The ‘People Risk Index' only looks at those risks that are extrinsic to the business and which are out of the range of control ofthe organization
As companies plan to move to tier II and III locations for cost arbitrage, the risk of moving to such cities will be much higher
People Matters, in conversation with Richard Payne, Practice Leader, Talent & Rewards, Asia Pacific, Aon Hewitt, explores how companies need to look at managing recruitment, employment and redeployment risks with a more scientific approach.
What are the risks associated with people? Why is it relevant to assess those?
Companies have developed mature frameworks to assess risks associated with catastrophic and natural occurrences. Post the recent financial crisis, companies have also looked at creating structures to manage and quantify financial risks. But when it comes to workforce - the essential differentiator which determines the success or failure of the company - companies are not yet giving much priority at managing people risks which include factors related to recruitment, employment, and retirement.
This is very important today specifically, as when you look at the actual risks that are associated with people, it can have significant impact on business performance. Additionally, catastrophic risks can be far more devastating when they occur, but they may happen less frequently than the type of risks associated with people.
As companies look at expanding and set up operation facilities in tier II and tier III cities in emerging economies, they need to identify new talent pools, cost arbitrage and affordable infrastructure. However, there are many risks associated with these business decisions that could be overlooked if companies just focus on a pure cost arbitrage. While labor cost might look lower; there might be other associated people risks that can make that location unattractive.
What are the elements that define “people risk”?
The ‘People Risk Index’ study by Aon Hewitt defines these risks in three main categories: risks associated with hiring, such as demographics and access to skilled talent pools; risks associated with employing people, such as government intervention; and risks associated with redeploying people, such as labor relations and employment practices.
The ‘People Risk Index’ only looks at those risks that are extrinsic to the business and which are out of the range of control of the organization. The first element related to people is the risk of recruitment, from finding the right people to not being able to develop them because they do not have the right education. The second type of risks are those related to employment. Once you employ the person, there are restrictions on how to manage them and risks of costs associated with employment like regulatory benefits. Finally, the third type of risks are redeployment risks, like for example, labor regulatory restrictions.
How does India stand in terms of ‘people risk’ as compared to other countries?
We define the ‘people risk’ by the availability of trained talent, the employment environment and the regulatory framework. India has very good executive recruitment for highly qualified employees. The high level of English literacy coupled with best-in-the-world technical and management programs, lend a competitive advantage. The mobility of the educated wherein they are willing to work in any part of the country, is an added advantage.
However, despite these positive points, there are very people specific risks involved for companies, like the lack of qualified candidates, low literacy rates and inadequate infrastructure in terms of training and development. The current education system, with India producing world-class graduates works well for the knowledge-based industries, which require high-quality engineers and IT people, but because of lack of quality lower down the system, a number of manufacturing plants are less likely to consider India as a feasible destination.
The gap in infrastructure services in tier II and III cities is much wider in India. As companies plan to move to tier II and III locations for cost arbitrage, the risk of moving to such cities will be much higher. On the employment side, attrition and shortage of talent is driving pressure to lift salaries. Finally, on the redeployment risk, rigid labor laws and regulatory framework as well as strong union movements is specially limiting for some of the sectors.
The contentious labor relations and inadequate healthcare (wherein with minimal government support, employers have to provide for the coverage) are issues, which create further risks for Indian companies too. The lack of equal opportunity in tier II and III towns - where people are hired based on caste, community or family ties - also creates risks in terms of corruption.
How can the People Risk Index be useful in decision making?
The model focuses on people risk associated with location. We do not want to measure the symptoms; we want to measure the costs. For example, the different data points to assess the risk of recruitment can be population size, education level, literacy rate, availability of secondary schools, level of absenteeism, safety concerns, etc. The Index is based on facts and fundamentals, and not merely on opinions. The complete Index is divided into five domains: demographics, government support, talent development, employment practices, and education.
The Index will help companies identify the risks that are present in the geographical location where they operate and what they can do to minimize these risks. It will also help them assess and ponder different location options when exploring a change in location for their operations.
For example, in India, as businesses are pursuing lower costs, there is a general movement to tier II and tier III cities. Though cost has taken precedence, it must be realized that choosing a business location purely based on cost can be a risky proposition. Looking at talent risks is particularly relevant in helping assess the hidden problems that can arise from this business decision to make an informed decision.