HR: Why Broaden Your Risk Perspective?

Strategy is founded on risk and risk is inherently subjective to the views of the people involved, including employees and management. As a result, HR has a great opportunity to improve the way in which risk impacts strategic success for the business, going beyond the more tactical or operational perspective HR has previously taken.

All economic activity is by definition “high risk”. And defending yesterday–that is, not innovating– is far more risky than making tomorrow.
Peter Drucker

HR and Risk Up to Now

Although it might be over-generalizing, for quite some time, HR has mostly focused on risk in terms of how to identify and address workplace risk items such as harassment claims, EEOC violations, health and safety liability, etc. These are all vital areas to be risk-managed, but to be more strategic, HR needs to broaden that perspective to include how it can positively impact business risk.

Risk is frequently misunderstood and mismanaged[i]. This misunderstanding and mismanagement can have unexpected, even dire consequences due to people’s varying comfort with risk and the complex ways that people in general react to it. Here’s a sobering real-life example of just how that can happen[ii]:

Blowing It on Business Risk and People – an Example

In oil & gas exploration, the odds are high against finding anything, let alone a find suitable for extraction. People working in this field apply their diverse expertise towards figuring which locations are most likely to be profitable. In addition, there is the added pressure to locate larger, more profitable reserves, which are even harder to find.

The decision on whether to bid on a lease and then drill is based on “pessimistic/low, likely/medium, and optimistic/high” estimates[iii] for how much can oil or gas can be extracted. If the “likely” estimate is large enough, then a bid is made and if that succeeds and drilling is approved and the actual output is on track to meet that large estimate, the folks behind that estimate are very happy as they can expect some kind of bonus.

However, it’s easy for a manager to only see the “optimistic” estimate and let that “frame” their expectations. Then, when in fact the more realistic “likely” value does result instead, the manager perceives a “loss” and they can end up taking it out on the troops. This did happen to a team and they were told they wouldn’t get a bonus because “the company wants those higher outputs” i.e. the optimistic level.

And here’s what happened next. The team then saw that only results that met the “optimistic” estimate get praise, so they naturally became more conservative in their estimates. They lowered their “optimistic” estimate to be closer to what they normally would have given as the “likely” estimate. In turn, the “likely” estimate was lowered as well. Because of these more conservative estimates, when budgets were decided, the allocations didn’t go to that team as much because their estimates are now lower than those of other teams. With a lower budget, that unit couldn’t bid as much on the leases (especially the riskier but higher potential ones – remember that the competition is bidding higher because they have higher, non-distorted estimates) so they missed out on more of the big finds.

Since there were fewer large finds returns were lower for the whole company. Investors were expecting higher returns when they chose the company, since they already understood it was higher risk. As a result, lower earnings and less capital were available for the company, it couldn’t compete, and eventually it was acquired.

What HR Can Do

All of this happened because management didn’t understand the relationship between the company business risk and the incentives and motivation of the people working there. If HR had an understanding of the strategic impact (e.g. company survival) of this relationship and had a role in making sure that managers understood it and practiced it as well, this poor management decision could very well have been avoided.

This was just one example from oil & gas exploration, but the same scenario plays out in a multitude of “high-risk” businesses ranging from software development and airplane manufacturing to drug development. However, the difficulty that management in particular has with dealing with the interaction of risk and incentives can even disrupt the competitiveness of “low-risk” enterprises. HR’s ability to apply its expertise with people coupled with a broader, strategic perspective of risk can bring huge advantage to a company.

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[i] The definition of risk is not well agreed upon, but we will use the following: the existence of more than one possible outcome where some of them are undesirable (e.g. loss or catastrophe). Risk only has real meaning when a decision must be made and human decision makers are decidedly not “risk neutral.” That is, they will not simply choose the highest “expected values” with cold logic, but will favor certain choices over others depending on factors such as current wealth, level of possible loss, gain, framing, ownership, etc.

 

[ii] Credit goes to “Why Can’t You Just Give Me the Number?” by Patrick Leach, an excellent, succinct book that shows executives how to manage risk and make better decisions using probabilistic thinking. Also recommended is “The Flaw of Averages” by Sam Savage and as previously mentioned, “The Failure of Risk Management” by Douglas Hubbard.

[iii] The medium or likely value has about a 50% chance of finding at least that amount. The high or optimistic value has only about a 10% chance of finding at least that amount. In other words, they might happen occasionally, but not on average.

Bill Kutik’s Musings on HR Technology® 2009

After reflecting on his personal experience at September’s conference and expo and the observations made by many bloggers that attended (including mine), Bill has put together a very good column summarizing his takeaway of the important issues happening in business, HR, and social media. Go check it out.

Bill links together the oft-mentioned “generational issue” with the “digital immigrants and natives” observation and concludes that it might really be different this time. He goes on to make the point that the fear that drives organizations and HR departments to ban social media will put their companies at a competitive disadvantage. I agree and have posted previously how fear can lead to actions that ultimately destroy a company because it can’t learn anymore.

Bill ends his column by asking that those who attended email him with what they’ve learned. Bill is quite up front about his expectations and opinions, but is also just as open to input, so here’s a great chance to have your voice heard in shaping the next conference. This conference has shown to be an important gathering place for not only learning what is going on in HR technology, but also of those in the industry with great ideas and thinking about where and how business and HR can improve.

Yankees Win World Series – What’s the Verdict on Moneyball?

All you need is a stone and a sling. Neither sword, nor armor.

To borrow some phraseology from Kris Dunn, “Wrong question, Sparky.” The takeaway from Moneyball is not about it being right or wrong, but how it asks you to reconsider the way you look at how talent creates value for your organization. The aftermath of its publication in 2003 teaches us that the larger game never ends; that there is no single optimal answer for all time. There’s no trick to winning either, but rather a way to see what others are currently missing or choosing to ignore, use that to your advantage, and also obtain insight into building a better strategy from it. A lot of people are still missing that point.

Public Service Announcement: This post is not all about baseball nor the ins and outs (no pun intended) of winning baseball divisions. Rather, it asks: Why should HR people still care about the Moneyball story, especially since 1) it has almost been played to death the last six years, and 2) it seems there’s all this proof that it didn’t work.

People still debate the “correctness” of Moneyball. They point out that the stars of the book, the Oakland A’s, didn’t win their division and the Yankees, with the largest payroll, won everything. Even many who agreed with the way in which the A’s had utilized measures that other teams ignored are now observing that it is no longer a competitive advantage since the other teams with larger payrolls were adopting those very measures. Many readers took away from the book that it was just a trick and once the trick had been exposed, the advantage was lost, so what was the point?

The point was that it wasn’t about coming up with a trick. That’s the narrow view. Moneyball told a story about how an organization that had a constrained payroll was forced to rethink the strategy for winning the most games. Rethinking your strategy is the point. That this story took particular twists and turns just made it unexpected, concrete, credible (to some), and in some parts, even emotional (i.e. “sticky”). It should come as no surprise that the specific steps, measures and outcomes didn’t maintain an advantage or last. The fact that your steps and measures don’t produce the same results they used to does not necessarily mean you throw them out, especially to revert back to previously discredited measures.

That is itself another takeaway; competition never rests and you must keep searching for the next thing that will help you win. One very good way to keep winning is to focus, as Peter Bregman writes, on playing the game you can win. Malcolm Gladwell recently wrote a piece for the New Yorker about this very kind of thinking. In “How David Beats Goliath,” Gladwell gets into David’s thinking:

In the Biblical story of David and Goliath, David initially put on a coat of mail and a brass helmet and girded himself with a sword: he prepared to wage a conventional battle of swords against Goliath. But then he stopped. “I cannot walk in these, for I am unused to it,” he said (in Robert Alter’s translation), and picked up those five smooth stones.

In other words, David figured he wasn’t going to win playing by the other guy’s rules, so instead he focused on something less conventional. Conventional wisdom at the time was that you fought brute force with brute force: sword against sword, armor against armor. Nobody thought any other route had a chance, so why bother? It’s not about playing a one-time only trick either; it’s about confronting the harsh reality of a situation and choosing the option that gives you the best chance.

There are people still applying the real lessons of Moneyball (and many other books that came before and have followed) and are finding/rediscovering insights into how to win, how to play the game they can win, or even change the game so they win. Kris Dunn and Tom Davenport show how basketball teams are benefiting from focusing on measures that better reflect the overall benefit to the team when a player is on the court vs. individual measures. This would seem to have some application in business as well. But again, this isn’t all about finding a trick that nobody else has discovered yet. Sure, it’s great when the competition is still looking in the wrong places while you trounce them, but you also want to use this information to get better understanding and insight into how your business and the marketplace, and the pieces that comprise them, actually operate and interact. That is what will really help you continue to win going forward.

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TalentedApps Turns Two!

It’s been two years today since Meg, Mark, and Amy began this blog. While the first year was about us finding our voice and building up our readership, this second year has been a bit more about us drilling deeper into the areas that we see as key in organizations achieving strategic impact from their talent.

This second year also found us building relationships with the rest of the HR, Talent, and Enterprise blogging community. That has been personally rewarding for each of us as well as a terrific way to help get our thinking to a broader audience. We are honored to be part of such an incredibly gifted group of contributors committed to the improvement of this craft.

Our mission continues to be to help create change by improving the awareness and knowledge of our community, in an entertaining and informative way, of how to better achieve your goals through talent. Our thanks go out to our readership, friends, colleagues, and family for their support. We look forward to the upcoming years working together on this mission.

Graphic by Vivian Wong

The New HR Carnival is here!

Ben Eubanks has done a terrific job of collecting and assembling a brand new set of HR blog posts covering a wide range of topics. To top it off, he also enlisted the help of Allen Robinson in the creation of an official HR Carnival logo!

Here’s a excellent opportunity for you to sample a variety of ideas, thinking, and opinions from a diverse set of excellent minds. It will save you time as well as help you discover a blog you might not have known about before.

Be sure to check out the carnival! In addition, take on Ben’s challenge and share what you’ve found with others!

HR: Why Improve Your Analytical Intelligence?

Hey! Come back!

Before you roll your eyes on this one, start having flashbacks to terrible experiences with calculating standard deviations, or trying to wrap your head around multiple regression analysis, and then run screaming from this post, this is not about you trying to become an expert at statistics! Trust me!

It’s about you understanding how analytical tools and methods can help HR have an impact on applying talent to strategic success. Besides, no less than Josh Bersin said at the recent HR Technology Conference® 2009 Talent Management Analyst Panel, “Get used to it.” And that’s a good way to look at it. Too often, HR has been shut out of strategic input because of the perception that it doesn’t speak the language of analytics sufficiently to measure and understand the relationships between various parts of the business (e.g. Human Capital) and profit (or whatever financial result you wish.) Once you have that better understanding, it will enable you to make a stronger case for why HR can provide valuable input and leadership in business strategy and execution.

By now, we’ve had the importance of measuring pretty well pounded in, particularly in the context of Finance. Increasing your financial intelligence is key to participating more in driving strategic decision-making around applying talent to improve business results. Being able to show to senior management the link between what you know about your company’s talent to financial results entails both measuring talent in terms of levels of performance, competency, skills, connectedness, etc. as well as measuring relationships between those measures and the other parts of the business that drive financial performance. What do analytical skills have to do with measuring those parts and their relationships?

Measuring is not Counting

To help answer that question, let’s take an example from “How to Measure Anything: Finding the Value of Intangibles in Business” by Douglas W. Hubbard. Picture the problem of measuring the population of fish in a lake; let’s say in order to know if a restocking effort was successful or not (a good ROI problem). A lot of people will say, “Drain the lake and count the fish.” They could then report there were exactly 22,573 fish and we’ll say that confirms the restocking investment was a success, although all the fish are now dead.

A better approach (certainly for the fish) entails using analytical methods to estimate the population of fish in the lake. If there is sufficient confidence in the estimate of the population before and after the restocking effort, you will be able to tell if the restocking effort was a success or not. Did you have to know every tiny detail of statistics to make a decision based on these estimates and the confidence level? No. How about to show the before and after picture to some “lake executive” who had to give the green light on the restocking effort? No. You just had to know enough about analytical methods to know that the application of them made sense in this case, and either determine you made the right call or get the point across to that executive.

As the authors of “The Differentiated Workforce: Transforming Talent into Strategic Impact” quoted a general manager, “I couldn’t do a regression analysis, but I knew what one was. And the results…made sense to me.” Further, they write, “Improved analytic literacy has a direct impact on the decision making at several levels in a typical HR organization…At the highest level, improved analytical literacy changes the perspective on the financial resources committed to HR…they consider a significant portion [of the HR budget] an investment.”

Principles of Uncertainty

HR labors under the false assumption that everybody else has “precise numbers” and there seems to be a perception that HR can’t come up with the “hard numbers.” The classic story is of the CEO asking the head of HR if they know the company’s headcount and the response is wishy-washy. The thinking is that people are either working for the company or they are not, so what’s the problem? What’s the count? Sure, in a company of a few hundred people, you might actually have a very precise figure. However, we know that depending on the industry, economic conditions, etc. as the number of employees gets larger, it gets a bit trickier to know the headcount with precision. There is a lot going on and even if you are using an HRMS system, the simple fact that humans are involved and entering transactions (or not), makes the number transient and constantly changing. In other words, one minute, you could see 59,268 and a minute later see 59,273.

This is not that different from the folks in Accounting keeping track of Receivables, the folks in Production keeping track of Inventory, or the folks in Development keeping track of Project Completion. In the case of Accounting and Finance, it gets even more interesting when it’s time to report; for instance, general accounting principles require the company to estimate the amount of Receivables that will be uncollectible and there isn’t any hard and fast equation for doing that. Different methods are used to estimate these values, some of them analytical.

The point, as Hubbard writes in his latest book, “The Failure of Risk Management: Why It’s Broken and How to Fix It” is that measurement is better understood as the reduction of uncertainty about the value of something. Once you see it that way and gain enough analytic literacy to feel comfortable with the results from those tools and methods, you’ll be able to move forward more readily with driving and demonstrating positive impact on strategic business results.

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The Failure of Risk Management: Why It’s Broken and How to Fix It

The new Carnival of HR is up at HR Bartender!

Make sure to take a tour of HRBartender’s Carnival of HR! Blogger Sharlyn Larby has assembled a tasty “Halloween Spirits” theme, categorizing a huge number of diverse posts from a wide sample of blogs by drink type (e.g. soda, hot beverage, mixed drinks, etc.)

This collection both saves you time by bringing together submitted posts into one place for you to quickly scan (Sharlyn introduces each with a brief description) as well as provides you with an opportunity to discover blogs you might not already know about.

In addition, Sharlyn has taken the effort to gather all the twitter accounts of the blog authors and put them into a TweepML list so that you can easily follow them all in one fell swoop. Thank you, HR Bartender!

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HR: Why Increase Your Financial Intelligence?

When in Rome…

si fueris Romae, Romano vivitomore; si fueris alibi, vivito sicut ibi*

My last post asked: how can the perception of HR’s function as being primarily about governance and compliance oversight be dealt with, in order to allow and encourage its role in maximizing the strategic impact of talent?

A key first step is to learn “the language of business” i.e. Finance. Why? Here’s a list from a book** I recommended a while back, outlining the benefits of financial literacy to HR:

• Move HR from a Tactical to a Strategic Organization – be trusted with organization and talent development investment decisions.
• Evaluate Your Company Critically – spot trends or problems and understand more of the stories behind the numbers.
• Understand the Business – knowing how your company makes money is key to your HR strategy.
• Understand the Bias in the Numbers – have the power to challenge, when called for, the assumptions made by the finance and accounting departments.
• Form Relationships with Finance – help to align more the efforts of finance and HR for their mutual benefit.
• Use Numbers and Financial Tools to Make and Analyze Decisions – improve your ability to make better investment choices regarding projects and programs.

It turns out that Trish McFarlane at HRRingleader is addressing this same step in an “HR 101″ series on the Creative Chaos Consultant blog, devoted to what an HR professional really needs to know to be successful. There’s also a great article, “Do HR Managers Have the Skills They Need?” by the same authors of the book, which covers exactly the discussion Beth Carvin and I were having here. Namely, it isn’t all on HR’s head or senior management’s head to enable HR to have a positive impact on strategic use of talent, but a shared responsibility. Here are the factors they listed at the root of the problem:

• Avoidance – HR folks not “dealing with it” and learning about the numbers (as  Josh Bersin and Naomi Bloom said at last month’s HR Technology 2009 Conference(r) Talent Management analyst panel and Naomi’s closing keynote).
• Perception – Even when HR professionals do know the numbers, the business side still retains the outdated notion that they don’t.
• Assumptions – Exhibited when companies don’t encourage their employees to be on the earnings call, for instance, because “it’s too complicated” and “they wouldn’t understand.”
• Trust – A common theme repeated in this blog. In this case, not sharing financial data with employees because you don’t trust them results in people having nothing real to learn from or apply their learning to. Maybe that was the intended effect.

Note that some of the last two issues are not limited to HR, but can be universally applied to all company managers and employees. In fact, there is another article, “The Dismal Financial IQ of US Managers” that covers this pervasive problem and its consequences in more detail. Even though the authors have a vested interest in pointing out these problems (they have a couple of books and a consultancy that address them), the impact is unmistakable.

*”If you are in Rome, live in the Roman way, if you are elsewhere, live as they do there”

- attributed to St. Ambrose (from Wiktionary)

**Financial Intelligence for HR Professionals: What You Really Need to Know About the Numbers by Karen Berman, Joe Knight, and John Case. Despite the drab title, this book is actually quite fun to read (really!) and does not take very long to read (a few hours.) It’s written in a friendly style that comes right out and tells the HR reader which things matter, how they matter, and which things really aren’t as crucial to know so you don’t get distracted by them. Each section is loaded with examples from recent history (especially scandals) linking HR areas of responsibility to financial problems for companies.

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Join the Internal Enterprise Conversation, Already in Progress

Conversations among employees (vs. broadcasts from corporate) have always taken place in organizations – they just haven’t always been easily seen by the leaders. These conversations continue to take place inside, outside and across organization boundaries and recently, social technologies have substantially amplified their volume. These amplified conversations then get the attention of management, and not always in a constructive way.

The enterprise’s interests are better served by participating in these conversations, particularly through the effective use of social technologies, rather than by ignoring, rejecting, or banning their use. The result is not only higher employee productivity, more effective innovation, and greater employee engagement. It also results in the organization making more informed business decisions by having a better understanding of what makes the company “tick” and by being more aware of key events and conditions. Finally, the organization can have at least some input into the conversation as well, but only if it participates.

What are the conversations about?

Steve Boese posted a great summary of the findings in an IBM research paper on how employees were using social networks and why. One of the paper’s most eye-opening findings, and one that organizations should note, is that employees appear to use social network within the enterprise more for reaching out to employees they don’t already know and for building stronger bonds with them and their other “weak ties.” This is interesting to know as it is in contrast to what most detractors cite as why social networks within the enterprise would be a productivity drain. Those detractors often label it “Facebook for the Enterprise” and point out that a primary use of Facebook is just to keep current on what close friends are doing and gossip on things that have nothing to do with work, ergo it is a waste of time in the workplace. The research paper shows the error in thinking that is the primary use.

Beyond reaching out to create and build stronger ties, what else is happening? As mentioned in this earlier post on last month’s HR Technology® Conference, Nokia’s Matthew Hanwell related how his company gradually adopted internal use of social technologies. Steve also has a terrific summary of the points from that presentation. It turns out that employees sometimes also used the social technologies for general discussions about work. For instance, they might discuss overall state of the market, business profitability, and so on. They might discuss various benefit programs. In general, topics often on employees’ minds regarding things that impact their employment.

The upshot is that employees use social technologies to discuss the things they would still talk about even if the technologies didn’t exist or were banned. It’s the same thing they have always talked about and for good reason; it’s their career and their livelihood. For instance, the IBM paper shows that why employees have these conversations over internal social networks is reflected in the way they use them. Both developing one’s career and campaigning for a project are particularly assisted by reaching out and strengthening weak ties. That notion was covered in this previous post about the advantages of being more “central” in a given network through the creation and maintenance of diverse networks. You get more benefit from diversity of connections than simply pure quantity. (More to the point of this post, it’s about the diverse conversations and not just the connections themselves – you have to actually use the connections.)

How can the enterprise join the conversations?

Hanwell’s presentation showed that at first, fear drove much of the reluctance to permit social technologies in the enterprise in the first place. What would employees say? Could moderators keep up? In other words, worst-case thinking that in turn triggered further rationalizing rejection – such as governance costs – of the technologies. However, once key stakeholders understood that the conversations were happening anyway (including using external social technologies like Facebook) and that there was much to be gained by observing and participating in them, they gave the green light.

Most obstacles to the enterprise joining the conversation are self-inflicted. During the HR Happy Hour at the HR Technology conference, we talked about how organizations need help in overcoming the fear that puts up obstacles to successful adoption and use of social technologies. Jason Seiden pointed out the “risk-aversion” obstacle – in particular how it surfaces in staff departments like HR – which in many cases see only downside in backing an initiative like this. This is very much driven by how HR is viewed by the organization. As long as a given HR department is exclusively chartered with (and therefore measured on) compliance and governance oversight, and not with maximizing the strategic impact of talent, putting social technologies under its control will likely result in not much adoption, use, or benefit.

How can that perception be dealt with? We’ll hit that in another HR Technology – themed post soon.

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See the Outstanding HR in the Social Business Carnival!

Jon Ingham has always done a terrific job at bringing useful knowledge to everyone, whether it be in Strategic Human Capital or Social Media in Business. He’s done it again with the latest HR Carnival, which focuses on social business and includes my post on social business thinking at HR Tech.

Jon has collected and organized approximately 50(!) submission from a combination of well-known blogs in this space as well as some that are likely to be new to you. This presents you a tremendous opportunity to efficiently sample a diverse set of observations, opinions, tips, insights and both decide to add them to your feed subscriptions as well as simply add to your knowledge and improving your thinking. A special bonus for Twitter users – Jon has also included a “Follow List” of Carnival contributors – truly a gold mine of useful info!

Kudos to Jon for assembling such an enriching Carnival! Be sure to check it out!

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