Risk Management In Human Resources

One of the most important aspects of any business owner’s job is to minimize risks when dealing with human resources (HR) issues. Many have learned the hard way that treating a crisis once it arises puts the company on the fast track to trouble. Experience shows that companies need to work proactively to discover potential problems and handle them immediately.

Auditing your HR practices on a periodic basis is the best way to create that advantage. The formality of an audit is the only systematic way an employer can examine its human resources function objectively, identify problem areas, assess strengths that can be leveraged, prioritize according to greatest payoff and take prompt, effective corrective action where needed.

From a strategic standpoint, effective HR risk management significantly and positively affects a company’s financial success, growth and reputation in many ways, including:

• Identifying the company’s overall needs, liabilities and strengths;

• Evaluating the effectiveness and efficiency of HR;

• Identifying policies that are missing or are not legally defensible if challenged;

• Bringing potential problems to the forefront;

• Identifying needs for improved internal control in human resources;

• Having a benchmark for future audits;

• Identifying the most common violations and suggesting ways to avoid them and

• Using the audit findings to change course in order to meet the company’s strategic goals.

Even if companies aren’t auditing HR practices in order to save money or identify issues before they become unmanageable, they should do it to help HR provide exemplary service to both employees and the organization. To make HR departments a profit center for the company instead of a cost center, you must begin with an assessment of your current practices.

The bottom line is that an HR audit gives you solid information to determine how to structure and align human resources to accomplish results most beneficial to the company.

HR Audits

There are as many types of audits as there are specialties in HR. Professionals categorize them into four groups: traditional risk management audits, strategic audits, function specific audits and HR effectiveness audits.

The primary goal of risk management audits, which are the most essential and comprehensive, is to assess the level of risk involved in certain actions or policies the company has either adopted or overlooked and provide actions to overcome the risk. Strategic audits focus on systems and processes to determine if HR is helping, hindering or having little impact. Function specific audits focus on a particular area of HR such as benefits, discipline and termination and leave policies. The HR effectiveness audits focus on evaluation of how well the needs of the company and employees are being met, not unlike a satisfaction survey or a scorecard for the department.

Using Metrics 

Using proper human capital metrics that are standard to your organization or industry allows companies to calculate critical data needed to improve the health and growth of an organization through tactical and/or strategic changes, ultimately driving the company to greater success and value. Some of the best metrics to capture include the human capital return on investment, which shows the return on investment ratio per employee; the human capital value added, which shows how employees add value to the organization; the health care costs per employee; the HR expense as a percentage of total operating cost and the cost of each turnover in both hard and soft dollars.

The Stages of an Audit 

At first glance, conducting an HR audit may seem daunting, but taking it in steps makes it much more practical. Some organizations choose to outsource the audit because of the magnitude. As with anything productive, there is a planning stage. A good audit begins with creating a project plan and having a defined scope. During this stage, the type and who, what, where, when and how of the audit are determined. This stage also involves the communication plan, an essential part of having a successful audit. Finally, the planning stage involves the creation of the questionnaire to which the audit will adhere.

The next stage can be thought of as either a separate phase or part of the preparation phase but cannot be overlooked; gaining buy-in is vital and is accomplished by communicating the reasons for the audit, as well as the advantages to those who are integral to the process. The more people affected by the audit feel in control, the more likely it is they will cooperate.

The third stage is the process of collecting actual information. Regardless of which type of audit you are conducting or outsourcing, it is at this point you will be interviewing people, reviewing checklists, policies and procedures and referencing different resources.

Each of these phases leads up to the benchmarking and analysis stage. It is here where you will summarize your findings and compare those findings to other companies’ results. Depending on your scope, you may or may not be adding actionable items to this phase. Typically, when outsourced, you will receive audit results coupled with actionable items. Before presenting the results, ensure you write the audit report and focus on your different audiences. Create an executive summary of no more than three pages for top management while providing more detail for the affected functional areas. And finally, if not already included in an earlier phase, create action plans and foster a climate for continuous improvement.

Areas to Audit 

When faced with conducting an HR audit, there is no doubt you will feel overwhelmed. If you are conducting an audit yourself or with the assistance of your staff, you will likely find that a focused, function-specific audit is best. However, if you can convince your organization to outsource the audit, it is well worth having a comprehensive audit. Most professionals suggest doing a comprehensive risk management audit at least every three to five years. Otherwise, focused audits are generally only required when there are significant organizational changes such as mergers, acquisitions, new management, catastrophes and changes to the strategic plan or those performed in response to a law, lawsuit or claim.

With all the work there is to do in HR, or as an executive wearing many hats, an audit may seem like just one more thing to do. Audits are not very enticing, but this investment will pay for itself many times over if it provides your organization with an accurate picture of what you need to worry about and what you don’t.