Payroll is a top-ranking line item on income statements, and the cost of turnover is a constant corporate concern. Human resources can have long-term, costly consequences, so it is important for businesses to treat human capital risk management just as seriously as they would any other area that creates risk.
Fortunately, there are three way that risks inherent to the human capital life cycle can be managed. The first is the alignment of the workforce with overall business objectives. The second is planning: ensuring that organizations are prepared for future changes. The third is in the execution of risk-sensitive HR processes, especially those governing layoffs.
1. Identify At-Risk Issues in the Workforce
Far too many organizations are blind when it comes to understanding the dynamics of their structure. Who reports to whom? What’s the turnover rate of Group A vs. Group B? Are diversity goals being met? Are key skill sets being lost to retirement or reassignment?
I once worked for a global telecom company that struggled to access personnel data after transitioning to a new human resources system. There were all kinds of discrepancies. Some employees were double counted because they reported to two different managers and some people who were no longer with the company were still listed in the system.
In one noteworthy example, the head of international sales insisted that he did not have anyone working for him in Ireland. It turned out there were a few dozen employees under him based in Dublin. (Who were they reporting to, I wondered.)
In another example, a large pharmaceutical company was so decentralized that the team in charge of producing the company’s annual report had to call the heads of each subsidiary to ask “how many people do you have?” before reporting a global workforce total.
What does this have to do with risk? Human resources lacking an accurate picture of the workforce is like the finance department lacking visibility into the availability of operating cash. An organization’s employees are a portfolio of investments. The elements within this portfolio just have arms, legs and, most importantly, valuable heads atop their shoulders. If you cannot measure and analyze this portfolio, you cannot manage it. And if you cannot manage it, you are certainly not going to get optimal results from your workforce.
As common as it is, even the term “head count” is not commonly defined. More often than not, organizations lack a consistent definition of head count, something exacerbated by the “creative staffing” morass of full-time, part-time and flex-time employees, telecommuting, contractors and shared resources. The risks include the unnecessary costs of unseen redundancies, an inability to identify and remedy issues (such as understaffing in a key market), and inadvertently losing top performers because they were not recognized, rewarded or promoted.
To resolve such issues, clarity and accuracy are crucial. Miscalculate workforce costs and what was thought to be a profitable organization may actually be hemorrhaging money once the correct numbers come in.
Managers need a real-time, comprehensive view of the workforce to make staffing decisions, identify potential trouble spots and use talent in the most effective — and profitable — way possible.
Organizational charts are a great way for businesses to visualize their workforces in an intuitive, useful way. But for these tools to be effective, companies must keep a few factors in mind.
First, the solution must combine workforce data from multiple sources. And it must be easy to access. In today’s complex, global organizations, workforce information may be scattered across multiple HR systems, buried in various accounting schemes or perhaps even misfiled somewhere, so having a way to combine and normalize this data for a “single version of the truth” is critical.
Second, an accurate organizational chart must be available to decision makers in real time at the click of a mouse. If managers are forced to wait days or weeks to get an updated view, business agility is lost.
And finally, the view needs to be configurable so users can look at staff costs and reporting structures in different ways. They must be able to easily analyze information related to salaries, head count, span of control, budgets, performance and more.
“Agility is a new strategic imperative for organizations,” said Martin Sacks, CEO of HumanConcepts, developers of organizational planning solutions. “Having accurate insight into the current workforce is key to knowing where you are today and what to change to achieve your goals tomorrow.”
2. Create Plans for Multiple Workforce Scenarios
The president of the telecom company I worked with literally woke up one night worrying about the fact that nearly a quarter of his technicians were fast approaching retirement. A mass exodus of so many critical employees could have serious consequences for the company’s business. In fact, he feared it could put them out of business.
In today’s volatile business climate, anything can happen. How will your workforce needs change if a new competitor enters the market, the economy takes a downturn, or, as was the case for this telecom company, your key skills walk out the door? Poor or neglected organizational planning can lead to costly mistakes.
Businesses simply cannot afford to wait for an event to happen and then react.
Being prepared for risks means that companies must continually track workforce trends and have plans for multiple business scenarios (e.g., M&As, big economic events, business expansion) in place well before they are needed. This requires both strategic, long-term thinking and an analysis of numerous key performance indicators related to the workforce.
At the telecommunications company, we crunched a ton of data and found an interesting trend; the technicians who had previously become eligible for retirement actually stuck around for an average of nearly five more years. After that point, some significant attrition began before tapering off after about seven years.
There were several reasons for this. Our technicians generally started with the company right out of high school and were relatively young as they neared retirement eligibility. Many of them still had kids in school, second mortgages on their houses, and were too young to tap into their 401Ks or collect Social Security.
This information helped us predict the behavior of the near-retirement personnel the president feared would soon be leaving in droves. The key here was that one factor — retirement eligibility — did not tell the whole story. It was only when we analyzed a number of characteristics of this particular employee group that we were able to see that the anticipated talent drain was less threatening. It was still something we needed to address but perhaps in a different way. Had we not dug deeper into the data, the company might have overspent on hiring, training or an unnecessary retention program.
Another time when doing your homework is important is during reorganizations. If you have bad or incomplete workforce data as you attempt to restructure, you risk making ill-informed decisions, missing financial goals or inadvertently losing key people. It is imperative to understand your baseline before developing a plan or taking action.
Based upon reliable metrics, workforce planning and modeling will help create scenarios that allow you to understand the impact of each decision before you act. In growth cycles, or when redirecting resources to support new initiatives, you may find underused people who can be redeployed. The better the data going into a planning exercise, the better the outcome.
3. Manage Workforce Change with Consistent, Repeatable Processes
If you have followed the first two best practices outlined here, your organization now has real-time visibility into its organizational structure. You have plans in place to deal with short- and long-term contingencies.
The third step is to ensure that the plans you implement are carried out efficiently and without avoidable risk to the organization. Many HR processes, particularly those associated with reductions in force, pose major legal, financial, talent, reputational and other risks.
Problems arise when processes are not followed or documented. The complexity of managing workforce change increases exponentially as the head count does. Processes need to comply with regulations, adhere to internal protocols, calculate severance packages, ensure reductions meet business goals and monitor progress. And this must all be accomplished without adversely affecting critical talent or employee morale.
Corporate reorganizations and layoffs are resource-intensive and involve many constituents, including human resources, legal, finance, managers and the employees themselves. Processes not only need to be transparent and easy to document for compliance reasons, but they also need to be efficient so that employees are not left wondering what is going to happen next. People can live with most decisions; it is indecision that causes the most anxiety.
In addition, separation processes need to be coordinated with payroll or facilities systems to ensure that all details are completed. Believe it or not, I have seen many examples of organizations continuing to pay employees after they have left the company. Others have rehired employees only to lay them off again and pay additional severance. And some have failed to comply with even the most basic regulations regarding firings.
The bottom line is that workforce changes are simply too complex to handle manually with spreadsheets and emails back and forth. Having a software solution in place that can automate the processes is essential.
One great example of how technology can help came when a company made a buyout offer to more than 10,000 workers located throughout North America. The employees had a window of time in which to make their decisions, so we had to track every detail daily to attempt to forecast the financials. Further complicating the matter was the fact that individual states have different and very specific laws related to how accumulated paid time off and other issues should be handled. Finally, after more than 8,000 employees took the offer, we had to remove them from the payroll within 24 hours.
The only way to manage both the volume and complexity of this operation was to use software. We were able to use a single system to do everything: document the decision definitions; deploy business rules ensuring that everyone followed consistent processes for compliance; set up regular communication and reporting cycles; create separation packages; and advise down-stream systems. Without technology like this in place, the process would certainly have become a completely unworkable nightmare. All it takes is a single error — an employee receiving inaccurate information or the appearance of discrimination — to spark a lawsuit.
Furthermore, automation speeds the process without sacrificing an attention to detail. Deploying a force reduction weeks or months faster can save hundreds of thousands in payroll costs, especially when you are dealing with a very large transition.
In this particular case, the incident was national news. All eyes were on us, so it was absolutely vital to get it right and treat the employees with the respect and compassion they deserved. Fortunately, everything went smoothly. The plan was followed consistently, there was clear communication throughout and we avoided lawsuits. But it took a tremendous amount of planning and risk management. Any company that believes it can succeed in a similar endeavor without those two elements is fooling itself.