Adopting a risk management approach to manage absence

Risk management techniques pioneered in areas with potentially catastrophic consequences, such as fire and IT failure, are proving useful to the management of attendance.


Learning points

  • Awareness of the risks associated with employing people is growing as organisations recognise that much of their corporate value in a knowledge-based economy is tied up in employees and their ideas, rather than in physical assets.

  • Looking at absence from work is the most obvious way of measuring an employer's exposure to a whole range of employment risks associated with workers' health, wellbeing and morale.

  • Risk management techniques traditionally used to assess a company's exposure to potentially catastrophic events, such as fire and IT failure, are gradually being applied to absence management.

  • However, robust analysis and evaluation is at the heart of a risk management approach, so that the lack of effective absence monitoring constrains many organisations from adopting the approach.

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    Risk management in business was originally developed as a way of coping with potentially catastrophic, but unlikely, events with the capacity to severely disrupt operations, such as terrorism, fire and IT failure.

    However, it is increasingly being recognised that less dramatic, ongoing exposure to certain risks, such as those leading to employee absence, can add up to a significant risk over time. Risk management is, therefore, gaining a foothold in the human resources department, and in the management of absence in particular. A recent European survey found that staff absence is the third highest risk identified by UK business, behind losing key staff to competitors, supply-chain failures and "high-impact events" such as terrorism.

    The relative importance of managing the risks associated with human capital is also growing as organisations recognise that much of their value in a modern knowledge-based economy is enshrined in employees and their ideas, rather than physical assets.

    Physical assets now typically account for less than a quarter of the value of the corporate sector and some estimate that intangible assets, including employees and their ability to do the things that make a company succeed, could make up more than 80% of a company's value. According to behavioural risk management consultancy, ICAS, the potential for employees to cause productivity and financial losses to an organisation has sharply increased: "People risks are often subtle and complex, and may be more difficult to measure and manage"1.

    Absence from work is the most obvious way of measuring an employer's exposure to a whole range of risks that are associated with employee health, wellbeing and morale - behavioural risks, in other words. Almost all such risks that employees pose to an organisation are eventually manifested in unscheduled absence _if left unchecked. One of the leading risks _to US business is behavioural - workplace violence - and HR professionals are in anideal position to push the issue of exposureto such risks up the board agenda through adopting a holistic approach to risk management and attendance.

    Managers still tend to view human capital risks solely from the point of view of legal liability, and the potential claims arising from this liability, rather than as a productivity issue linked to absence. The emphasis in absence management, however, is gradually shifting from damage control to prevention.

    Take the example of workplace stress, which accounts for a growing proportion of long-term sickness absence among non-manual workers and which can quickly become a productivity issue. Organisations are increasingly being encouraged to look not only at tertiary stress management interventions, such as training and counselling, but at organisational practices that allow behavioural risks like stress to foster. The HSE's draft stress standards, for example, recognise that reducing workplace stress is as much about changing business culture as sending employees on stress management courses.

    Sickness absence is controllable

    British society and business is undergoing a "slow awakening" to the nature of risk, particularly observed risks, according to John Humphrey, head of capital risk consulting at Marsh. However, these observed risks - particularly if they are sensationalised in newspaper stories - tend to be catastrophic or unusual, for example, a young person dying of deep vein thrombosis.

    Real risks in the world of business tend to be ones that have a low consequence individually, but that occur sufficiently frequently to add up to be a significant cost to business, he argues.

    Sickness absence falls into this category of cumulative risk and has been overlooked for too long, Humphrey believes. However, it is now being taken seriously for two reasons:

  • employers are unlikely to find a bigger risk in the human capital area; and

  • sickness absence is partly controllable.

    Organisations that have adopted a risk management approach to other aspects of corporate life are "undoubtedly" convincing senior management that it is worth while extending the technique to sickness absence.

    But surely, if an employee is sick, there is nothing an employer can do to manage the risk that their illness will lead to an absence from work? John Humphrey works from the premise that levels of sickness in the general population are lower than those suggested by the data on absence from work, and that the difference between these two figures represents the extent to which sickness absence can be controlled.

    Organisations need to look for ways of managing absences that are related to reasons other than sickness. The "arch enemy" in this process is the way in which many GPs issue sick notes, according to John Humphrey. Occupational health consultants also need a new code of conduct to resolve the current debate raging between this group of professionals and their HR colleagues. HR departments complain that they send peopleto OH and get no useful information back, while OH professionals are left feeling thatHR and line managers fail to give them information on why people are being sent to them in the first place.

    Principles

    John Humphrey uses a quartered matrix to examine employment risks, enabling an organisation to weigh up the impact of a particular risk against the cost of reducing it.He suggests that it is not worth doing much about something that either has a relatively small impact on costs (for example, succession planning) or about which little can be done (mortality). Work stress and absence both liein the quadrant of the matrix where the potential impact and the potential for improvement is high.

    Risk management is worthwhile if the losses from not managing the risk are:

  • large enough to potentially damage the business, such as terrorism, in which case the issue is usually how best to transfer the risk to the insurance sector; or

  • frequent and likely enough to have a significant impact on an organisation's balance sheet; or

  • controllable, so that a relatively small investment can make good savings, for example, sickness absence.

    Absence due to ill health is a "high frequency/low consequence" risk, in that, over the course of a year, the days lost to an employer are significant and, until recently, rarely calculated. Risks associated with employee health are also not easily transferred to the insurance sector, so that HR professionals' attention, in their new role as risk managers, should be on reducing the risk.

    Because health risks respond to interventions, there is a great deal of potential for organisations to achieve large savings from relatively small-scale risk-reduction programmes. But some employers fail to undertake even the most basic elements of a risk management approach - such as monitoring and recording absence.

    No single group or profession "owns" risk management in an organisation, according to David Gamble, executive director of the Association of Insurance and Risk Managers (AIRMIC), and all managers should be thinking in risk management terms to deliver added value.

    Gamble also argues that absence is a difficult risk to transfer - that is, insure against - so that businesses must largely "self-insure", or absorb the costs. The inability to transfer the costs of absence through insurance should make initiatives to cut absence immediately attractive to employers.

    Is risk management too managerial?

    Critics argue that a risk management approach, which assumes that at least part of sickness absence is not genuine, has nothing to offer employers seeking to work in partnership with trade unions and employees on employee health.

    Humphrey counters this by asking what it is about a risk management approach that is not in the employee's, or their representative's, interests? An employee taking time offwithout cause upsets the whole team and sooner or later their colleagues want something done about it, in his experience. In any case, a properly developed risk management programme will be "relentlessly helpful", with a great deal of attention devoted to supporting the employee back into work when they are ready.

    It is, however, relatively easier to convince senior managers of the merits of a risk management approach to attendance because of its bottom-line impact. For example, Marsh is so convinced of the savings to be made from a risk management approach that the consultancy recently offered to work for free on a client's absence agenda in return for half of any savings the employer made from adopting a risk management approach.

    There are problems, though, in making a business case for a risk management approach based on cost savings. Organisations may well ask the question: "Where do these savings appear on my balance sheet"? That is, how does cutting sickness absence show up as a reduction in salary costs when slack capacity may conceal the true costs of absence.

    A conventional balance sheet, if it shows anything on absence, will often only show the cost of any interventions used to manage the issue (training, for example), rather than highlighting the contribution of the workforce to margins.

    Elements of the approach

    The elements of a risk management approach to absence are no different from those used to apply the technique to other aspects of business. Box 1 provides an example of how the approach works, based on a risk management standard developed by AIRMIC2. Consultants applying risk management to employee health will typically combine quantitative and qualitative approaches to evaluate the occurrence, frequency and distribution of sickness absence before working with clients to develop action plans for policy development and absence rate reductions.

    In order for this staged risk management approach to absence to be effective, there must be buy-in from an employer's liability insurer, as it is this body that partially pays for the risks of workplace ill health.

    Proper risk management must be integrated in the employer's organisation so that employers are not addressing exposures to different risks from within a series of different silos. For example, occupational pensions, permanent health insurance and employer liability insurance departments can all be involved. One individual needs to be responsible for all these risks, according to John Humphrey.

    Managing attendance requires really effective measurement and reporting, something Humphrey "hardly ever sees" - even those organisations with best-practice procedures do not produce good reports. Absence management needs to be built into line managers' performance reviews. Organisations must be able to understand the financial impact of changing absence levels and maintain a sense of priority, so that absence is not made a risk management priority if assessment suggests it is not a big threat. If this is the case, "move on to something else", Humphrey suggests.

    Cost-benefit evaluation

    A risk management approach needs to demonstrate that initiatives have an impact on an organisation's bottom line. Sickness absence data will provide this evidence, but the statistics need to be detailed enough to identify absence "hotspots" and the direct and indirect costs of absence.

    One model suggests a ballpark figure of £300 per employee per year for each percentage point in an absence rate. For example, this figure would mean that an absence rate of 4% across an organisation represents a cost per employee of £1,200. For an employer of 2,000 people, absence could be costing £2.4 million a year on the basis of these figures.

    The savings to be made from cutting suchan absence rate are obvious, but the employer needs to ensure that the costs of doing so do not outweigh the benefits. However, basic changes to the monitoring and recording of absence by line managers - for example, introducing return-to-work interviews - can achieve significant cuts in absence from anearly stage.

    Working with one ambulance trust, consultants Marsh conducted a review of its sickness absence management procedure, and identified a lack of coordinated recording and reporting due to different parts of the organisation doing their own thing.Employees at all levels of the trust were interviewed, and feedback provided oncurrent performance and costs, togetherwith recommendations on the ways inwhich the client could improve the issues highlighted in the review.

    An overhaul of the data collection methodology provided information on the areas where the different divisions needed to concentrate their absence management efforts. The consultant also provided information on how to improve the trust's occupational health services and line managers' ability to manage absence more proactively. As a result, the ambulance trust was able to look at transferring the costs of absence during premium discussions with its insurers.

    "Good health - good management"

    Three years ago, AIRMIC produced a software tool to help organisations identify the true costs of absence, including elements such as the impact on pension funds of pushing long-term absence cases into early retirement.

    The "Good health - good management" software took a year to produce, and shows how to build in the costs of accident and ill-health claims, occupational health provision and rehabilitation into an organisation's absence costs. The model was designed from a risk management perspective, so that its cost elements tend to focus on insurance premia and claims rather than on HR costs such as replacement labour.

    The project ran into problems when AIRMIC tried to get organisations to use the toolkit, because the level of information required to run the software was simply not collected by employers. Even the largest employers were unable to provide the data to populate most of the fields in the software - for example, AIRMIC gave a copy to J Sainsbury to pilot, but told us that even a company of this size was unable to provide the data needed to calculate absence costs.

    Why is there such a problem with data collection when it comes to absence? David Gamble of AIRMIC believes there are so many different systems involved in measuring the potential risks of employee activity cutting across all areas of business, and it is rarely any one person's job to pull the outputs of all these systems together. One possible coordinator for this role could be the insurer that sells employers their cover for all HR risks, but this sector is "abominable" at sharing information with its clients, according to Gamble.

    Line managers, who should be at the forefront of measuring absence, tend not to be very good second-level problem solvers, particularly if this requires them to occasionally think counter-intuitively. Many managers also simply do not have time to get more out of the different IT systems they are required to operate.

    1.ICAS research bulletin, February 2003.

    2.Association of Insurance and Risk Managers, tel: 020 7480 7610, www.airmic.co.uk.

    1. A potential risk management model for absence

    Risk management approach

    . . . To absence management

    Organisation's strategic objective

    "To help our employees stay accident-free and healthy and to help them back to work after absence."

    Risk assessment:

     

    - risk analysis

    Require line managers to collect data on spells/duration of absences, including the causes of absence, for all groups of employees in a one-off exercise to establish the organisation's absence baseline.

    - risk evaluation

    Personnel/HR/risk managers to analyse this data, feeding back reports on absence levels by department, employee group, working pattern and cause to supervising managers.

     

    Personnel/HR/risk managers to calculate the cost of absence, including replacement labour costs, contractual/statutory pay and benefits, insurance and admin. costs, and indirect costs, such as the impact of absence on team productivity and customer service.

     

    This report to include a risk profile, setting out the prevalence of different types of absence in different business units (including identifying "hotspots") and opportunities for reducing associated risks.

    Risk reporting

    Establish mechanisms for this reporting to become regular, including providing incentives (and training) for line managers to undertake it.

     

    Provide the board with a full report on the levels, costs and savings connected with absence and managing attendance.

    Decision

    Take a corporate decision to manage absence effectively. This could mean reducing levels over a specific period (eg across the board to a specific percentage; or to target particular types of absence if these are considered a particular issue, for example, absences of one or two days' duration).

    Risk treatment

    Design an absence management programme and communicate it.

     

    Dovetail absence management policies with other relevant corporate health initiatives (eg health promotion; health and safety).

    Residual risk reporting

    Consider including information on absence in external reporting, such as annual reports and corporate websites.

    Monitoring

    Incorporate six-monthly reviews of policies in first year, thereafter yearly. These reviews should evaluate the costs of absence and the costs of initiatives taken to control it.

    Source: AIRMIC for elements of risk management shown in the left-hand column.


    2. Stress is the biggest emerging HR risk

    A survey1 conducted by Glasgow Caledonian University for Marsh consultants in 2001 looked at a range of employment risks and the ways in which these are managed. The survey questioned all business functions involved in managing employee risks - the two largest groups responding were HR and finance professionals.

    Almost three-quarters of public sector respondents stated that the resources allocated to the management of employment risks had increased - dramatically, in some instances. In the largest proportion of cases, this was in response to external factors, a general increase in awareness or a concern about litigation.

    Employers spent most time monitoring the risks arising from: attracting and retaining staff, work-related accidents and stress, and other work-related illnesses. All these are absence-related except the first. Some 70% of private sector organisations felt they should do more to manage employment risks, according to the survey. Risks with the greatest potential impact on the organisation were connected with recruitment, retention and absence management.

    Work stress was the issue that most businesses felt would increase in importance over the next five years. HR risk management prevents a particular challenge emerging, according to the survey respondents, because it is always evolving with changing employment relations, workforce composition and job design. For example, psychosocial health issues have moved up the agenda quickly in response to an evolution in the legal system embracing claims for damages to mental health.

    1.       Employment risks survey, Marsh/Glasgow Caledonian University, 2001.