Enhancing your Productivity Risk Chain by defining your Total Cost of People Risk.

Danni Hocking, O.T. and Principal,
Aon Hewitt

In corporate Australia the demand is higher than ever for businesses to attract and retain superior talent. Continually changing global market conditions are making this goal increasingly difficult.

Savvy businesses now need to give serious consideration to how they can differentiate their employee value proposition (EVP) by offering innovative benefits to attract the right talent. To develop an attractive EVP and benefits strategy, an organisation needs to assess its capacity to understand and manage its People Risks. This is more than an assessment of the conventional risks adopted through traditional occupational health and safety compliance and insurance reviews. A people risk approach is holistic and requires the creation of a Workforce Risk Strategy that ensures your Productivity Risk Chain remains intact and the potential for hidden costs is removed. This type of approach leads to a greater understanding of how risks impact productivity and profitability within an organisation.

Traditionally organisations have managed their people risks from a compliance perspective, however this misses a number of the significant people risk cost drivers. This approach can also result in unmanaged and uncontrolled costs impacting on overall profitability.

So how do you move from a compliance-based occupational health and safety (OH&S) approach to a holistic Workforce Risk Strategy?

The starting point is to apply the risk management principles usually applied to other parts of the business – identify the risk, measure it, manage it and then mitigate or remove it. Organisations need to step back and have a look at their corporate health profile and how it is influenced by factors like its culture, employee health, demographics, policies and procedures and the environment.

This allows them to understand the current state and develop solutions tailored to their needs. The best place to start is by understanding the state of your workforce.

Areas that companies can address include assessing their workforce’s demographics. Do you have a young, ageing or diverse workforce? Do you measure the commitment of your workers to your company? What is your level of engagement? Do you know the health profile of your workers? Are modifiable lifestyle risks influencing your absence or illness trends? The answers to these questions will assist to build your people risk profile and understand your Productivity Risk Chain.

Aon Hewitt’s approach to managing the Productivity Risk Chain is simple, keep employees healthy and well, safe and secure and productive and the end consequence will be a reduction in hidden costs and more efficient and effective risk transfer and retention programs.

One of the key emerging risks in Australia is the increase in modifiable lifestyle conditions such as obesity, cancer, depression and diabetes. These conditions not only have a negative effect on an individual, but research suggests that the impact on that individual’s workplace as a result of these conditions, is considerable. Being overweight or obese increases a person’s risk of developing cardiovascular disease, high blood pressure and/or Type 2 diabetes. In 2011-12, 63.4% of Australians aged 18 years and over were overweight or obese, comprised of 35.0% overweight and 28.3% obese.

The prevalence of overweight and obese Australians has increased over time and has led to an increase in absentee rates. The total financial cost of type 2 diabetes is estimated at $10.3 billion. Of this productivity losses were $4.1 billion.

More frequently companies in Australia are investing in health and wellness programs to complement their WHS and HR policies. To really develop an effective program, organisations need to understand the risks inherent in their demographic profile.

“Investing in the health of your human capital – of the people who generate your profits and fill your workspaces – yields untold dividends to your bottom line,” says Hocking. “Investing in the health and wellness of people in your business is a sound investment in your business itself. Likewise it makes sense to ensure your investment is aimed at the issues pertinent to your workforce.”

The second part of the Productivity Risk Chain involves keeping employees safe and secure. This is more than just a compliance regime which tends to focus on being safe at work. Keeping employees safe and secure is cultural and extends beyond the workplace. Productivity is impacted by risks to your employees at all times, not just in the workplace. There is a growing trend for organisations to adopt safety programs that focus on things like safety while traveling and safety at home.

“As with any risk, a responsible approach to people risk management dictates an emphasis on prevention rather than cure”, says Robyn Perkins, Managing Director of People Risk Solutions at Aon Hewitt. “This is evolving to be 24 hour in nature, and across the work/life divide. It doesn’t matter whether risks are borne occupationally or otherwise. If they result in the absence of an employee, they result in financial cost to an organisation.”

The third element of managing the Productivity Risk Chain is the management of absence. If employees are not healthy and well, safe and secure, then the likely impact on the business will be absence.

Absenteeism is estimated to cost Australia’s private sector $2 billion and the public sector $5 billion in lost productivity each year.

It also has a host of hidden costs. Absence is a significant cost for a business, because not only is the organisation paying someone who isn’t at work, it is often paying someone to stand in. With this comes the cost of recruiting, inducting, training and insuring the replacement, plus lost productivity because the stand-ins are invariably slower at the job.

The causes of absenteeism are many: genuine illness, employee stress, substance abuse, family demands, office politics or conflict, and a culture of entitlement or the ‘I need a mental health day’ mentality. Unfortunately absence is often not measured, quantified or assessed. Very few companies apply risk management principles to their absence programs and few apply intervention programs to manage the impact of absence on their business and their employees. Hocking adds that organisations should also understand their tolerance to the different risks in the productivity chain. If they are looking at absence, they need to know what is an acceptable, and in fact an expected level of absence. Remember, not all absence is bad. People do get sick so you need to have some tolerance. A zero tolerance to absence is not good and organisations need to measure and quantify their risk tolerance for absence and also have intervention strategies for absence that breaches their tolerance. Once you have measured the problem, know what it costs and understand your tolerance, you can assess the results of your intervention program against these measures to monitor how successful it has been and how much it has saved the organisation. Your end results should be improved productivity and profitability.

The last element of the Productivity Risk Chain is managing your risk transfer strategies. This is where a large number of companies start. It is the wrong end of the chain and deals with the consequences or outcomes. Moving the focus up the chain to the starting point will have the impact of reducing costs further down the chain.

While insurance – such as workers’ compensation, life, disability and health – is still a necessary risk financing cost, this cost can be reduced after implementing effective employee wellness, safety, security and absence management programs.

This in turn frees up capital which supports the costs involved with running value adding productivity risk management programs.

Many workforce risk management programs run on the premise that one size fits all. It doesn’t. The causes of the problem will be different in every organisation and even in different parts of that organisation. You really do need to do a cause analysis to find out what the problem is and where it lies in your organisation. How you respond will depend on the problem.

Once you identify the cause – be it poor management, a bully for a boss, workloads that are too heavy or Key Performance Indicators that are too high or too low thus demotivating employees – you can work on a solution. When you have measured the problem, identified costs and understand your level of tolerance, you can then assess the results of your intervention program and monitor its success and resultant cost savings. Your end result should be improved productivity and profitability – and a lower insurance bill. I recommend undertaking a Total Cost of People Risk analysis to identify the direct and indirect spend on people. This includes the understanding the costs associated with absence, turnover, use of contractors, salary continuance experience and workers’ compensation.

The Total Cost of People Risk approach will provide your organisation with the data to be able to articulate your people spend, better understand your high risk areas and provide you with opportunities to mitigate risk. Ultimately you will improve your bottom line by influencing productivity whilst containing costs.

Case Study

A power and poles company were told by their executive leadership team to slash their health and wellness budget as a result of the global financial crisis and general cut backs.

Whilst they had experienced good participation rates in this program, they needed to justify why it was important to keep it. Aon Hewitt undertook a total cost of people risk analytics to assist them in articulating exactly what they spend on their people and what areas posed a high risk.

Aon Hewitt were able to articulate that the company could have a productivity cost saving of $679,556 in one year if they continued with their wellness program.

This was significantly more than the investment into the program.

In addition we demonstrated a saving in lost wages due to reduced absence of $2m+. One key management performance measure was the “cost to serve per person”.

The analysis identified a considerable reduction in this KPI with the inclusion of the wellness program designed to enhance health behaviours, increase productivity and engagement and ultimately reduce absenteeism.

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