HIRING RISKHOW COMPANIES MANAGE RISK

TO CREATE COMPETITIVE ADVANTAGEAND HIGHER PRODUCTIVITY

Ranjan Sinha, MBA

Dr. Cabot Jaffee, PhD

Reimara Valk, MSc

Executive Research Series 2009

People are NOT your

most important assets

“”

The

RIGHT

people are

IntroductionCompanies 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.

While companies constantly manage business risks like extending credit, underwriting insurance, selling mortgage, investing their cash utilizing tools and models to set guidelines for their managers. We all know hiring decisions are not perfect and have the most significant impact on the short and long term value of the company; however most companies do not systematically manage their hiring risk.

A larger part of the “wrongs” in managing talent begins in the early phases when talent is being acquired due to

[ a ] Limited guidelines on how many “wrong” hires is acceptable

[ b ] Absence of processes that monitor how many of these decisions ended being: “right” vs. “wrong”

[ c ] 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; resulting in high training costs, unplanned attrition, low employee morale, poor job person match that eats into a company’s profitability and organizational productivity and ultimately the loss of revenue.

Hiring Risk Management Systems tie business outcomes to hiring decisions.

Case Study: Our client a large financial institution in India hires a few thousand sales people every year and has to process over 100,000 resumes. More than 45% of the decisions were failing after the first six months. Employees either failed to meet performance goals or after training left within the first year resulting in revenue loss of over 8 crores, increased cost per hire and training costs.

The company had used various personality assessment and aptitude test. The tests were expensive, not developed for the Indian market, and proved to be inadequate in terms of predicting hiring outcomes.

The bank decided to implement a Hiring Risk Management System to better guide its managers on an individual candidates risk for performance and retention.

The system saved the bank over 4 crores annually in lower assessment costs, lower attrition and improved recruiter productivity.

01

What is a Hiring Risk Management System?

Hiring RiskManagement System

Hiring Risk Management Systems are similar to any other risk management systems in approach.

For example, Banks before extending a loan(mortgage) request the applicant for certain information as determi-nant factors to ascertain the risk the company undertakes when giving someone a mortgage. They input the informa-tion into a system that utilizes sophisticated algorithms and in-turn compares them with historic outcomes to decided 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 psychometric 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.

Distributionof Individuals

POST

PRE

QUALITY OF HIRE (Measured six months post hire)

02

Employee PerformanceLow High

Enga

gem

ent L

evel

03

Evolution of Hiring Risk Management Systemsand its Efficacy

Evolution

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 assess-ment tools such as Aptitude tests, Skill tests, Domain or Technical Tests and Psychometric Assessments to filter their talent pool. Psychometric assessments tools were never 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 i.e effectiveness vs. a comprehensive hiring risk.

MEDIUM

HIGH / EASY

LOW / COSTLY

LOW HIGH

VALUE - Predictive correlation to Business Outcome

Eas

e of

Dep

loym

ent

RandomSelection

Personality Test,Cognitive Ability,

DISC 16PF

UnstructuredInterview

StructuredBehavioralInterview

Job SpecificAssessment

Hiring Risk SystemsCombine Personality, Job

Simulation and NeedMotivator assessments

with predictive algorithm

Knowledge /Aptitude Test

What do Hiring Risk ManagementSystems Measure and How does it work

Measure

Hiring risks are manageable like any business risk. Center for Talent Research and HR Analytics identifies three critical risk areas that through systematic monitoring andmanagement can lead to better hiring effectiveness and business outcome.

[ a ] Performance Risk – Can the person do the job and how well? [ b ] Engagement Risk – What does the person want and will the person stay with the company?

[ c ] 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 assessments with historic performance using predic-tive algorithms is at the heart of a Hiring Risk Management platform. Significant advances in predictive algorithms, India relevant and normed assessment tools; leveraging technology (internet) to rapidly, cost effectively and continuously collect data on individuals and organiza-tions makes such systems practical today.

What does the personWANT/NEED

from an EmployerSTAR™ Select Employer

Dimensional AttributeMeasurement

What has the person Done?

[+] Knowledge and Skills Test[+] Behavioral Interviews[+] Background Checks

What can the person Do?

[+] Ability Test[+] Personality Measures[+] Job Simulation

HiringEffectiveness

future jobperformance

04

Future Trends in Hiring

Future We expect each of these trends 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 assess-ment 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 35-69%.

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 particu-larly 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 achiev-ing critical business outcomes. Furthermore, whole-person assessments have been determined to be more predictive than tests that isolate a single competency. More details about Hiring Risk Management Systems can be found in a follow-on white paper devoted to this topic.

In summary, organisations can benefit from a Hiring Risk Management System so that deployment decisions around both external and internal candidates are efficient and effective.

05

Mr. Ranjan Sinha Chairman and CEO, Summit HR

Authors

Ranjan Sinha has founded and directed number of service and technology companies andin the area of human resources, email and marketing services in India and the USA. Ranjan founded Summit HR with the vision of helping CEOs and their teams win the war for talent. Summit HR is recognized as the Top HR Outsourcing Company by The Wall Street Journal®, International Association of Outsourcing Professionals, The Gartner Group and Fortune® magazine.

Ranjan has been selected as the “HR Outsourcing Superstar’ numerous times by HR Outsourcing Today magazine for his contributions to the HR Industry in the US and India.He is a frequent speaker on various industry panels on Talent Management, Hiring Risk Management and HR Outsourcing. He currently writes a column for The Financial Express and has written numerous articles on Six Sigma applications in HR and Talent Supply Chain Management. Ranjan serves on the board of Summit HR Worldwide Inc., Global Talent Management Inc. and Greenwich Capital Venture Corporation.

Ranjan lives in California; he is active in his community and is also a member of the Young Presidents Organization (YPO) Northern California Chapter.

Ranjan has a Masters Degree from The Wharton School of Business and a MBA from the Indian Institute of Management, Bangalore. He has a B. Tech from the Indian Institute of Technology, Roorkee.

Dr. Jaffee is a recognized authority in the area of personnel evaluation and development. He has been a nominee for the Training Magazine Hall of Fame. He started his career with AT&T and was responsible for assessment center activities for the Bell System. For over 30 years, he has consulted with a large variety of organizations in the U.S. and abroad, both in the private and public sectors.

Dr. Jaffee's areas of expertise include testing, electronic selection, assessment centers, job analysis, career development, managerial development, performance appraisal and legal concerns associated with personnel evaluation. As one of the world's leading experts in the area of personnel evaluation, Dr. Jaffee has been an expert witness in a variety of court cases.

Dr. Jaffee has published extensively in the field, and has authored several books, chapters and numerous articles. He has been a frequent presenter at major conferences including the American Society for Training and Development's National Conference, Training, American Society of Personnel Administration's National Conference, etc.

Dr. Jaffee holds a B.A. degree in Psychology from New York University, an M.A. degree from Columbia University and a Ph.D. degree in Psychology from Florida State University. Dr. Jaffee has been on the faculty of the University of Tennessee and the University of Central Florida. He has given guest seminars on personnel practices at such institutions as the University of Michigan, etc.

06

Dr. Cabot L. Jaffee, Sr., Ph.D.Chairman, Global Talent Metrics

Reimara ValkSenior Research Analyst,Global Talent Metrics / IIMBReimara Valk (MSc, BA Honors, BA) is a Senior Research Analyst for Global Talent Metrics based at the Indian Institute of Management Bangalore (IIMB), India. In collaboration with professor Vasanthi Srinivasan, (IIMB) Reimara has worked on various studies in the field of human resources (HR), including work-family balance of women and men IT professionals in India; Global staffing strategies of expatriates involving companies like Sun Microsystems, Google, Volvo, Honeywell, Alcatel-Lucent, Philips, Bosch, Hyatt Hotels; Employee attrition in India, a collaborative endeavor between IIMB, Summit HR Worldwide and Alignmark Inc.

Reimara has gained prior work experiences in the area of HR and business process analyses, customer services and facilities management within industries such as IT, chemical manufacturing, healthcare, hospitality and municipality government across the Netherlands, UK and India.

AcademicSnippets1. Sackett, P. R., Schmitt, N., Ellingson, J. E., & Kabin, M. B. (2001) suggested that the item content of a psychometric test should not be unfamiliar to those of a particular culture and should not be more verbally complex than warranted by job requirements.

2. Ryan, A.M. & Tippins, N.T. (2004) believes that the usefulness of a selection tool in any given situation will require evaluating context-specific information such as the selection ratio (number of candidates hired relative to the number of candidates who applied), hiring cycle time, costs of a selection error (e.g., cost of replacement, error, lost opportunities), marketability (getting people in the organization to use the tools), timeliness (feedback to applicants and hiring managers), and management of the process (selection system administrator ability and credibility)—are all context- specific and may be more challenging for some HR managers than others.

3. Tippins, N. T. (2002), argues that putting a selection system into use involves a host of implementation issues—decisions about the ordering of process elements, the ways in which information will be combined, the use of technology in delivery of tools, the training of tool users, policies (e.g., waivers), the database structure and access, and communications about the system—all of which contribute to the success or failure of a selection system.

4. Mattone, J.S., Jaffee, C.L. & Struth, M.R. (2009), believes that technology should be leveraged to help organizations source and screen talent more effectively

07

References[ + ] Ryan, A.M. & Tippins, N.T. (2004). Attracting and selecting: what psychological research tells us. Human Resource Management, 43 (4), 305–318.

[ + ] IT People (2002). www.itpeopleindia.com/20030120/cover.shtml

[ + ] Furnham, A. (2008). HR Professionals’ Beliefs About, and Knowledge of, Assessment Techniques and Psychometric Tests. International Journal of Selection and Assessment, 16 (3) September.

[ + ] Mattone, J.S., Jaffee, C.L. & Struth, M.R. (2009). Sales Results are Predictable! A Sales

[ + ] Leader’s Guide to Measuring & Managing Leading Indicators. White paper series AlignMark Inc., 1-28.

[ + ] Anderson, N. & Cunningham-Snell, N. (2000). Personnel Selection. In: N. Chmiel (ed.),

[ + ] Introduction to Work and Organizational Psychology. Oxford: Blackwell, pp. 69–99.

[ + ] Cook, M. (2004). Personnel Selection: Adding value through people. Chichester: Wiley. [ + ] Hunt, S.T. (2007). Hiring Success: The art and science of staffing assessment and employee

[ + ] selection. San Francisco, CA: John Wiley & Sons Inc.

[ + ] Sackett, P. R., Schmitt, N., Ellingson, J. E., & Kabin, M. B. (2001). High stakes testing in employment, credentialing, and higher education: Prospects in a post-affirmative action world. American Psychologist, 56, 302–318.

[ + ] Tippins, N. T. (2002). Issues in implementing large scale selection programs. In J. W. Hedge & E. D. Pulakos (Eds.), Implementing organization interventions: Steps, processes, and best practices (pp. 232–269). San Francisco: Jossey- Bass.

[ + ] Van Hoye, G. and Lievens, F. (2007). Investigating Web-Based Recruitment Sources: Employee testimonials vs word-of-mouth. International Journal of Selection and Assessment, 15 (4). 372-382.

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Global TalentMetricsGlobal Talent Metrics is a human resource information services company, dedicated to helping organizations and individuals make better hiring and selection deci-sions with greater confidence and control.

Global Talent Metrics is a part of Alignmark.Inc, a lead-ing provider of innovative solutions that help organiza-tions optimize their investment in human capital across Europe, USA and Latin America for over 30 years. Leveraging this global expertise in the design and deployment of assessment and by combining dedicated research on Indian organisations and individuals; we offer a range of solutions in the areas of talent acquisi-tion, management and retention.

At the core of innovation is a team of expert industrial and clinical psychologists and technologists that make up the research wing of the company. Over the last three decades the team has developed HR solutions for Fortune 1000 companies that have gained significant competitive advantage by better talent management practices.

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