Coping with a changing business environment may require a new human capital risk agenda

Coping with a changing business environment may require a new human capital risk agenda suggest Mark Edelsten and Rema Sood

In today's difficult economic climate, companies are struggling to find areas for corporate growth. The annual budgeting process for 2003 has resulted in many companies asking if the end of the downturn is in sight, or whether they must face deeper structural changes. As a result, many organisations are likely to delay taking on additional members of staff or buying new capital equipment (especially within the telecoms and airline industries) until there is greater predictability of growth. Adrian Slywotzky of Mercer Management Consulting believes that 'much of the growth of the 1990s was brought about through mergers, international expansion and price increases'. In light of this, many would argue that growth, even when it does return, will not be as rapid as in the 1990s, and may have to come from different means, as markets are saturated and investment is flat.

Falling prices may be the toughest challenge for companies, with the focus having to turn to product quality and customer service to stay ahead of the competition. For most, this is an entirely new experience.

In addition to falling prices, companies are having to cope with wider challenges, such as:

  • the introduction of the Euro, with consequent changes to accounting and tax rules
  • pushing share price levels up, to boost confidence amongst investors
  • keeping profit and revenue levels at an acceptable rate during a difficult economic period
  • expanding current customer base and building sales revenue
  • greater focus upon compliance and operational control
  • retaining high performers and raising performance levels of average performers
  • improving business alignment and harmonisation.

    Recent research by Goldman Sachs explored whether the world economy is to blame for the poor economic performance of European countries, especially Germany. Politicians have often pointed to shocks in oil and food prices, and the lack of global investment as the main reasons for the world economy's problems. Some have blamed the European Bank for holding monetary policy too tight. which has had an adverse effect on price setting and competitiveness.

    As a result of this changing economic climate, it is fair to say that company bosses are having to adapt to a different world. To win market share in this turbulent environment, companies will need to change the way they operate, their business positioning, internal structures and the presentation of their offerings to consumers. On a positive note, it is through handling the hard times that opportunities will be created. Above all, if companies are willing to spend a little, rather than just look for cuts, hard times offer an opportunity to introduce structural changes essential for survival. So what does this mean for the corporate risk management agenda and human capital issues in particular?

    Impact of new risks
    Due to the changing economic environment, companies' corporate risk agendas will need to be adapted. The remit of traditional risk management has typically centred heavily on managing compliance processes, enforcing health and safety legislation, and investigating fraud and insurance risk. This focus will need to widen, so that risk professionals can support the management group with the strategic business risks they face .

    The role of risk professionals will therefore also need to change, and a new skills set will be required. The new corporate risk agenda may begin to challenge traditional risk methods and apply a more strategic vision to support organisational performance. Within the new corporate risk strategy, human capital risk management will need to play a more important role. This is critical for companies looking to protect and build their reputation and consumer brand.

    New human capital risks themes are emerging that stretch beyond the requirements outlined within current corporate governance standards, such as the Turnbull Report. Some of the key business risks that companies need to address within their business strategies include the following.

  • Managing organisational performance: Companies across all sectors are reporting lower levels of operating profit, and are challenged by the need to find innovative and cost-efficient ways to increase performance.

  • Enhancing sales performance: The challenge of enhancing sales performance is a never-ending one, but is now exacerbated through the difficulties in increasing market share. Our own experience indicates that global, and particularly European, companies are looking to harmonise sales structures and processes across the countries in which they operate. It is becoming increasingly common to see sales commission platforms created, with the objective of driving the overall sales strategy across the business.

  • Managing cost and creating value: Due to the need to increase financial performance there has been a resurgence of cost cutting, with the short-term focus on reducing fixed and variable costs. The real question is whether long-term value is being created as a result of this cost cutting and, if so, how, for which stakeholders, and in which business area? The organisational risks of cost cutting strategies need to be measured.

  • Increased importance of business streamlining: Business streamlining in terms of people and assets is increasingly becoming the norm. Often, such changes are accompanied by wider changes in process or system upgrades, which allow for streamlining to become operational at all levels. The focus on outsourcing non-core operations is now becoming more prevalent, due to the potential cost benefits.

  • Creating alignment across the organisational structure: To support the changing environment, the need for consistent, flexible and flatter organisational structures has never been greater. As a result of reduced merger and acquisition activity, there has been a push towards introducing structural change across merged business areas, and measuring what impacts they have on role clarity, reporting lines and performance assessment. Each factor needs to be examined to ensure any structural change is understood and well communicated to the business at large.

    Moving forward
    Each of these business risks has significant people implications. which must be managed and thought through before introducing any change. The expectations of employees, as a key stakeholder group, are rarely taken into account in such turbulent times. In future issues, we will examine these five core business risks in more depth, using real case studies and discussing the challenges, implications and potential solutions to support company bosses and risk professionals in managing strategic risk in hard times.

    Mark Edelsten and Rema Sood are consultants, Mercer Human Resource Consulting, E-mail: ,