Effectiveness as a Risk-Mitigation Strategy
The traditional categories of Risk Management include “Operational Risk” (the failure of internal processes, people or systems). As a subset of those risks, a firm’s fixed assets face “Obsolesce Risk” as the utility (in economic terms) of those assets declines over time. In today’s fast-paced, knowledge-driven economy of services, economic value is created primarily by intellectual activity. So wouldn’t it stand to reason that the very tasks, practices, ideologies and working assumptions underpinning those activities are all similarly susceptible to “intangible obsolesce” risk?
The London-based Chartered Institute of Management Accountants (CIMA) estimated that sixty-four percent of the total value of UK firms is in “intangibles,” a category that includes key personnel, brand value, and intellectual property. The economic value of intangibles is sometimes calculated using a multiple of salaries or a multiple of profits. Consider your firm’s core output in terms of the salaries or the value of your firm’s reputation necessary to produce it. Then consider these analogous observations about fixed asset obsolescence presented by Thomas Emil Wendling at the 2012 Enterprise Risk Management Symposium of the Society of Actuaries in a research paper entitled Obsolescence Risk and the Systematic Destruction of Wealth (April, 2012). Wendling posits that the economic costs associated with keeping an obsolete fixed asset may include the opportunity costs of using outdated infrastructure (energy savings, lower staffing, etc.), unexpected maintenance or interventions required to maintain outdated systems, lost revenues associated with declining reliability and “All other quantifiable calendar year costs of time, energy, and materials needed above and beyond owning the newest and latest like asset.” Wendling notes that, “These future costs are as real as the future cash flow obligations associated with a bond issue or an insurance company reserve. However, unlike bonds and reserves, they are not recorded as a liability on the balance sheet.” He continues, “Nevertheless, they (obsolesce-related expenses) are 100 percent likely to occur in the future. As such, they constitute an invisible liability to the firm.”
Aligning (or re-aligning) your work around decentralized, inclusive, shared-information can be an effective risk-mitigation strategy. Neil Cantle, a Principal at Milliman stated in a sponsored essay for Raconteur in 2015, “It is a proven fact that central command-and-control structures cannot efficiently guide complex dynamic outcomes as efficiently as a decentralized, but well-informed, approach can.” He continued, “The focus must be on things that matter to success and aligning the whole organization around that goal. This also requires acceptance that risk management is about more than ‘oversight,’ and is actually about building common narrative around uncertainty and recognizing solutions require an understanding of the cultures within the organization.” Supporting the conditions that create healthy feedback infuses your organization with the capacity for continuous renewal. Continuous renewal is the key to creating and preserving your firm’s intellectual assets. your firm’s intangible assets.
The Human Implications of Misalignment
When internal process become misaligned, your workforce is the first to experience the discontinuities. Manifestations might fist appear as benign confusion about organizational priorities, but left unacknowledged they can escalate over time into disengagement, conflict, lower workforce productivity, higher employee dissatisfaction, and higher employee turnover. These outcomes cannot be treated as purely Human Resource (HR) issues to be smoothed over by counselling interventions that fail to address the root causes. Because humans respond to their environment, their behavioral “symptoms” provide measurable evidence of larger, more systemic challenges within your organization. (If your office machinery likewise had the ability to express its will, it might tell you the same thing as well.)
In a 2010 interview, National Public Radio correspondent Robert Siegel interviewed behavioral economist Dan Ariely about his book, The Upside of Irrationality. During the interview they explored the fundamental question of why people work. Dispelling the easy and obvious answer that people work only for money, Ariely stated, “that basically works for rats under some conditions, but people work for many more motives — including meaning, a sense of completion and so on. But in our reasoning about why people work, we often don't include that part.” Ariely described an experiment he designed in which one group of participants was paid to perform a simple assembly task. A second group was also paid for the same task but, unlike the first group, the products they assembled were then dis-assembled before their eyes and then handed back to them to re-assemble. The result was that the first group stated a higher level of satisfaction with the task and stayed engaged longer before opting out than did the second group. Ariely summarized, “And sadly, I think this is a good analogy for lots of stuff that we do in the workplace — when we take things that could've been enjoyable and by doing little things to people's ability to infer meaning on their job, we just kind of eliminate motivation and joy.”
In a 2008 report on workplace health published by the National Institute of Health, co-authors Jong-Min Woo, MD, PhD and Teodor Postolache, MD, noted, “The occupational environment is delivering increasing stress, such as job insecurity, increasing workload, and the burden of lifelong learning. Larger proportion of employees became involved in service- and knowledge-based industries requiring heavy technological preparedness and mental stress. If the pace of change exceeds the capacity of the workers to cope, negative stress reactions can occur. These include psychosomatic reactions (e.g. depression, insomnia) as well as vocational consequences (e.g. job dissatisfaction, decreased organizational commitment, reduced job performance, and absenteeism).”
Their study cites the two models long-proposed to explain the job characteristics and health implications of work stress; Demand-Control (DC) and the Effort-Reward Imbalance (ERI). According to the DC model, “high strain”—a combination of high demand and low control—at work will lead to psychological stress, which can eventually lead to chronic disease, including depression. The ERI model proposes that insufficient reward (income, esteem, and occupational status control) compared to workers’ effort (demands and obligations) can lead to adverse health effects. The co-authors write, “The relationship between occupational environment and mood disorders seems to be reciprocal, creating vicious cycles in many cases. For example, depressive episodes resulting from work-related stress can impact vocational performance by ‘presenteeism’ (reduced work productivity while present at work) due to decreased concentration, reduced motivation, and decision errors, as well as ‘absenteeism’ (lost productivity from absence, e.g. non-attendant workdays, arriving late or leaving earlier than usual).” And those are just the internal consequences. What about the external effects on customers in terms of attraction, retention, and sales? How might disengagement manifest itself in courtesy, response time, or the willingness to go the extra yard to create a positive customer service experience? As previously stated, this is not an HR issue about hiring, training or incentives. These are the warning signs of broken processes in need of mending. The symptoms are just manifesting themselves in your people.
If you’re still convinced that workplace “malaise” is just another normal condition associated with HR, then consider these anecdotal facts. People experiencing stress or anxiety have elevated metabolism which translates to higher body temperatures which, in turn, shows up as increased air-conditioning costs as most office environments are in cooling-mode year-round. Stress and unhappiness can also translate into obesity and weight issues. What do you currently spend on office furniture purchase and maintenance? Unhappy people demonstrate reduced care for themselves and their surroundings. What do you currently pay for workplace cleaning? Disengaged people have low levels of involvement and volunteerism. What do you currently pay for outsourced programs that could be handled by internal teams such as for recycling, safety, or skills training? In other words, human unhappiness doesn’t just sit neatly in your HR budget. Because it derives from systemic causes, it shows up in your operating costs as well. By leaving the root causes of stress and disengagement unaddressed you are, in effect, borrowing capital from investors or owners or other business units to subsidize the operation of your human unhappiness program. Or, considered from a slightly differently perspective, the economic value of your unhappiness subsidy equals your current discount rate for capital.