Human Risk 2: A Much Bigger Risk Than Most People Think

Human Risk 2:  A Much Bigger Issue Than Most People Think

This is the second in a series of articles on Human Risk. The first can be found here.

It has been one week since the first article on human risk and the feedback has been more than interesting. Some believe that the management of human risk begins and ends with recruitment, retention and promotion, the traditional HR view of human risk. Others acknowledge that human risk goes beyond HR considerations but also believe that managing process risk is way more important than managing human risk.

This article will emphatically illustrate why both these assertions are wrong.

Human Risk Beyond HR

HR is the starting point for managing human risk and there is no question that recruiting has to be done with the proper due diligence. For example in banking, the presence of criminal networks looking for opportunities to launder money has forced banks to ensure that they conduct criminal record checks before hiring anyone.

More generally, recruiting the right person with the right skill sets and aptitude for a designated role is very important—and so too is ensuring that an organisation retains the crucial skill sets that it needs going forward.

In addition, an organisation’s policy on promotion and remuneration sends crucial messages to employees, as well as in some cases to outsiders, as to what it values most. This is all very basic stuff which most people understand but which some organisations still get wrong. So for example, the reward structures within the banking industry are deemed to have played a significant role in the last financial crisis.

Yet, the context within which one can view human risk is so much wider.

Human Risk At The Strategic Level: The Problem With Mergers & Acquisitions

In 2007, the management consultancy Hays Group reported that fully 97% of UK mergers failed to achieve their strategic objectives. The single biggest cause of failure was the clash of cultures between the merging organisations. The problem as cited by Hays was that due diligence focused on tangible assets, finance, operations and systems, completely ignoring the intangible assets such as culture. As much as 54% of all managers cited this lack of focus on intangibles as a major problem.

Given that total mergers in the UK in 2006 were almost £1 billion or US$1.5 trillion that is a lot of value destruction being caused by the failure to properly focus on human or people risk.

A KPMG paper entitled; Unlocking Shareholder Value: The Key To Success Mergers & Acquisitions – A Global Research Report, looked at international mergers and acquisitions and determined that:

…as many as 53% actually destroyed value…83% of mergers were unsuccessful in producing any business benefit as regards shareholder value.

The report also highlighted the fact that:

…successful acquirers naturally incorporate the softer aspects into their pre-deal planning activity with cultural appraisals and management assessments.

This is proof positive of the importance of the human risk at the strategic level and those who believed that it is limited to recruitment, retention and promotion need to think again.

Human Risk At The Tactical Level: The Problem With Business Alliances

Now that we have settled the discussion as to how and why human risk applies at the strategic level then let us look at how it applies at the tactical level.

Corporate alliances are increasingly being used by large organisations to ensure that they acquire the skills and resources necessary to respond to market conditions. A failure to effectively manage the human issues and risks is wreaking havoc here as well. In a CNET management article entitled Group Targeting Merger, Acquisition Failure Rates, Rachel Konrad noted:

Andersen’s survey of 323 senior executives showed that 61 percent of alliances are viewed essentially as disappointments or failures. Only 39 percent are seen to have met or exceeded expectations.

Corporate culture clashes, high rates of management turnover, rank-and-file employee defections, sagging morale and irrational expectations are the main culprits that cause alliances to sour.

The above confirms that human risk issues are important at the tactical as well as the strategic level. They are no less important at the operational level.

Human Risk At The Operational Level: Lean And The Work of Edward Deming

Included in the feedback on the first article was an assertion that human risk is only 15% of total risk and that the other 85% is process risk. In other words, some are of the opinion that establishing control over operational processes is far more important than human issues when it comes to controlling risks. The work of Edward Deming and his focus on process control was invoked to further reinforce this process-oriented assertion.

However, when one examines the work of Deming and its relationship with the Toyota Production System aka Lean Production, the perspective is drastically different. Both Deming and the leaders at Toyota focused on organisational principles and values i.e. human issues, to both drive efficiency and reduce risks.

This is perhaps best demonstrated by Toyota’s Why Analysis of The Gasket Problem. This Analysis is described by Jeffrey Liker in his book The Toyota Way where it is described thus:

A method to pursue the deeper, systematic causes of a problem to find correspondingly deeper countermeasures”. 

The Why Analysis itself goes like this:

There is a puddle of oil on the shop floor—why?

Because the machine is leaking—why?

Because the gasket has deteriorated—why?

Because we bought gaskets made of inferior material—why?

Because we got a good deal on those gaskets—why?

Because the purchasing agent gets evaluated on short term cost savings.

Solution—change the evaluation policy for purchasing agents.

In other words, understanding that merely mopping up the oil and changing the gasket is not a good enough solution is the key to process improvement.

The moral of the story here of course is that processes don’t fix themselves, although we are developing more and more intelligent software. Process improvement and more specifically continuous process improvement require a constancy of organisational values which are entirely dependent on the extent to which employees and managers are engaged and have the ability to sustain those values.

In summary, process improvement, all 85% of it, is entirely people based.

The Triumph Of People Over Process

In an earlier series of articles on risk culture within organisations, I described how Toyota’s system of values was the basis on which it was able to eliminate waste, improve quality and reduce its operational risks (specific article is right here). This is also the reason why when Toyota ran into severe problems because of the uncontrollable acceleration of its cars, CEO Akio Toyoda did not refer to operational processes and manufacturing breakdowns as the root cause of the company’s problems. Instead, when Toyoda apologised to the US Congress he stated:

“We pursued growth over the speed at which we were able to develop our people and our organisation, and we should sincerely be mindful of that. I regret that this has resulted in safety issues described in the recalls we face today.”

The flip side of this is what happened when US manufacturers initially tried to copy Lean Production. They failed because they focused on building factories with vast numbers of robots—meaning they did not understand that Lean Production was based on people and values and not processes and automation.

A Preliminary Definition Of Human Risk

Consequently, now that we have a much better understanding of the nature of human risk, we can now define it in preliminary terms as follows:

Human Risks are those risks which arise from any human factor, whether at the strategic, tactical or operational level, which are capable of significantly destroying value, increasing costs or reducing the reliability of operations.

In the longer term this might not be enough but it is a start. All feedback is welcome and please do not forget to do the poll below. Thanks.

More next week when will take a closer look at human risks and the financial crisis.

Jonathan Ledwidge is the author of the book Clearing The Bull, The Financial Crisis And Why Banks Need A Human Transformation (iUniverse).


5 responses to “Human Risk 2: A Much Bigger Risk Than Most People Think

  1. Pingback: When Most People Think

  2. Graeme Alexander


    Another great article. My jaw dropped at the feedback that posters felt that human risk is only 15% of total risk. I work in operational risk and time after time when you look at the how of something that’s gone wrong, it is almost always people related. Whether it’s having to do something under pressure because of volumes or lack of resources; don’t have the skills or knowledge (or worse thinking that you do but you don’t); management incentives or pressure to sell or act in a certain way; misunderstandings or miscommunications – it’s about people. Processes are performed by people, even automated systems are programmed and monitored by people.

    Many consider the crisis that started in 2007 to be mainly about liquidity. Peel back the lawyers of the onion, hwoever, and it quickly comes apparent that the systemic problems that caused the crisis had a lot to do with people – motivations of politicians to extend credit; mortgage brokers with no incentive to check/ensure credit worthiness; investment banks incentivised to package up and flog stuff because of the money that they could make from it.

    I look forward to reading your next article.

    • Graeme, thanks for your comments. Very, very well observed. A number of articles on this blog have dealt with that very said topic but I will summarise the human risk issues and the financial crisis in the next article.

  3. Pingback: Human Risk 3: Why Banks, Organisations Must Rethink Their Approach | Ledwidge

  4. Pingback: Human Risk 4: Steve Ballmer, The Decline Of Microsoft | Ledwidge

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