HR professionals wear many hats. Some fit a little better than others; take legal risks, for example. There is a natural inclination to identify them and then do whatever it takes to avoid them. A better approach is to identify, assess and manage these risks instead.
A Formula for Determining Risk
Identifying a legal risk is an excellent start, but to fully understand it, you’ll need to assess it carefully. Ask yourself questions such as,
- What is the scope of the risk?
- What is the likelihood the risk will affect the company?
- If the risk materializes, what are the likely outcomes?
It might be helpful to think of risk assessment in terms of an equation. Don’t worry, we aren’t bother with anything complicated like figuring out the hypotenuse of a right triangle using the Pythagorean theorem (just typing those words brings back bad memories). Try this instead:
L x M = V
L represents “likelihood” (the odds that the risk will occur), M stands for “magnitude” (the anticipated cost of the risk should it transpire) and V is the “value” of the risk.
For example, let’s say you are facing a situation where there is a 50 percent risk of losing $100. Plugging those numbers into the formula (.50 x 100) means your potential loss would be $50. Now, if you had a 10 percent risk of losing $1,000 (.10 x 1,000), the risk is higher: $100. This is an excellent way to evaluate whether or not to pursue a situation while taking into account the company’s long-term economic interests.
Once you’ve assessed the risk, you’ll need to determine where it lands on the risk/reward spectrum. There are typically at least three options: high risk/high reward at one end of the spectrum; low risk/low reward on the opposite end; and all other possible risk/reward options in between. When you have decided where the risk falls on the spectrum, identify the next steps to be taken. Decide who is going to take action, when that will happen, what potential obstacles you’ll encounter, how you’ll handle those when they arise, and how success will be measured.
Addressing legal risks in this manner empowers HR professionals and gives them the latitude to make important business decisions—a role familiar to CEOs. The more you conduct business in this matter, the more positive impact you’ll make on the organization.