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How to manage the talent risk in transformation

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8 minute read 15 Dec 2022
Related topics
Consulting
Transformation Realized
Workforce
Risk

A multitude of talent risks can hinder transformation. Chief risk officers (CROs) can mitigate those risks and help build a resilient workforce.

In brief

  • Heightened talent risk is driven by a talent shortage, a skills and capabilities mismatch, and the human toll of transformation.
  •  If CROs take action now, they can turn risks into opportunities and arm their organizations for future talent upheavals.

As chief risk officers (CROs) pilot their C-suites and boards through a fog of volatility, uncertainty, complexity and ambiguity (VUCA), managing talent risk is critical to building and sustaining a resilient enterprise.

To remain resilient, CROs must help their organizations transform at speed, turning potential risks into opportunities as they navigate increasing inflation, slowing economic growth and ongoing geopolitical tensions. However, given today’s climate, it’s important that CROs help their organizations manage the inherent risks of transformation.

New research from EY (EYGS LLP) and the University of Oxford’s Saïd Business School confirms that the old ways of transformation aren’t working — 67% of survey participants acknowledged that they have experienced at least one underperforming transformation in the last five years. To date, organizations have assessed this level of failure as an acceptable risk. With transformation becoming continuous rather than a one-off event, this level of failure is unsustainable.

EY and the University of Oxford’s Saïd Business School surveyed 935 senior leaders and direct reports, as well as 1,127 workforce members from 23 countries and 16 industry sectors. We also conducted in-depth qualitative interviews with 25 transformation leaders across more than 10 sectors.

What is particularly notable about the research is the emotional toll participants said it took. In a successful transformation, negative emotions increased 25%. In an underperforming transformation, negative emotions rose by more than 130%. These negative emotions can lead to disengagement and apathy — feelings that impact performance and can lead people to leave the organization. 

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Chapter 1

Three talent risks CROs need to address

Heightened talent risk means organizations can ill afford to lose their most valuable assets — their people.

How EY can help

1. The talent shortage

 

Over the last several months there has been considerable talk about the huge labor shortage wrought by the Great Resignation. However, CROs have been tracking the labor shortage risk for quite some time.

 

In several industries, such as oil and gas or power and utilities, the labor shortage began decades ago and is reaching a crisis pitch today. Baby Boomers are retiring, taking their institutional knowledge with them, and there aren’t enough workers, particularly engineers, with the required skills and experience to fill the gap. This said, to a greater or lesser degree, the talent shortage is a concern all industries share today.

 

And yet, as inflation rises and economies slow, CFOs are inclined to cut their scarce talent as the first expense item to lower operating costs and address slowing growth and profitability. This short-term response to meet quarterly targets increases critical talent risk by eroding employee psychological safety and commitment and in the long-term business value.

 

As economies rebound, many companies will find that specific skills and competencies they need have moved to other industries or simply have left the job market. This is because while economic uncertainty is cyclical, today’s labor shortage is structural as global demographics decline in the western world.

 

2. A skills and capabilities mismatch

 

Often, transformations create a mismatch between the skills and capabilities of their current workforce and the skills and capabilities needed for the future organization. As roles change, so too do the skills needed to perform them.

 

According to The Future of Jobs Report 2020 (pdf) from the World Economic Forum, by 2025, automation may displace 85 million jobs through a shift in the division of labor between humans and machines. The World Economic Forum has labeled this upcoming period as the “Reskilling Revolution”. Within the same timeframe, 97 million new roles may emerge to address the shift. A recent Forbes article suggests that 85% of the jobs in 2030 don’t exist yet.

 

This skills and capabilities mismatch can cause a significant risk, particularly if organizations aren’t properly planning for or investing in upskilling or reskilling the people they need as part of the transformation.

 

3. The human factor in transformation

 

Our research collaboration with the University of Oxford’s Saïd Business School highlights that complex factors influencing a transformation’s success or failure are rooted in human emotions. These findings are largely consistent regardless of industry or geography.

 

In a successful transformation, leaders invest at the outset to build the conditions for success, both at a rational level and an emotional level. As the transformation progresses, stress increases and confidence may dip. However, with the right support at the right time, workers end the transformation feeling positive. In our study, 79% of workers reported positive emotions after a successful transformation, the majority of which were happy or content — 50% higher than before the transformation.

 

In an underperforming transformation, leaders and workers begin in a similar emotional state to those in a successful transformation. However, at some point during the transformation, things spiral down. Two-thirds (66%) of workers reported negative emotions. Without any supportive intervention, everyone loses hope. At the end of an underperforming transformation, three-quarters of the workforce reported negative emotions.

 

This level of dissatisfaction can be crippling, not only for the current transformation, but for all transformations that follow.

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Chapter 2

How CROs can turn talent risks into opportunities

Risks are often opportunities that no one saw coming. Here are four areas of opportunity and actions for CROs.

1. Create a vision and culture where people want to perform at their best, even during times of uncertainty

CROs will want to work with their chief human resources officer (CHRO) to steer their organization toward transformation success. They should recognize critical talent as strategic assets rather than surplus operating costs that inevitably translate into headcount cuts at the first sign of a downturn.

In our survey, half of employees who experienced an underperforming transformation agreed that transformation was just another word for layoffs. Going into a transformation with a negative mindset creates a greater risk of underperformance and passive resistance right from the outset.To counteract this perception, CROs will want to help to create and communicate a compelling vision where everyone can see their role and how it will benefit them. The right story can engage, excite and motivate people to go the extra mile, even during the darkest days.

Key action for CROs:

Work with transformation leaders to craft a compelling and authentic story that describes a shared purpose and aspiration that benefits a wide set of stakeholders. An extended purpose has to address a number of conflicting priorities. CROs can help sort out which priorities are critical to achieving the desired outcomes for the transformation and provide the motivation for people to engage rather than check out.

2. Close the future skills gap

To understand the future skills gap, CROs will need to work with CHROs to understand what skill gaps their people currently have. From there, they can jointly develop innovative learning programs to upskill and reskill.

Through a combination of hiring, upskilling or reskilling, collaboration and outsourcing, CROs can help their organizations cultivate the right digital mindsets and skillsets to turn the potential value of transformation into reality. Forty-nine percent of respondents in high-performing transformations said their organizations had the digital skills and mindset needed for transformation versus 35% of respondents from low-performing transformations.

Key action for CROs:

Work with the CHRO to foster the proper learning environment, training and space to upskill or reskill in ways that give people confidence to move forward.

3. Show people you care and mean it

There can be no psychological safety among employees when they see that they are the first to go when times get tough. CROs must support the development and wellbeing of their people to succeed.

One way to achieve this could be with a servant leadership model coupled with authenticity and an openness to listening and acting on the opinions of people across all levels of the organization. By doing so, leaders can help people feel supported as they navigate the ups and downs inherent in a transformation journey. 

CROs will need to work with the C-suite to manage transformation risks by championing a servant leadership model and creating environment that puts people at the center of transformation.

Key action for CROs:

Persuade the C-suite to adopt a servant leadership model that puts the workforce first at the heart of the transformation. Consider layoffs the last cost-cutting option rather than the first. Reskilling and redeployment actions go a long way to demonstrating psychological safety. Practice active listening, be open to the opinions from all parts of the organization and respond to them to demonstrate that their voice has been heard.

4. Create a culture of experimentation and collaboration

In many organizations, roles are often designed to integrate command and control structures. Leaders who limit risks through excessive control erode opportunities for autonomy, innovation, and empowerment.

Risk management starts with hiring the right people with the right values that align with those of the organization. If leaders trust their people, they should empower them to take risks that create value for the organization. Investing in intelligent risk-taking encourages rather than inhibits creativity, experimentation and innovation.

In addition to encouraging an entrepreneurial culture, CROs should also support a culture of positive collaboration. Collaboration enables transformations to thrive. Yet many organizations continue to project manage transformations down into tasks and goals that can dehumanise the change management process required to build new skills and capabilities for transformation and continuous improvement. CROs can help transformation leaders see that measuring on outcomes and new capabilities rather than tasks will improve future capabilities and decision-making.

Key action for CROs:

Work with transformation leaders to give employees the disciplined freedom to build new skills, experiment and fail fast, and to be creative problem solvers in ways that optimally manage risks for reward. Encourage a culture of collaboration and a diversity of perspectives and measure performance on outcomes rather than specific tasks or goals.

3

Chapter 3

Managing risk is a mindset

CROs’ actions must be supported by the right mindset, which will trickle down to people around the organization.

Managing talent risk as organizations transform is less about process and tools, and more about having the right mindset to cultivate people to go the extra mile for a vision they believe in and who feel properly supported throughout the journey. CROs will want to encourage them to think like entrepreneurs who have their own capital at stake.

Entrepreneurs deal with risk all the time. It’s a skill many organizations lose as they grow. In the right culture and environment, people involved in transformation can experiment, innovate and produce creative solutions even as they manage or even take advantage of the associated risks.

The result is a resilient, sustainable organization that can navigate any challenge and accelerate growth once the storms and crises pass.

Summary

By identifying talent risks early, CROs can make their organization’s people the linchpin of transformation. They should work across the organization to align key stakeholders with a shared risk mindset.

About this article

Authors

Related topics
Consulting
Transformation Realized
Workforce
Risk

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Errol Gardner + 2

    EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Limited, each of which is a separate legal entity. Ernst & Young Limited is a Swiss company with registered seats in Switzerland providing services to clients in Switzerland.