departments such as Enterprise Risk Management and Financial Risk Management were being complemented in some forward-thinking organizations by a new corporate function referred to as "HR-M&A."

When Cisco acquired more than 40 companies in the '90s to fuel its innovative R&D initiatives, it also innovated by creating a robust function to manage the complex mix of human capital risks and opportunities inherent in mergers and acquisitions -- from deal selection to human capital due diligence to business-integration planning to actual business integration -- and called this function "HR-M&A."  Cisco found that focusing on people risks in the context of major business transactions and decisions simply made good business sense.

In the late '90s, the corporate HR function for industry consolidator Wayne Huizenga at Republic Industries also had an HR-M&A group that was kept fairly busy. Republic's portfolio of small- to mid-sized waste-management companies and automobile dealerships around the U.S. grew at a rate of 15 or more acquisitions per month in those days. For the unfamiliar, Wayne Huizenga has the distinction of founding and building three Fortune 500 companies.

Fast forward to today, and we now see hundreds of HR professionals on LinkedIn with "M&A" in their job titles. Included in their profiles are responsibilities ranging from assessing cultural compatibility to HR-related integration planning.

Indeed, two recent Towers Watson surveys -- one titled Human Capital Risk in M&A (and focused on Canadian organizations); the other titled Global M&A Pulse Survey (and global in scope) -- highlighted the underlying need for HR-M&A competencies and the importance of involving HR leaders early in the process. Specifically, the studies found that HR was involved in due-diligence activities in "very successful deals" around twice the rate at which they were involved in due diligence in "less successful deals."  Relative to integration planning, HR was involved 70 percent of the time in very successful deals, but only 44 percent of the time in less successful deals.

Now that more and more executives are recognizing the importance of managing human capital risks and opportunities during periods of significant change or attending major workforce events like an M&A, we believe it's inevitable that we will start to see the broader application of strategic HR risk management on a year-round basis and as part of a core HR/talent-management agenda.

Below, we have produced a blueprint for identifying and mitigating significant people risks in a variety of key human capital areas, ranging from standard background checks to leadership succession. In reviewing this model, it's important for HR leaders to note the following:

*           The levels (1-10) included in the model depict activities or processes of increasingly higher levels of strategic value being brought to bear to capture competitive advantage through better HR risk management. While achieving excellence at Level 7 is probably going to produce more significant business benefits than achieving excellence at Level 3, this won't always hold true. Business conditions within and external to the organization, and the size, profile, industry, business model and initiatives or objectives at-hand, could certainly make a lower level in the hierarchy more relevant and more vital to that company's success.

*           In general, the "negative multiplier factor" is typically greater or more material at the higher levels in the framework. In other words, there will likely be more -- and perhaps cascading -- issues and problems resulting from having more people (larger segments of the organization) adversely impacted by not proactively and systematically managing associated risks.

*           Finally, it should be noted that as one traverses from the lower to the higher levels of the model, the elements of the solution typically change from being more technology-centric as a means of identifying potential or actual risk factors (ideally requiring verification or corroboration since data accuracy issues exist everywhere) to more people-centric as a means of assessing, mitigating and managing risk.

Strategic HR Risk Management Model


Level


Human Capital
Risk Area

Relative Strategic Value


Key Risks to be Accounted
for and Mitigated


Related Data Points

1

Standard, Routine Background Checking

Somewhat Low

Criminal record, other court case involvements, credit issues, driving violations, etc.

One major industry player was recently fined $2.6M for failing to verify background check information; and the FTC also came down on another vendor recently for providing information without taking steps to ensure the information was accurate. Routine checks also don't account for other fundamental due diligence aspects (see Levels 2 and 5).

2

Defensible, Value-Add and/or Custom Background Checking

Somewhat Low

Generally the same information in the scope of Level 1, but is verified; and more custom programs are available when needed.

Services are not unduly reliant on technology (exclusively) to deliver information to customers; and unlike in Level 1, the model is not all about high-volume transaction processing at the lowest cost.

3

HR-Related Compliance (Cost Avoidance)

Somewhat Low

EEOC/OFCCP, Sexual Harassment, Equal Pay, OSHA, SOX, etc.

Non-compliance can result in multi-million dollar fines, or in some cases, government contracts going away that could put businesses "out of business."

4

Operational Execution Risk Management

Medium

Sourcing talent ahead of demand, addressing competency gaps, optimizing staff resource deployment, etc.

The intersection of business continuity, operating efficiencies related to staff costs and usage, and ensuring the workforce has what it takes to succeed.

5

Strategic, Predictive Human Capital Due Diligence (Ongoing)

 

Medium

Are key successes / achievements or competencies being exaggerated while failures are being hidden? Is there a "culture fit"? Is the commitment level there?

An example is the executive who claims he or she grew a business from $5M to $50M, but others are making the same exact claim– or that he or she wasn't even there during that period of growth. And after a business restructuring, are key employees committed to the new org structure?

6

Strategic, Predictive Human Capital Due Diligence (Critical Business Scenarios)

Medium

Same as above in the context of M&As, business restructurings, rightsizings, other transformational initiatives, etc.

The cultural fit and/or commitment level of key executives and other high-value resources can undermine critical business undertakings; and validating their competencies is also essential.

7

HR-M&A Macro issue:
HR Data, Process and Technology Infrastructure

High

Redundant, incompatible and/or non-integrated infrastructure assets and processes must be sorted out.

The millions spent on the key elements of one company's HR delivery infrastructure should perhaps not be the primary concern, but rather what delivery infrastructure best enables the new (combined) organization's business strategy.

8

HR-M&A Macro issue:
Comp and Benefits Integration, staff consolidation and related compliance risks

High

Comp and benefits plans of the acquired company must be compliant (or they will invalidate the acquiring company's plans), and the total cost of offering and integrating those plans must be accounted for.

Two examples that are not foreign to industry consolidators:  Are pension plans in the acquired company under-funded or collateralized on illiquid assets? And what is the total impact of change of control provisions in executive employment contracts?  Additionally, staff consolidations must be done in a totally defensible manner or risk lawsuits.

9

HR-M&A Macro issue:
Over-estimation of cultural compatibility or other business synergies

Very High

Realistically evaluating cultural compatibility and all business synergies that prompted the deal to be considered in the first place, and realistically evaluating integration costs as well.

As alluded to in Level 6, cultural compatibility of the two organizations in an M&A has been known to crater many deals valued at billions of dollars. Over-estimation of business synergies has also been very prevalent among failed deals.

10

Leadership Risk Management

Very High

Examining the likelihood of planned and unplanned vacancies in all mission-critical roles, and taking ongoing proactive actions (and implementing processes and tools) to mitigate.

Ideally, leadership-level succession planning should include a view of all viable talent options (within and outside the organization) side-by-side, with readiness timing, and benchmarked using the same success criteria. Leadership continuity impacts business continuity and overall performance.

 

Final Comments

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It is clear that people pose both the greatest risks and the greatest rewards for organizations, especially during periods of change and transition, or in uncertain times. It is essential to incorporate systematic and proactive human capital risk management into all stages of the talent management lifecycle, particularly when executing M&As, corporate restructurings, rightsizings, upgrading leadership or top-grading the organization overall, or transformational initiatives. It is also important to recognize that some risk areas are more complex than others, requiring specialized expertise, proven toolsets and well-defined processes. Using a framework such as the one introduced here can serve as a useful way to inventory the extent to which these capabilities exist within your organization.

Chris Dyer is a recognized innovator and thought leader in the human capital intelligence and risk management field.  He is founder and CEO of PeopleG2 (formerly Liberty Alliance), a firm based in Anaheim Hills, Calif., delivering a broad range of human capital due diligence solutions to HR departments, leadership teams and others involved in corporate restructuring and M&As. Chris holds a BA in Criminal Justice from California State University-Fullerton.

Steve Goldberg is a principal advisor to PeopleG2 and considered a top-tier HR/HR technology thought leader. Earlier in his 30-year career, Steve served as vice president of HR systems for investment banks in the U.S. and Europe and as vice president of HR-M&A at Republic Industries. He also served as global head of HCM product strategy at PeopleSoft. In recent years, he’s been a trusted advisor to both HR solutions companies and end-customers.  Steve holds an MBA in HR from SUNY Buffalo.

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