Managing Overlooked Talent Risks

Gary Pearce


February 1, 2017

talent risk management

Now that we have migrated to an interconnected and knowledge-based global economy, talent has never been a greater determinant of an organization’s success. But just as talent is a competitive differentiator, it can also be a critical source of under-recognized, insufficiently controlled and often uninsurable risk.

Talent risk management often seems outside the traditional risk manager’s job description, but for those who seek to truly manage enterprise risk and make a difference within their organization, there are few areas of comparable need and opportunity.

The following are some chronically under-managed talent risks and ways risk professionals can work to mitigate them:

The Inherent Talent Supply Chain

“Talent” is much more than the accumulation of people directly employed by an organization. All but the smallest organizations use complex networks of independent contractors, staffing companies and outsourced vendors to get their work done. The good news is that a portion of the risk arising from deploying talent thereby becomes somebody else’s responsibility. But this arrangement sacrifices some transparency and control, and when something goes wrong, no one will care about who was the technical employer of record.

More than ever before, human capital risks must be managed by exerting judicious control over all the ways work is performed on behalf of an organization, and over all the parties that contribute to that complex network. Identifying the ways talent exists within an organization is a good starting point for further investigation.

Societal Expectations and Intolerance

The failure of a small employer on a distant continent to pay all wages due to its employees is unlikely to be noticed beyond those immediately affected. Take that same situation and mention that this small employer is an outsourced provider to a large multinational organization, however, and drastic reputation damage and regulatory consequences can arise. As global talent networks become more dispersed and complex, organizations face more adverse consequences from events occurring within those networks.

The list of issues to manage is distressingly long: pay for all work, abusive labor conditions, cross-border hiring, child labor, safe working conditions, environmental responsibility, fair dealing, non-discrimination, anti-corruption, cybersecurity and much more. Organizations can start to address these issues by establishing a code of conduct, obtaining self-affirmations and attestations from vendors and suppliers, performing due diligence on new engagements, and performing selective auditing that reaches down to the individual worker level.

Regulation: A Growth Industry

Regulation occurs in dozens of contexts such as data privacy, cybersecurity, wage-hour compliance and workplace safety. If there is one striking consistency, it is that regulatory obligations are increasing. The U.S. government, for example, is taking strong and expansive positions on issues such as joint employment, safety of temporary workers and recognition of broadened collective bargaining units. Meanwhile a rapidly increasing number of states and municipalities have their own laws concerning minimum wages, mandatory benefits and “wage theft.” The next frontiers are likely to include pay equity and tight control over how employers may set and alter work schedules. Regulators are increasingly protective of workers with respect to background screening, overtime pay exemption and non-compete clauses. Some legal obligations are unacceptably ambiguous or can conflict with other legal requirements.

Even the largest and most resourceful organizations suffer from deficiencies in their ability to assess their obligations and deploy the systems and practices necessary to ensure legal compliance. Although larger organizations may have a number of people whose job it is to deal with such issues, those parties might not fully consider the talent supply chain consequences. A significant adverse event suffered by a vendor or independent contractor in any of these realms could result in severe upstream consequences.

Regulations are now so complex and pervasive that they are cumulatively beyond the ability of most entrepreneurs to understand, let alone manage. It is therefore increasingly necessary for managers of talent supply chains to assign dedicated resources to help their suppliers and contractors comply with many legal obligations. The risk management function can assist by identifying the most significant areas of under-controlled compliance risk and devising practical solutions that can be deployed throughout the organization’s talent supply chain.

Data Privacy

Privacy may be one of the fastest-growing legal obligations, especially in light of the 2016 enactment of Privacy Shield as a replacement for the repudiated Safe Harbor agreement between the United States and the European Union, the 2016 enactment of the European General Data Protection Regulation, and many other country-specific developments. The growing legal obligation is a direct consequence of societal dissatisfaction over the use of sensitive personal information. Organizations that abuse personal information are subject not just to lawsuits and punitive regulatory sanctions, but also to angry backlash on social media and long-term damage to their reputation and the relationship with their own workforce.

If an organization collects personally identifiable information (PII) in the course of compiling data from third parties such as vendors, independent contractors and staffing companies, then specific measures must be in place to ensure that such transfers are legally permissible. Necessary actions include verifying that the source employer is obtaining informed consent from its own data subjects, and having appropriate contractual clauses in place with each third party that controls or processes PII.

Analytical Advances

Today’s analytical tools and applications would have been unthinkable even a decade ago. Using creative combinations of internal and external data, whether proprietary or in the public domain, talent consultants can now perform granular analyses of market pay rates and availability levels by job title, demographic characteristics, and multiple other factors within a selected geographic region. Such analyses can provide insight into business expansion opportunities, shape talent recruitment strategies, or assess whether a given employer is paying above or below market rates for a specific talent niche.

Businesses that do not partake in such exercises may be at a competitive disadvantage, while those that do must ensure that their source data is accurate, timely and relevant, that PII is scrubbed or protected from unauthorized disclosures, and that such analytical exercises are linked to relevant business metrics and actionable consequences.

Organizational Misalignment

A prominent reason for failure to manage talent risk is the presence of multiple stakeholders with divergent agendas. Three factions, each with their own particular agenda, typically exist: procurement, operations and human resources. Once multiple subsidiaries or geographies are added to the equation, holistic management becomes even more difficult. Even when there is a unified organizational voice, it can be difficult to secure resources for initiatives that may not possess a direct link to revenue generation or cost reduction.

This dynamic nonetheless constitutes an opportunity for risk management professionals, particularly those with credibility and influence within their organization. Because risk professionals are probably not tied to one of the three traditional factions, they can be the detached voice that transcends organizational dynamics and fosters a collective dialogue about aligning interests to address critical talent risk management priorities.

The Talent War Is Over, and Talent Won

We live in an increasingly bifurcated world of talent. In one area are workers with relatively undifferentiated or less-relevant skills. Such workers are in abundant supply and possess comparatively little bargaining power. The second area consists of workers who possess in-demand skills that are not in sufficient supply in the larger labor market. The latter group has options: If they do not like working for a particular organization, they can (and often will) find a better job elsewhere. This phenomenon is true of freelancers and conventional employees alike.

There is no substitute for understanding and satisfying the expectations of the in-demand cohort. Monetary compensation is only part of the package—many also want to feel part of a worthy social endeavor, work where and how they want, and develop their skills. They identify with their qualifications and networks more than their employer. And as long as their talents remain in scarce supply, they are in charge. Meet their expectations and help them thrive, or risk losing them to the competition.

Not-So-Independent Contractors

Many of the in-demand workers are electing to be freelancers rather than traditional employees so as to work how and where they want. Although the term “gig economy” is relatively new, the presence of independent contractors in the talent supply chain is not. What is new, and potentially under-recognized, is the pervasiveness of the independent contractor (IC) workforce and the degree of regulatory scrutiny that this cohort is attracting.

The critical risk management task is to ensure that the IC workforce is truly independent. On the one hand, government agencies are sharing data like never before to detect questionable arrangements; on the other, legal and societal concepts around what constitutes a separate business entity are changing in ways that are likely to impose greater risk upon organizations that depend on broad networks of ICs to perform their work. Of particular note is the U.S. government’s advocacy of an economic dependence standard for evaluating IC arrangements.

Demographics and Talent Shortages

Talent shortages affect practically every organization to some extent. In some cases, the impending retirement cliff is exacerbating the situation. We are at a point where lack of key talent is causing entire business units to cease operation, never be formed, or re-locate to more-favorable geographies. Throwing money at the problem will not necessarily help. Other approaches are more likely to be effective, such as gaining a deeper understanding of how candidates perceive the organization in order to address identified weaknesses, exploring new and different ways to identify, engage and promote talent, and redoubling efforts to retain current talent.

Not all organizations fully understand their exposure to unfavorable demographic trends in critical labor categories. Those that do not would be well-advised to consider the consequences.

Overspending on Talent

Few organizations have the pricing power to pass along cost increases, especially if demand for their products or services has plateaued. With talent being one of the largest organizational costs, and with the chronic lack of clarity and insight into ever-changing labor markets, organizations are very likely paying too much for certain categories of labor in certain markets.

To address this risk, an insightful and ongoing analysis of the organization’s entire talent supply chain is needed. That analysis should incorporate all the ways that talent is engaged, whether as traditional full-time employees or other forms such as contractors, part-timers or temps. It also needs to have a strong connection to real-time labor market data.
Gary Pearce, CPCU, ARM, is chief risk architect at Aclaimant Inc.