By Dr.Cabot Jaffee President & CEO at AlignMark
How banks manage risk to create competitive advantage and higher productivity through their most important asset – their people
Hiring Risk Management System ties business outcomes to hiring decisions and gives your organization the ability to develop QUANTIFIABLE metrics around: hiring process, efficiency, cost per hire, workforce performance, and talent measurement
“People are not your most important assets – The right people are”
Banks invest significant time and money to acquire talent. Every time a company extends an offer; it needs to answer a few critical questions such as:
- “If we hire this person will the person be able to perform the job and to what level of excellence?”
- “If I hire this person will the person stay in the job long enough to justify the costs that are associated with hiring and training the person” (i.e., Does my company offer what this person is looking for in terms of his psychological, sociological and demographic needs?)
Most of these decisions are taken typically through a nebulous process of unstructured interviews utilizing information about the candidate that is confined to a resume (not necessarily an unbiased or accurate representation of the individual) and the recruiters or managers interpretation of “right” talent, with scope for bias exposing the organization to significant hiring risks.
Banks constantly manage business risks like extending credit, underwriting insurance, selling mortgages, investing their cash utilizing tools and models to set guidelines for their managers. And we all know that hiring decisions are nowhere close to perfect. Why do banks tolerate a 30%-50% error rate on hiring (defined by turnover)? So when it comes to hiring decisions why don’t banks systematically manage their hiring risk like they do in all other aspects of their operation? Reducing this error rate by even 10 percentage points would save most banks over $1M in direct costs as well as 5 times that in indirect costs.
A larger part of the “wrongs” in managing talent begins in the early phases when talent is being acquired due to:
- Limited guidelines on how many “wrong” hires are acceptable
- Absence of processes that monitor how many of these decisions ended being: “right” vs. wrong”
- The absence of a hiring risk management tool to help make better hiring decisions.
This marks the beginning of an unproductive employee (asset) life cycle for the organization, resulting in poor employee performance, reduced managerial productivity, constant hiring and firing, etc. All this in turn results in high training costs, unplanned attrition, lower employee morale, and poor job person match that eats into a bank’s profitability and organizational productivity and ultimately the loss of revenue.
What is a Hiring Risk Management System?
Hiring Risk Management Systems are similar to any other risk management system in approach. For example, banks before extending a loan or mortgage request the applicant to provide certain information as determinant factors to ascertain the risk the company undertakes when giving someone a loan. They input the information into a system that utilizes sophisticated algorithms and in-turn compares them with historic outcomes to decide whether to give someone a loan, how much, and at what interest rates.
Similarly, Hiring Risk Management Systems through proven, validated and relevant methods collect data about a person (typically using a variety of assessment tools), his/her historical “performance” data (if it exists) and combines it with organizational and job related factors using predictive analytics to provide an easy to use decision making tool as an interview guide for recruiters and managers. These systems take complex analytics and data analysis and present them as simple ready to use decision making tools.
Hiring Risk Management System ties business outcomes to hiring decisions and gives your organization the ability to develop QUANTIFIABLE metrics around:
- Hiring process efficiency
- Cost per hire
- Workforce performance
- Talent measurement
Successful CEO’s have always understood that the recruiting selection process must be systematized and linked to revenues and profits. A Hiring Risk Management System can provide the information platform and data that business leaders need to make decisions about human resource, cost allocation, process improvement, staff performance and ultimately future direction of the company, to significantly improve the quality of hire.
Evolution of Hiring Risk Management Systems and its Efficacy
Psychometrics is the field of study concerned with the theory and technique of educational and psychological measurement, which includes the measurement of knowledge, abilities, attitudes, and personality traits. Over the years psychometrics has been adopted by the corporate world to hire and manage its talent. Organizations use a combination of assessment tools such as Aptitude tests, Skill tests, Domain or Technical Tests and Psychometric Assessments to filter their talent pool. Psychometric assessments tools were not originally designed for hiring and selection but to understand people’s personalities and traits. While these tests describe/capture a person’s personality or behavior comprehensively they are limited and inadequate in predicting business outcomes like performance and retention. Hiring Risk Management Systems effectively combine psychometric, job related knowledge, work simulation, personal need/ motivator information with performance data to deliver a comprehensive hiring decision making tool. The graph below shows the cost of deploying such tools and their correlation to business outcomes (e.g., effectiveness vs. a comprehensive hiring risk).
What do Hiring Risk Management Systems Measure and how does it work?
Hiring risks are manageable like any business risk. A variety of research identifies three critical risk areas that through systematic monitoring and management can lead to better hiring effectiveness and business outcome.
- Performance Risk – Can the person do the job and how well?
- Engagement Risk – What does the person want and will the person stay with the company?
- Knowledge and Aptitude risk – Does the person have the necessary skills and does he have the aptitude to do a particular job?
There are various instruments that can measure past accomplishments, personality and behavioral characteristics that is associated with a candidate. The performance, sociological pressures, demographic constraints and psychological needs of a candidate will also need to be matched with the company’s ability to meet them.
Combining measurements from these types of assessments with historic performance using predictive algorithms is at the heart of a Hiring Risk Management platform. Significant advances in predictive algorithms and norm-based assessment tools; leveraging technology (internet) to rapidly, cost effectively and continuously collect data on individuals and organizations makes such systems practical today.
Future Trends in Hiring
The trends listed below are expected to continue over the next few years.
The Financial Impact of Screening
Organizations are demanding more from their employment screening programs. They want to see the direct impact of assessment scores on business outcomes and the ROI of using employment assessments. Showing financial impact is particularly critical in the current economic downturn, as organizations try to identify which programs are mission-critical and which ones are merely costly digressions.
Leveraging Technology in Employee screening
With the recent economic slowdown companies will have to process higher numbers of resumes while keeping cost of recruiters and hiring infrastructure down. Technology can filter candidates more consistently than individuals while reducing recruitment operating cost between 35-60%. Even as the economy improves companies will continue to look for these efficiencies in the screening process.
Job Simulation through Multimedia
Test development efforts are moving increasingly towards high-tech, multi-media simulations that model “a day in the life” for a given job role. In addition to being more engaging for candidates, these assessments can serve as a “realistic job preview” by simulating actual job activities, and may particularly appeal for positions that are high impact and require technology interaction like bank tellers, check-out clerks, customer support reps.
From piece-meal assessments and tests to comprehensive Hiring Risk Management Systems
As CEO’s demand from HR to impact business outcomes intensifies through more accurate employment testing, organizations will increasingly adopt a “whole-person” risk assessment approach. These systems employ a variety of different assessment methods that specifically target those characteristics of the candidate (behavior, ability, skills, needs and traits) that are most relevant for achieving critical business outcomes. Furthermore, whole-person assessments have been determined to be more predictive than tests that isolate a single competency.
Organizations can benefit from a Hiring Risk Management System so that deployment decisions around both external and internal candidates are efficient and effective. And to reiterate, reducing the wrong hire error rate by even 10 percentage points would save most banks over $1M in direct costs as well as 5 times that in indirect costs.