The study establishes that a scarcity of HR specialists and insufficient dialogue between the HR and risk management functions are major obstacles to establishing a successful human capital risk mitigation plan.
"For HCR to be a priority in domestic organizations, a fundamental mindset shift from HR being perceived as 'administration/functional' to a more 'strategic partner' is required"
The milieu for effectively understanding and managing risks related to Human Capital in India is undergoing a gradual and slow-paced evolution. Indian organizations are increasingly realizing the importance of addressing potential risks pertaining to their biggest resource and asset the human capital. David Creelman, CEO of Creelman Research, an organization working in the field of ‘human capital management, and identifying pivotal issues and assessing what HR leaders should do about those issues’, once stated that, “Almost everything that can go wrong in a business has a human capital component.” And rightly so, as people are the most important variable of an organization and touch every aspect of its performance, assessing Human Capital Risk (HCR) is critical to achieving holistic growth. When David Creelman made the above mentioned statement, he probably didn’t realize that his words would be verified and quantified by ‘The State of Human Capital Risk in India’, a study jointly undertaken by Willis Towers Watson and CII - Suresh Neotia Centre of Excellence for Leadership (SNCEL).
Harshavardhan Neotia, Chairman, CII – SNCEL, says “Across the globe, business leaders are grappling with human capital issues, compounded by a rapidly changing business environment. As business leaders in India become more concerned about challenges like shortage of key skills, rising workforce costs, employee acquisition, retention and evolving labour reforms, they are increasingly realising the need to move to a comprehensive talent management approach that allows them to plan for long-term business needs. Using the right risk mitigation tools and frameworks enables the leadership of an organisation to gain advanced insights into various risks and address them in a proactive manner.”
But how does one define HCR?
The study ‘The State of Human Capital Risk in India’ defines the risks associated with human capital as the workforce factors and practices that can have a range of possible effects on business performance. The comprehensive study examines the state of affairs related toHCR, and inspects the awareness levels, barriers, and drivers of Human Capital Risk Management (HCRM) in India. The respondents to the study included CEOs, Chairman, Presidents (15%), CHROs (40%), among other Senior Executives (45%) and showcased that 62% of respondents viewed human capital risk as an urgent or very important board-level concern for their organizations. This in turn signals to an increased awareness in the Indian corporate landscape regarding the critical nature of such a challenge. Furthermore, a majority of the respondents showed concerns about retention of critical talent and leadership bench-strength. Roughly 41% of respondents believe their organization manages human capital risk effectively, with multinational corporations reporting considerably greater success than domestic companies. However, despite the heightened awareness, only 35% of respondents reported their organization having a formally defined risk mitigation or control strategy in place. The study also established that a scarcity of HR specialists and insufficient dialogue between the HR and risk management functions are major obstacles to establishing a successful human capital risk mitigation plan.
HCR: The organizational view
Human capital is the biggest risk that could impact business performance, according to the study, as 84% of the organizations echoed this thought. And the next two critical risks identified are Market Risk factors (70%), and Macroeconomic factors (55%). It also brings to light the fact that only 38% of the HR respondents cited board involvement as an important concern in strategizing risk management, compared to 62% of CEOs, general counsel and other managers. Furthermore, 61% of respondents from MNCs consider HCR as an important board-level concern, whereas only 39% of those from domestic organizations agree to the same, displaying the disparity in evolution of risk management in Indian organizations and MNCs.
“HR in India has become a recipient, rather than a collaborator, in the Board Risk Committees and the Board Audit Committees of the organizations, and ends up serving a compliance function, rather than becoming an equal stakeholder in the process” states Shatrunjay Krishna, Director – Rewards, Talent and Communication, Willis Towers Watson India. Such an issue at hand presents a dual challenge. One, management in India, although has evolved in the last decade, it hasn’t matured to the level of identifying HCR as a critical risk. Since the mid 1990’s, MNCs, which already have frameworks in place, have realized this need and such a global influence is forcing Indian organizations to develop a fresh perspective. Two, the role of HR has been restricted to that of a process function, and the risk factor has never been consciously integrated, which not only needs a fresh viewpoint, but also the incorporation of new skills and knowledge to the function.
Managing HCR: Drivers and Challenges
The study identified the drivers of HCRM, and listed the factors that prompted organizations to prioritize managing the risk. Some of them are attraction and retention of critical talent (85%), business sustainability and continuity (69%), changing HR function making it crucial for strategic success (66%), growing human capital costs (58%), reputation/image of organization (57%) etc. It is interesting to note that attraction and retention of critical talent, a challenge that is faced by almost every organization, is paving way to the realization that management of human capital risk is essential to deal with the challenge itself, and that a long-term and sustainable solution is needed. However, the barriers to identifying HCR as a critical risk, and successfully managing it are aplenty.
The study highlights that about 39% of the respondents cited insufficient dialogue between the HR and risk management functions as a barrier to effectively managehuman capital risks. Amongst those who cited lack of collaboration as a major obstacle, 32% are HR professionals, while 68% are other executives. This points to a gaping communication void and highlights a missed opportunity for two critical functions of the organizationto work in alignment.
Are organizations prepared?
The study lists insufficient leadership bench-strength, retention of critical talent segments, capability gaps with respect to emerging business/technology, low workforce productivity, inadequate talent attraction programs among others as the top human capital risks in India. But the pertinent question is, whether Indian organizations are ready to proactively assess and manage such risks, before they start impacting their businesses negatively. The answer to the question, it seems, isn’t very encouraging. Only 41% of the organizations are effectively managing HCR and of these, 73% are MNCs, and 27% domestic organizations. Most organizations do not seem to be prepared to address their human capital risks as 63% said they lack formally defined risk mitigation strategies. Respondents from MNCs were more than three times as likely as domestic firms to have formally defined risk mitigation strategies. Although larger organizations seem to have a strategy of some kind, 45% of them reported that it is not formally defined.
Ashank Desai, Co-Chairman, CII National Committee on HR explains, “A narrow focus on measuring and monitoring other tangible assets, like financial, and not giving the same importance to the intangible assets which are often hard to measure is a major reason why many organizations are not investing in HCRM. Organizations need more data and analytics which enable them to quantify the positive business impacts of investing in HCR mitigation strategies. They also need more access to HCR specialists who are able to guide them through the entire process - from identification of such risks to their regular monitoring.”
It is evident that organizations are slowly realizing the importance of managing Human Capital Risks pro-actively, and are designing strategies to pre-emptively combat such risks. However, the unification of such strategies with the role and function of HR remains a challenge, one that needs a conscious attempt to change the way we look at HR and how it operates. Chandrajit Banerjee, Director General, CII, sums up, “Risk management is a developing discipline in India, and Indian organizations focus extensively on complying with rules and regulations rather than using it as an opportunity to meet local business rules and enhance business performance. For HCR to be a priority in domestic organizations, a fundamental mindset shift from HR being perceived as ‘administration/functional’ to a more ‘strategic partner’ is required.”