Background
The Incremental Employee Contribution model (Chapter 4) provides an analytical framework for the analysis of employee value from the point of view of positive contribution associated with productivity, time to competency, and other factors. While providing positive value to the organization, employees also impact the organization in a number of areas not directly tied to productivity, most critically in the areas of risk and loss. The term risk is used here in the context of describing potential harm or loss.
The current trend in risk management is toward the development of an integrated framework for describing and discussing various aspects of risk with the goal of quantifying a risk profile, or portfolio of risks. This quantification is carried out in an effort to establish the total impact of risk and loss for an organization. Commonly referred to as Enterprise Risk Management or ERM (deLoach, 2000), modern risk management is focused on understanding the sources of risk from multiple perspectives. Under the ERM framework a risk exists if:
It is specifically definable as an observable event or action that can have a material impact on the financial or operational performance of an organization.
It is measurable using a standard unit of account (such as revenues, percentage of return, EBIT, etc.).
It is observable over a period of time.
Organizations are moving from a paradigm where controls were the focus and action was generally discontinuous and after the fact, to one where the keys are:
Avoid/diversify risk.
Share/transfer risk.
Control/accept risk.
One of the core tenets of ERM is that risk is capital with both downside potential and upside or profitability characteristics. An organization that can more effectively identify and manage its portfolio of risks can establish an advantage over its competitors by exploiting its superior risk management approach. In this new ERM paradigm, organizations seek to understand their risk portfolio or risk profile. The process of developing a risk profile is generally known as risk assessment. In discussing how employees impact an organization’s risk profile, it is useful to use a framework familiar to those who analyze risk, its sources, and costs, as the prime focus of their work.