Seven ways HR can use organisational risk to influence strategy

Were you to sit 100 CEOs down and connect them to polygraphs, you may not see a discernible movement of the needle when you ask them questions like “what do you think about performance management?” and “will you to endorse a line management capability programme?” But one word is guaranteed to get that needle scratching across the graph paper every time: risk.

When managers talk about leadership, performance, talent, skills or culture, what they are really talking about is risk. Risk that the strategy will not be delivered, risk that the business will not be profitable, risk that the company will come second, risk of falling foul of the regulators, risk that people will not want to invest in the business or that the share price will fall. Talking overtly about “organisational risk” as a partner to “strategy” is such a simple and powerful concept, yet so rarely is it done.

Every business has a strategy. If your competitors are operating in similar markets with similar customers, then their strategy may well be similar to your own and, like you, they hire smart people. So who is going to win? Ultimately, winning is more about the organisation – how quickly and efficiently strategy can be executed through the people, structures, systems, processes, skills and behaviours the organisation has or needs to get the job done. Business strategy and organisational capability are two complementary halves of what is needed to be successful, and they need to be in continual balance or strategy is diluted, delayed or blocked completely.

Ensuring awareness of risks

A good awareness of the organisational capability risks associated with the business strategy surely becomes a critical element of competitive advantage, and a prerequisite for being an effective senior leader. But how often is this the case?

Business leaders are very well informed as to external risks to strategy, such as competitor activity, economic factors, buying trends or pending regulation. However, they have non-specific and largely uninformed views on the ability of their own organisation to deliver the strategy. They are effectively making promises based on only half the information that they need.

There is a second drawback associated with business strategy and organisational capability being considered separately, or being considered at different times – and that is that a disconnect is created in the planning cycle. A business strategy is usually accompanied by a financial forecast, but this forecast very rarely includes a solid view of the true organisational costs of delivering the strategy. For example, the launch of new products may be enormously costly in terms of external recruitment or training, or moving production from one country to another could be delayed by months due to local employment legislation issues. Considered separately, there is a real danger that the financial parameters become constraints to doing what is needed to equip the organisation to deliver. Even more important, there may be some elements of the strategy that – given a reasonable view of the organisational implications – may no longer stack up in terms of benefit versus cost.

HR’s place in the discussion about risk

Put all this together, and there is a watertight case for saying that a consideration of organisational risk is a critical element of any business strategy process. It allows what are often two separate processes, a “strategy discussion” at senior levels and an “activity prioritisation” discussion at functional level, to be joined up and to inform each other both “upwards” (a consideration of organisational capability and risk as part of strategy creation and planning) and “downwards” (an alignment and prioritisation of functional and individual activity to addressing critical risks to strategy delivery).

Since HR should naturally be at the centre of the organisational capability and risk discussion, filling this gap suddenly gives context for everything from recruitment to the employer brand, allowing them to be optimised and aligned to something tangible. Suddenly, HR activity has a strategic relevance that it may have lacked before. HR people can talk with confidence about the value that they are adding – they are managing people and organisational risks to the business strategy.

Bridging this gap has to be given real focus by HR. There are some green shoots – for example, the frequency that strategic workforce planning is being talked about these days – but even this is often with the mindset of “we need the business to be clear about what it needs first”. As such, there is a danger of this ending up more like downstream “recruitment planning” than an upfront exploration of the organisational implications of various strategic options.

Delivery is everything

Analysts, shareholders and investors no longer ask questions such as: “What is your strategy?” They ask “how are you going to deliver it?”, since market confidence depends on their view of whether or not your strategy is achievable. In 2010, over 60% of the market capitalisation of companies was attributed to “intangibles”. Price-earning ratios – effectively, the ratio of total share value to earnings – are heavily affected by factors such as availability of talent and succession to board level, organisational structure and culture. A failure to meet strategic milestones or deliver against market expectations is damaging to a business, yet how often is organisational capability and risk discussed around the board table?

The HR director should make it a top priority to give the CEO an appreciation of organisational risk. In the same way that the finance department is the expert at the numbers, people and organisation is HR’s area of expertise. HR needs to connect this expertise with the strategic imperatives in the same way that finance is connecting its numbers with the business plan.

So, what needs to happen? I would encourage any HR director to think about the following seven questions:

  1. Are you engaging with your board from a risk perspective? Can you and your function understand and articulate the link between what happens – or should happen – in HR and the strategic value chain? If not, start thinking about how you can.
  2. How early are you getting involved in the strategic debate? If you are currently a “receiver”, there is a significant risk that there are risks to the strategy which, if they materialise, cannot be mitigated in time or within cost parameters. How do you get to play in the upstream discussion?
  3. Does HR have the tools and skills to draw out, diagnose, categorise and prioritise the organisational capability needs and risks from the business strategy? How proficient are they at organisational development, how wide a business perspective can they bring to bear and how up to date is their view of external market supply capacity? How comfortable are your key HR people in working with ambiguity, scenario planning and macro data? Think about how you can plug skills gaps in these areas.
  4. Is there anything tangible existing in your organisation that can be described as a “strategic capability plan”? Something that concisely expresses the organisational capability needs and risks, and what needs to be done, and something that is referred to regularly at board level to provide confidence that the strategy is on track? If not, produce it.
  5. Have you aligned the HR processes, downstream suppliers, employer brand and metrics with the key organisational capability needs and risks? Is there an evident and tangible connection between the strategy and what you are asking your operational people processes to do? Consider reviewing activity, processes and downstream supply chain against organisational capability priorities and risks to see where you are aligned and where you are not.
  6. Is your CEO able to answer questions from the market about the “how” of the strategy in a way that builds confidence? Have a conversation about how you and your function can help him or her do this.
  7. Around the board table, are you personally seen as a vital element in turning strategy into delivery? Start staking your claim in the organisational strategy space.

Nick Kemsley is co-director of the Henley Centre for HR Excellence.

Using data and statistics more effectively

This article is the ninth in our series on using data and statistics more effectively in HR:

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