Operational Risk Management Through HR Outsourcing

Operational Risk Management Through HR Outsourcing

by on 3 Nov, 2021

As a business owner, you know that your company is only as strong as its weakest link. That's why it's crucial to identify and mitigate the risks associated with your operations. Operational risk management can help reduce costs and increase profits in your organization. 

CFOs and finance managers need to understand risk management principles and apply them in their business to achieve this. When not well managed, a company runs the risk of reputational damage, loss of cash flow, and fraud.

Employee risk mitigation is vital for business growth and development. If the company is not large enough to afford multiple HR specialists, it should consider outsourcing risk management. 

What is Operational Risk? 

Operational risk is the potential of loss associated with non-compliance, risk exposure, and other company activities. The risks include:

  • People and skill-based risks 

  • Process and system-based risks 

  • External factors like technology or market-based risks 

  • Legal and compliance risks 

Internal Fraud 

Internal fraud is a significant issue and can cause irreversible damage to a company. 

This type of fraud includes crimes like accounting scams, embezzlement, and check deception. 

Skills-based risks are more likely to be an issue for companies that depend on a specific set of employees. For example, skilled positions like experienced accountants may have fewer applicants available, making it easier for candidates to find a job quickly. 

External Fraud 

External fraud is another issue companies face. External fraud includes identity theft, various forms of cyber-crime, and credit card fraud. These are serious issues because they can lead to significant financial losses for a business. 

Employment Practices and Workplace Safety 

These are other identified risks that companies should consider when outsourcing. Employment practices risk arises out of discrimination issues like harassment, bullying, and unfair dismissal claims. 

Workplace safety is also an area to focus on because if employees don't feel safe, they may be less committed to their jobs and may get injured. On-the-job injuries raise workers' compensation insurance premiums. 

Damage to Physical Assets 

Damage to physical assets like equipment is another issue. For example, if a business rents an office and their employees damage the property, it will affect their bottom line. 

Business Disruption and Systems Failures 

Business disruption and systems failure can lead to extensive damage to a business. It can also be quite costly. For example, data entry errors, failed mandatory reporting, and accounting errors might occur among other human errors. These issues can lead to declined revenue and brand reputation damage. Such instances can lead to clients' lack of trust in the brand. An effective execution, delivery, and process management plan are required to reduce operational risks. 

How Does HR Outsourcing Reduce Operational Risk? 

Outsourcing some HR functions can help companies reduce operational risk. The key areas where outsourcing can help are in training and development programs for employees. 

Outsourcing HR means that your in-house HR team partners with an experienced workforce who have extensive knowledge about applying HR practices. The third-party HR service provider will influence the following aspects of your business: 

Risk Management Plan 

Before risk mitigation, there has to be a plan to identify the risk and its impact on business operations. A plan must consider:

  • Benefits and costs of implementing risk management processes 

  • Feasibility and how long it will take risks to materialize 

  • What needs to be done to implement change

  • Who can help in controlling these risks

Before creating a plan, a manager must have a comprehensive risk model that identifies risks and develops a strategy that mitigates or reduces them. Risk identification is necessary to determine the probability of different risks materializing and causing damage. 

Safety Audit 

A safety audit is required to assess any damage caused by risk. For example, the safety audit will determine a potential disaster's impact on an organization and mitigate it. Find an HR services provider that can create a unique safety plan tailored to your worksite. This safety plan includes the employee safety training program.  

Compliance 

Non-compliance hurts your business as you can lose customers and face financial penalties. A risk management team should identify the areas where there is a need for compliance and create processes to implement it. 

The outsourced company can provide training, advice, and information on employee rights and responsibilities to ensure your workforce complies with local, state, and federal laws and regulations at all times. Not doing so can lead to interruption of business activities. 

Claims Management 

Make sure there is no fraud from any new workers' compensation or unemployment insurance claims. An effective risk management plan will ensure there is a process to audit and identify fraudulent claims. If your HR employees are stretched too thin, you can also outsource claims management entirely.  

HR Best Practices 

Implementing HR best practices means that your employees are motivated and productive. When your employees feel valued and appreciated, you will get the best from them. An experienced HR partner has in-depth knowledge of human resources practices to help achieve a sustainable workforce for your company.  

While HR outsourcing can't directly address external fraud, market manipulation, or natural disasters, it can reduce the risk of internal fraud while improving employment practices and workplace safety. It can also prevent business disruptions from data entry errors or failed mandatory reporting. 

Companies Should Commit to Operational Risk Management 

Operational risk management requires commitment. Managers must be willing to put in the time, money, and resources necessary. Remember, the goal is to pinpoint and mitigate operational risks to facilitate smoother, uninterrupted business operations. Outsourcing HR functions will help you maintain a safe and healthy workplace with a positive and productive workforce.

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Disclaimer: this article does not represent expert advice and is provided for informational purposes. Please get in touch if you would like expert HR advice.

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