As the demand for skilled labor grows across industries, employers are looking for creative ways to support and retain trades workers — from electricians to machinists to HVAC techs. One lesser-known but powerful tool in the tax code is Internal Revenue Code (IRC) §132, which allows employers to offer certain tax-free fringe benefits to employees.
While not specific to trades alone, Section 132 includes key provisions that are especially relevant for employers of skilled workers, particularly when it comes to training, tools, and equipment required for the job.
Section 132 allows certain fringe benefits to be excluded from an employee’s taxable income, provided they meet the IRS definition of:
In the context of skilled trades, the most useful is the working condition fringe.
A working condition fringe benefit is any property or service provided to an employee that would be deductible as a business expense if the employee had paid for it themselves.
In other words, if a tradesperson needs something to perform their job — and would normally deduct it on their taxes — the employer can instead provide it directly, and it will be non-taxable to the employee under §132.
| Benefit | Tax Treatment | Notes |
|---|---|---|
| Employer-paid licensing or certification fees | Tax-free under §132 | Must be job-related |
| Continuing education or recertification | Tax-free | As long as it maintains/improves job skills |
| Tools or equipment required for the job | Tax-free | Cannot be personal-use items |
| Safety gear (gloves, helmets, boots, etc.) | Tax-free | Must be necessary for the job |
| Job-specific uniforms | Tax-free | Only if not suitable for everyday wear |
| Employer-provided cell phones or devices | Tax-free | Must be primarily for business use |
✅ Example: An electrical contractor buys $600 worth of specialized testing tools for a technician to use on the job. The employee does not pay tax on this benefit — it qualifies under §132 as a working condition fringe.
While Section 127 covers formal educational assistance (like trade school tuition), Section 132 covers practical, on-the-job expenses related to current job functions.
| Provision | Covers | Annual Limit | Written Plan Required? |
|---|---|---|---|
| §127 | Tuition, fees, books | $5,250 | Yes |
| §132 | Tools, certifications, training, safety gear | No specific limit | No (but documentation is key) |
Together, §127 and §132 provide a well-rounded approach to supporting employees' education and day-to-day needs without increasing their tax burden.
Section 132 is a flexible and underused tool for employers in the skilled trades. From certification costs to job-specific tools and equipment, offering non-taxable working condition fringe benefits helps reduce employee out-of-pocket expenses and boosts morale — all without increasing taxable wages.
For employers competing for talent in the trades, it’s another way to stand out — and do right by the workers who keep the country running.
How do employer-paid tuition benefits for apprentice school tuition work? The answer lies in Internal Revenue Code (IRC) §127 — the Educational Assistance Program.
IRC §127 allows employers to provide tax-free educational assistance to employees, up to $5,250 per calendar year. This benefit can be applied toward a broad range of educational expenses, including:
Historically, this provision was associated with traditional college courses, but it is not limited to degree programs. Vocational and trade education — such as plumbing apprenticeship, as well as the Indiana PHCC Academy courses like Fast Track to Service and Repair certification — can also qualify, provided certain requirements are met.
Employers may pay or reimburse the cost of job-related training that improves or maintains skills necessary for an employee’s current role or prepares them for advancement. In the skilled trades context, this includes:
As long as the program is educational in nature and not simply an employer-required license or compliance course, it can fall under §127.
For employees:
For employers:
Employers who invest in trade-related tuition assistance under §127:
Meanwhile, employees in the trades gain career-advancing credentials without taking on student debt.
Maria, a maintenance technician, wants to attend a local HVAC certification program. Her employer agrees to pay the $4,800 tuition under their Section 127 EAP. Because it falls under the annual $5,250 cap:
Vocational and trades training is vital to economic growth — and Section 127 offers a powerful, tax-efficient way to fund it. Employers interested in supporting skilled workforce development should establish or review their §127 Educational Assistance Program to ensure it covers eligible trades training.
Joshua Siler is CEO of HiringThing, a modern recruiting PaaS that enables seamless hiring with integrated applicant tracking.
Data shows that skilled trades jobs experienced double-digit growth in 2022, making it ripe with opportunities for those joining the workforce. But despite these upwardly trending numbers, many skilled trades industries face hiring challenges. For example, 80% of construction companies need help recruiting. In fact, for the past six years, they’ve cited hiring as their number one business challenge.
Skilled trades include trade occupations requiring specific training and/or certifications but typically not a college degree. While the terms “skilled trades” or “skilled labor” cover a wide breadth of work, they're most commonly associated with the manufacturing or construction fields. However, the Bureau of Labor Statistics considers other roles like home health aides or application software developers to be skilled trades workers.
At HiringThing, we partner with a number of software companies that serve skilled trades, so I've seen up close the hiring and recruiting strategies needed to best attract these workers. Here are some of the best tips and tricks for finding talent in this unique field.
According to a study by Snagajob, nearly 36% of hourly workers—who make up a significant portion of skilled labor roles—reported that flexibility was the most critical work perk. But only around 50% of employers offer meaningful job flexibility.
Traditionally, skilled labor jobs have had set shifts, days, times and tasks, but slowly that’s starting to change. As the demand for workers grows, many skilled trades employers are realizing that current and potential talent are leaving for more flexible jobs. This is especially true of younger generations, which prioritize having control over their work hours more than older workers.
While the nature of skilled trades roles often means they can’t be as flexible as, say, an accountant who can work remotely, savvy employers are getting creative with split shifts, transparent scheduling, flexible PTO or just more leniency with breaks.
When recruiting, advertise your flexibility and demonstrate it in real time during your hiring process by giving candidates options for interview modalities and when they take place. This will help ensure potential talent knows you're committed to providing a work environment they value.
In today’s competitive recruiting landscape, you must make the hiring process easy and enjoyable for candidates. However, there’s often a discrepancy between what companies and employees think that means. For example, around 74% of construction companies say workers can easily attend their interviews, but more than half of job candidates disagree. Consult former and current job seekers when making your application process people-centric.
To be people-centric, treat candidates as people and not assets or commodities. It's all about meeting them where they are, which includes how they can apply to open positions. For instance, 79% of job seekers utilize social media as part of their job search, and nearly 70% of them do so on mobile devices. So having a people-centric hiring process would include having mobile-friendly applications.
Beyond the application process, how you engage with candidates must center on their experience. Provide clear communication to every candidate. This includes showcasing your company benefits, highlighting your safety standards and discussing professional growth opportunities.
While this overlaps with being people-centric, a speedy hiring process is so important that it deserves particular focus.
Today’s job candidates have been groomed by our technologically advanced world; whether it's their streaming service of choice or applying for a job, they want things quick, easy and efficient. About one in five candidates cite long hiring processes as a significant job search challenge, and 92% don't even finish online applications due to length or complexity.
So do everything you can to make your hiring process fast. Limit the steps it takes to complete an application, and keep the interview process at a length that respects candidates’ time. Remember: The best talent is applying for multiple jobs, and these people will move fast to accept offers.
Technology is designed to make our lives easier, yet many skilled trades sectors are infamous for being slow adopters. Digitizing hiring makes it faster, more dynamic and more people-centric, and it gives companies a competitive advantage. A digitized hiring process also sends the message that you’re a technologically forward organization, which today’s job seekers want. For example, digital technology is the number one skill that today’s construction workers want to acquire on the job.
According to a study by BCG, 60% of company leaders intended to increase digital tech investments in 2023 to counter current economic pressures. However, it's key to ensure you’re investing in technology that works well and is tailored to your industry. Of 2,000 senior executives surveyed, nearly half don't feel their organizations are getting significant value from the tech currently employed.
Skilled trades jobs are struggling to connect with younger generations. The application rate for young people seeking technical jobs like plumbing, HVAC, construction and electric work dropped 49% between 2020 and 2022. Compounded with Baby Boomers starting to retire, connecting with younger workers is essential for the skilled trades.
This is where some education is needed. Skilled trades often get a bad reputation for having low wages, long hours and no real room for advancement, but that’s not the reality. In fact, job satisfaction is remarkably high in the skilled trades, with 83% of tradespeople either somewhat or extremely satisfied with their career choice. So be sure you're promoting the perks of the job and high satisfaction rate in the job posts, recruitment marketing and interview process.
One mistake we’ve seen skilled trades make is to only recruit when they have a big project or need labor. Forward-thinking organizations will be more proactive with recruiting, developing an employer brand that attracts candidates and hiring from within to promote engagement and company morale. Recruiting is cyclical, and developing a pool of quality candidates prepares you for whenever you need to hire.
Recruiting for skilled trades may seem daunting. But with the right strategy and mindset, you can find quality candidates and set your organization up for success.
New roles support new product lines, expansion into residential market
Ferrer Mechanical & Electrical has announced a new leadership structure to support its continually growing organization, adding the positions of Commercial Service Manager and Residential Service Manager. The strategic move is part of Ferrer’s commitment to scaling effectively, delivering exceptional customer service, and supporting the company’s continued growth as it adds services and expands into the residential market. Filling the new roles are:
Tim Reis, who joins the Ferrer team as Commercial Service Manager, bringing over 30 years of experience in
HVAC and refrigeration. Reis most recently served as Service Manager at Climate Pros in Indianapolis. Other
past roles were at Freije Engineered Solutions, TP Mechanical, and DEEM. “Tim is a seasoned professional
with a proven track record,” said Ferrer President and Chairman Kris Griffith. “He’s driven by a commitment to
training, integrity, and quality workmanship — values that align with our company’s mission and goals.”
David Carpenter will now serve as our Residential Service Manager after serving as Service Coordinator and
Service Manager at Ferrer. Carpenter will focus on growth initiatives for Ferrer’s strategic entry into the
residential market. “David has filled an important role for us by managing the software system, personnel, and
procedures that help us deliver exceptional customer service,” said Griffith. “His ability to innovate will help us
identify improvements to enhance the residential client experience.”
Griffith said these changes “set the stage for exciting growth opportunities for our company. Given our recent
acquisition and product expansions, these focused roles enable us to serve our clients better, respond more
quickly, and ultimately increase our revenue potential.”
Ferrer, an independent, employee-owned company, recently expanded its residential offerings to include Trane
HVAC and Cummins whole house generators. In February, Ferrer strengthened its growing electrical team by
acquiring LEEPER-LESCO Electric, Inc., a family-owned company that has served the central Indiana market
since 1945. In May, the acquisition of Todd's Mechanical Service added refrigeration services to the company
and expanded its existing HVAC services. Ferrer will also partner with its sister company, Cooper’s Water, to
offer a full range of residential plumbing, water conditioning, HVAC, and electrical services for the home.
Generation Z (Gen Z) accounts for a growing percentage of the global workforce. In the second quarter of 2024, this group comprised 18% of the U.S. labor force, and this rate will only continue to grow. These individuals, born between 1997 and 2012, range from 13 to 28 years old, making up nearly all of the current as well as the next wave of young professionals. The U.S. Bureau of Labor Statistics predicts that by 2030, Gen Z will constitute 30% of the workforce.
However, many individuals in this demographic feel disengaged or disempowered in the workplace. Research by analytics and advisory firm Gallup found that disengagement affected Gen Z more than other generations in 2024, as they were five percentage points less engaged than in 2023. Employers who take measures to engage with Gen Z workers and adapt to their needs may experience increased productivity and heightened retention and attraction of these workers.
This article explains how engaging Gen Z is important for organizations, outlines challenges employers face in these efforts and provides tips on engaging this demographic in the workplace.
Gen Zers are often socially conscious, digitally savvy and invested in career development. They are passionate about social causes and may choose to work for organizations with similar values over higher-paying positions. According to a survey conducted by Deloitte, 75% of Gen Z and millennial workers factor in an employer’s community engagement and societal impact when searching for employment.
This generation of workers tends to value honesty and transparency from employers, prioritize mental health and job flexibility, and seek opportunities for career growth. They are also more willing than previous generations to leave their jobs if they don’t offer what they desire. As such, they will likely remain loyal to employers offering development opportunities and internal support.
With Gen Z comprising almost a third of the global workforce by 2030, it’s clear that engaging this demographic is crucial for employee attraction and retention. It’s also essential for organizational productivity. Gen Z workers can bring fresh ideas and creativity to an organization; as digital natives, Gen Z can bring new talent and in-demand skills into the workplace, driving innovation and efficiency. Therefore, harnessing this potential can keep organizations ahead in a competitive market. Engaging this generation can help maintain a productive workforce and drive long-term organizational success.
Gen Z individuals are a growing percentage of the global talent pool. However, like every new demographic entering the workforce, these employees have unique needs and priorities. Employers who actively engage Gen Z may experience a competitive advantage when hiring and retaining these workers. These initiatives may also contribute to increased satisfaction and productivity.
Contact us today for more workplace resources.
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Source: Afterburner
Put simply, Flawless Execution is about getting things done! The important and life-changing things. The things you dream about regularly, that seem impossible to deliver. The idea of flawless execution was born into the world of fighter pilots, where the consequences of losing are severe and the operational speed is incredibly fast.
So, let’s define Flawless Execution one word at a time!
Flawless: In a word, flawless means perfect. Arguably, there is no such thing. However, flawless execution is not about perfection! Instead, it is about the endless pursuit of the achievement of our goals! It is an obsession with failure, as both something to be avoided AND something to treasure for the learning that it provides. In a world full of complex systems, there can never be any guarantee of success. Yet, our failures can teach us how to succeed!
Execution: Execution means getting things done! But, what things? The right things, of course! The right things are those things we plan to do. We are not talking about processes here. We don’t plan to do processes. Instead, we plan to develop processes. From its inception, every organization begins as a plan. It grows and succeeds as the result of planning. At best, processes are only the product of planning. And, planning is the first step in Flawless Execution.
There a three commonly misused words that we will define in order to fully understand what Flawless Execution is trying to achieve. Those terms are simple, complicated and complex.
Simple: Simple can be defined as something with few or only a single part or process. For our purposes, simple is something easily comprehensible. Simple tasks are those things that can be easily taught and mastered by anyone, with little investment in time or pre-requisite training.
Complicated: Complicated can be defined as something with many parts or processes that requires significant technical knowledge to operate or manage. Complicated tasks and processes require specialized knowledge derived from considerable training and education.
Complex: Complex is vastly different from simple and complicated. Anything that is simple or complicated can, with sufficient technical skill, be mastered and produce predictable results. However, something that is complex means that its complexity arises from the collective interaction of simple, complicated or even other complex parts. The distinguishing mark of complexity is its unpredictability. Complexity is everywhere! It exists in all living things and their interaction with other living things.
Now that we understand the differences between simple, complicated and complex, there are two other related terms we must clearly understand. Those are process and system.
Flawless Execution in Business
Process: We define a process as a set of specific steps that converts a specific input into a specific output. Therefore, processes may be simple or complicated. But, they cannot be complex because the output of a complex process is not predictable or specific. It is for that purpose that we use methods like Six Sigma.
System: A system can be described as a complex process. A human being is a system. A company is a system. As is government or an economy. The global economy is a system of systems, a supra-system if you like, that is continually changing in unpredictable ways. Systems are interdependent of other larger and smaller systems. Everything is part of a system. Everything is affected by other systems.
So, if everything is part of a complex system that is unpredictable, then how is it that we can speak of predictable processes existing within unpredictable systems? Well, that is why we must define our next term, organization.
Organization: Organization is a broad term that originates from living systems. Its root comes from living systems and implies coordination and cooperation among other living things. In Flawless Execution, we use the term organization in two slightly different senses. First, we use it as a blanket designation for any business or company, government entity, association, and so forth. In that sense, an organization is an association of individuals for some coordinated purpose. Second, we use organization more specifically to describe the degree to which those individuals coordinate well. In that sense, then, organization applies to the quality and value of the processes utilized within an organization. Processes are developed within organizations to bind the problems and challenges it faces into more manageable and controllable tasks. Therefore, processes can be viewed as a rigorous attempt to shield an organization’s necessary functions from the dangers of complexity. Even then, an organization’s processes must still change over time in order to evolve under the assault of constant change.
There is just one final term to define, one that is commonly used in organizations today. It’s a powerful concept, one that has dominated the business world for decades. It is Continuous Improvement.
Continuous Improvement: Continuous improvement is a commonly used phrase to describe programs such as Total Quality Management, Six Sigma, Lean, etc. However, Continuous Improvement can only logically refer to the improvement of processes. It cannot refer to the improvement of organizations in a holistic way because organizations are complex systems. Systems either survive, thrive, and perform highly or they stagnate, decline, and possibly die. Therefore, organizations do not continuously improve. Instead, they improve their performance by adaptation and evolution within the larger system. Think of it this way, no process can be more than 100% effective, but an organization’s growth and success are unlimited!
Flawless Execution References –
ASQ. (n.d.). What is total quality management (TQM)? ASQ. https://asq.org/quality-resources/total-quality-management
White, S. (2018). What is six sigma? Streamlining quality management. CIO. https://www.cio.com/article/3237692/six-sigma-quality-management methodology.html#:~:text=Six%20Sigma%20is%20a%20quality,little%20to%20no%20variance%20throughout.
McLaughlin, E. (n.d.) Lean Management. Tech Target. https://searchcio.techtarget.com/definition/lean-management
ByMark C. Perna, Contributor. Mark C. Perna is a generational expert who covers education & careers.
Source: https://www.forbes.com/sites/markcperna/2024/06/25/why-tradespeople-are-satisfied-in-their-careers/
Job security in the age of AI, little to no education debt and fulfilling work all add up to record-high job satisfaction among skilled tradespeople. In the next twenty years, it’s estimated that some 47% of today’s jobs will become obsolete in the face of advancing artificial intelligence and automation. Of course, it doesn’t mean almost half the working population will be out of a job, but it does mean that those impacted will need to upskill in significant ways as the world shifts.
Not so the skilled trades, however. A recent Angi survey took the pulse of America’s skilled tradespeople in fields like construction, plumbing, electrical and HVAC—and the pulse is strong. Notably:
Yet for all this, the skilled trades are not immune to the skills gap. Today, we have one million fewer skilled tradespeople in America than we did in 2007. Thirty-nine percent of business owners are unable to find qualified workers to fill open positions, and 66% believe they could expand their company if they could only find more talent.
“If the skills gap in the trades continues to widen, it could result in a shortage of qualified workers to fill essential roles, leading to delays in construction projects, maintenance backlogs, and decreased productivity,” says Angie Hicks, Angi's co-founder. “Moreover, industries reliant on skilled trades may struggle to innovate and remain competitive, potentially hindering economic growth and development.”
“While an increasing number of young people are entering the trades, especially construction trades, it’s a drop in the bucket compared to construction’s chronic skilled labor shortage,” says Procore founder and CEO Tooey Courtemanche. “It’s imperative we encourage more people to consider this career path, across generations.”
Why people don’t choose the trades—and 3 reasons they should
Courtemanche believes that the skilled trades has a branding problem…a big one. “It’s so deeply ingrained in American culture that it’s perpetuated by our entire educational system,” he says. “As a result, societal pressure continues to push young people toward four-year degrees instead of careers in construction and related trade professions.”
Hicks also points to the obstacles keeping women—half the population—out of the skilled trades. “Historically, less women have entered the trades due to factors like stereotypes, stigmas and even a lack of visible female role models in the field,” she says. “Although, this is changing; in our 2024 Skilled Trades Report, 41% of pros said that they have seen more women enter the workforce as skilled tradespeople in the last 5 years.”
In today’s world, both Courtemanche and Hicks see three reasons why a career in the skilled trades can be a fulfilling one.
1. Job security.
As Angi’s survey indicates, most tradespeople don’t feel threatened by the rise of generative AI; in fact, they see it as a potential asset. “AI is transforming the work of tradespeople by automating routine tasks and increasing efficiency across various aspects of projects,” says Hicks. “This allows them to concentrate on more important responsibilities like problem solving, complex repairs and client communication.”
At the same time, Courtemanche points out that the trades are by no means averse to new technology. “Gen Z has expectations of working in tech-enabled environments, and construction is becoming more tech-enabled by the day,” he says. “Leading construction companies are embracing cutting-edge technology like AI, drones, AR/VR and more in their operations.”
2. Little to no education debt—and great earning potential.
Unlike a traditional degree program, training for a trade involves little to no debt. Often, you can even earn while you learn. “With the rising costs of college and concerns about student debt, a lot of young people are thinking more about practical options like trade schools and apprenticeships,” says Hicks.
Courtemanche agrees. “Most young people simply don’t understand that there’s another career path where they can earn a six-figure starting salary, all without having to take on college debt,” he says. “I’ve witnessed this firsthand in construction, an industry that offers skilled tradespeople a fast track to a high-earning, high potential career.”
He notes that the UN predicts that over the next 40 years, the world will build 230 billion square meters in new construction—equivalent to constructing a city the size of Paris every single week. “This staggering demand for construction indicates that job opportunities for skilled labor will persist in the years to come,” says Courtemanche. “As demand escalates and the shortage of skilled labor intensifies, the earnings potential within the construction sector will continue to rise.”
In today’s world, it's a return on investment that is increasingly appealing.
3. Tangible, satisfying work.
“Building something tangible in an increasingly virtual world can be highly rewarding,” says Courtemanche. “Construction touches all of our lives, every single day, from the homes where we raise our kids, to the hospitals where we receive care, to the airports we use to travel, to the infrastructure that powers and brings them all to life.”
In that light, the skilled trades offer a great opportunity for Gen Z to actuate their desire to make the world a better place. “Working in the construction trades affords the opportunity to contribute to something tangible, meaningful and lasting to our local communities and beyond,” adds Courtemanche.
An optimistic outlook
Surrounded by inflation, increased interest rates, home prices, tuition rates and more challenges, many Gen Zers are becoming disillusioned by the idea that a four-year degree is the key to success.
“Data shows that many individuals are questioning the traditional stigma surrounding the trades, opting instead for opportunities that offer greater earning potential without the financial burden of college debt,” says Courtemanche.
Hicks also believes there are encouraging signs that Gen Z is becoming more interested in trades careers. “They’ve been known to really value work-life balance and job satisfaction, which trades often offer with flexible hours and the rewarding nature of skilled work,” she says. “Plus, the cool tech that's being used in trades, like AI and automation, makes these jobs a lot more appealing to tech-savvy young people.
“Gen Z trade workers are even trending and gaining popularity on social media.”
The skilled trades represent a great job outlook—and it’s only getting better. “The skilled labor shortage continues to be the number one barrier our customers face in meeting the demand for construction,” says Courtemanche.
If they can tune out the outdated stigmas and college pressure, Gen Z could make a powerful, positive impact on the skilled trades—and their own career trajectory.
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Businesses can’t operate without risk. Economic, technological, environmental, and competitive factors introduce obstacles that companies must not only manage but overcome.
According to PwC’s Global Risk Survey, organizations that embrace strategic risk management are five times more likely to deliver stakeholder confidence and better business outcomes and two times more likely to expect faster revenue growth.
If you want to enhance your job performance and identify and mitigate risk more effectively, here’s a breakdown of what risk management is and why it’s important.
What Is Risk Management?
Risk management is the systematic process of identifying, assessing, and mitigating threats or uncertainties that can affect your organization. It involves analyzing risks’ likelihood and impact, developing strategies to minimize harm, and monitoring measures’ effectiveness.
“Competing successfully in any industry involves some level of risk,” says Harvard Business School Professor Robert Simons, who teaches the online course Strategy Execution. “But high-performing businesses with high-pressure cultures are especially vulnerable. As a manager, you need to know how and why these risks arise and how to avoid them.”
According to Strategy Execution, strategic risk has three main causes:
These pressures can lead to several types of risk that you must manage or mitigate to avoid reputational, financial, or strategic failures. However, risks aren’t always obvious.
“I think one of the challenges firms face is the ability to properly identify their risks,” says HBS Professor Eugene Soltes in Strategy Execution.
Therefore, it’s crucial to pinpoint unexpected events or conditions that could significantly impede your organization’s business strategy.
According to Strategy Execution, strategic risk comprises:
Understanding these risks is essential to ensuring your organization’s long-term success. Here’s a deeper dive into why risk management is important.
4 Reasons Why Risk Management Is Important
1. Protects Organization’s Reputation
In many cases, effective risk management proactively protects your organization from incidents that can affect its reputation.
“Franchise risk is a concern for all businesses,“ Simons says in Strategy Execution. “However, it's especially pressing for businesses whose reputations depend on the trust of key constituents.”
For example, airlines are particularly susceptible to franchise risk because of unforeseen events, such as flight delays and cancellations caused by weather or mechanical failure. While such incidents are considered operational risks, they can be incredibly damaging.
In 2016, Delta Airlines experienced a national computer outage, resulting in over 2,000 flight cancellations. Delta not only lost an estimated $150 million but took a hit to its reputation as a reliable airline that prided itself on “canceling cancellations.”
While Delta bounced back, the incident illustrates how mitigating operational errors can make or break your organization.
2. Minimizes Losses
Most businesses create risk management teams to avoid major financial losses. Yet, various risks can still impact their bottom lines.
A Vault Platform study found that dealing with workplace misconduct cost U.S. businesses over $20 billion in 2021. In addition, Soltes says in Strategy Execution that corporate fines for misconduct have risen 40-fold in the U.S. over the last 20 years.
One way to mitigate financial losses related to employee misconduct is by implementing internal controls. According to Strategy Execution, internal controls are the policies and procedures designed to ensure reliable accounting information and safeguard company assets.
“Managers use internal controls to limit the opportunities employees have to expose the business to risk,” Simons says in the course.
One company that could have benefited from implementing internal controls is Volkswagen (VW). In 2015, VW whistle-blowers revealed that the company’s engineers deliberately manipulated diesel vehicles’ emissions data to make them appear more environmentally friendly.
This led to severe consequences, including regulatory penalties, expensive vehicle recalls, and legal settlements—all of which resulted in significant financial losses. By 2018, U.S. authorities had extracted $25 billion in fines, penalties, civil damages, and restitution from the company.
Had VW maintained more rigorous internal controls to ensure transparency, compliance, and proper oversight of its engineering practices, perhaps it could have detected—or even averted—the situation.
Related: What Are Business Ethics & Why Are They Important?
3. Encourages Innovation and Growth
Risk management isn’t just about avoiding negative outcomes. It can also be the catalyst that drives your organization’s innovation and growth.
“Risks may not be pleasant to think about, but they’re inevitable if you want to push your business to innovate and remain competitive,” Simons says in Strategy Execution.
According to PwC, 83 percent of companies’ business strategies focus on growth, despite risks and mixed economic signals. In Strategy Execution, Simons notes that competitive risk is a challenge you must constantly monitor and address.
“Any firm operating in a competitive market must focus its attention on changes in the external environment that could impair its ability to create value for its customers,” Simons says.
This requires incorporating boundary systems—explicit statements that define and communicate risks to avoid—to ensure internal controls don’t extinguish innovation.
“Boundary systems are essential levers in businesses to give people freedom,” Simons says. “In such circumstances, you don’t want to stifle innovation or entrepreneurial behavior by telling people how to do their jobs. And if you want to remain competitive, you’ll need to innovate and adapt.”
Netflix is an example of how risk management can inspire innovation. In the early 2000s, the company was primarily known for its DVD-by-mail rental service. With growing competition from video rental stores, Netflix went against the grain and introduced its streaming service. This changed the market, resulting in a booming industry nearly a decade later.
Netflix’s innovation didn’t stop there. Once the steaming services market became highly competitive, the company shifted once again to gain a competitive edge. It ventured into producing original content, which ultimately helped differentiate its platform and attract additional subscribers.
By offering more freedom within internal controls, you can encourage innovation and constant growth.
4. Enhances Decision-Making
Risk management also provides a structured framework for decision-making. This can be beneficial if your business is inclined toward risks that are difficult to manage.
By pulling data from existing control systems to develop hypothetical scenarios, you can discuss and debate strategies’ efficacy before executing them.
“Interactive control systems are the formal information systems managers use to personally involve themselves in the decision activities of subordinates,” Simons says in Strategy Execution. “Decision activities that relate to and impact strategic uncertainties.”
JPMorgan Chase, one of the most prominent financial institutions in the world, is particularly susceptible to cyber risks because it compiles vast amounts of sensitive customer data. According to PwC, cybersecurity is the number one business risk on managers’ minds, with 78 percent worried about more frequent or broader cyber attacks.
Using data science techniques like machine learning algorithms enables JPMorgan Chase’s leadership not only to detect and prevent cyber attacks but address and mitigate risk.
Start Managing Your Organization's Risk
Risk management is essential to business. While some risk is inevitable, your ability to identify and mitigate it can benefit your organization.
But you can’t plan for everything. According to the Harvard Business Review, some risks are so remote that no one could have imagined them. Some result from a perfect storm of incidents, while others materialize rapidly and on enormous scales.
About the Author: Kate Gibson is a copywriter and contributing writer for Harvard Business School Online.
SOURCE: https://online.hbs.edu/blog/post/risk-management
