Is Your Human Resources Department Profitable?
What's driving the role of HR as a strategic business partner
What would you do if you had a Human Resources employee who could improve the company’s profit margins, positively impact the cost of goods sold, lower the day’s sales outstanding, and increase the price/earning ratio while liquidating overhead costs to the business - and still deliver flawless transactional and traditional HR services?
Most CEO’s would react in two ways:
- Why is this individual wasting his/her time in an HR department?
- Why didn’t I demand this level of HR department performance five years ago?
The concept of the Human Resources department as a profitability contributor is fast gaining currency in U.S. businesses and bears closer examination. Professor David Ulrich of the University of Michigan, a leading expert on HR competency models, sees the changing business world as a 20-20-60 proposition.
Of executives surveyed, 20% currently use the HR department as active and innovative business solution partners and another 20% believe that the HR department should remain as administrative overhead and only perform transactional work. However, 60% of the executives are starting to expect the HR department to partner with other departments to improve the company’s core competencies and competitive advantages, and more HR people are stepping up to the plate and delivering the goods.
This shift is taking place because of competitive pressure in a fast-changing business world – pressures for sales, talent, and profits. Most CEOs (and their CFOs) are held accountable for three general, but powerful results: Increasing revenue, generating cash, and reducing costs. In order to focus on these three accountabilities, executives are discarding paradigms that no longer work as companies seek to stay in and grow their business.
The HR department as a strictly administrative overhead and resource consumer is one of the paradigms under justifiable attack. Transactional HR departmental activities such as payroll, benefits administration, and recordkeeping are easily outsourced or digitized with significant cost savings.
We have worked with companies who have digitized their current and past employee databases. In one company, they eliminated over 35 five-drawer file cabinets (and two rooms) and condensed them into CDs that fit into a shoebox. With advances in technology, even the shoebox is in jeopardy as a storage device.
HR as a Revenue Enhancer
For many CEOs and CFOs, the HR department as a revenue enhancer takes getting used to. That’s not the way they were taught.
They are more interested in the payoff and are asking appropriate questions: What’s in it for the company? Where is the improvement in the revenue stream? How does this get us new customers and retain our current customers? Where is the proof of corporate performance enhancement metrics?
Once they get solid answers to these questions from competent HR leaders, the CEOs are quick to change their thinking. To answer the payoff questions, recognize that a continual company-wide value chain analysis is critical to the success of any organization.
Over the past decade, CEOs began demanding that their Human Resources departments deliver flawless functional work and become a knowledgeable partner with all other disciplines to advance the company's business plan.
Individual professional silos are breaking down. Disciplines such as finance, sales, marketing, operations, and HR no longer exist as standalone entities. They are inter-dependent with one another. The weakness of any one of the links inhibits other links from maximizing their efficiency and productivity.
Expectations Have Changed
Three emerging concepts in the practice of HR bear examination.
What value does the HR department bring to the organization? Many HR teams lack a vision that includes their value to the organization. Do the HR department’s activities directly help the company achieve its broad business objectives?
Are the HR team’s arguments for or against a business strategy credible to the other department heads at the decision-making table? How are the HR department strategies, that benefit the employees, the shareholders, the customers, and all other stakeholders in the organization, selected and implemented?
What value does the HR department generate for the customer – the end user of the company’s product or service? Sales and quality are no longer restricted to the sales and quality assurance teams.
W. Edwards Deming taught organizations that quality and value must be built into every step of the process. The HR department doesn’t just hire a salesperson based on a manager’s request. The end result of HR’s recruiting and hiring efforts is that the customer who interacts with the new salesperson receives continuing world-class service from the company.
HR shares the quality of the new hire with the other departmental silos to ensure that the company is, or becomes, the vendor of choice for that customer.
What core business competencies must HR leaders possess in order to be credible strategic partners with the rest of the executive team? Each company and each industry can generate its own list of core business skills their teams must have that go beyond their individual specialties. This issue has become so critical that in graduate and undergraduate level business programs, new editions of Organizational Development textbooks are including chapters on financial calculations and ratios, corporate social responsibility, globalization, and major workforce diversity challenges, among others.
The biggest barrier to profitability is ignorance – ignorance by many people about how the company makes money and how it achieves its objectives, and how all of the departmental silos are interdependent on each other. The myth that only finance people need to know about finance or that marketing people are the only people who need to know about marketing is fast disappearing. In today’s business environment, profitable organizations require highly skilled employees who can solve complex problems using multi-disciplinary teams.
Can HR be linked to profitability metrics? Yes. Here are three examples:
A well known global company formed a group of HR professionals who developed processes and training programs in sales, customer service, workouts, project management, process improvement and leadership development that focused on critical performance issues for their internal and external customers.
By partnering with operations, sales, and customer service they served as a catalyst to forge alliances, partnerships, and agreements. Many of their efforts resulted in improved relationships that translated into “Preferred Provider Status”, which increased sales and lowered costs. All of their costs were liquidated by charging a fee for the service while creating net revenue.
After two years, this HR group generated sales of $4 million and a profit margin in excess of 30% which was returned to the division budget at the end of each fiscal year.
Secondly, an HR team, partnering with the Audit staff, discovered that the accounts receivable turnover had moved from a preferred 30 days to 45 days during the past two years. They decided to let the chief credit officer go.
The HR staff established criteria to identify candidates with the ability to reduce the ratio from 45 days back to 30 days. The HR staff recommended one candidate for hire. Within six months, the company’s DSO (Days Sales Outstanding) ratio was reduced to 35 days.
In a third case, while designing and negotiating a new health care and 401(k) plan, the HR leadership partnered with the sales and marketing team to determine whether the cost of the program would erode the company’s market share and competitive pricing strategy.
The resulting benefits program design achieved its cost/benefit objectives without jeopardizing the company’s market share and pricing metrics.
Transitioning Human Resources to a Profitability Factor
How do HR leaders and CEOs make the transition? Here are suggestions based on the belief that the more employees become knowledgeably involved in the business, the better they will be able to become a more productive asset.
- Develop a leadership development program that includes hands-on training in all of the functional disciplines. For example, in the production department, identify the barriers that prevent managers from achieving efficiencies and savings;
- Insist that HR staff receive financial training so they understand the impact of cash flow, receivables, billing cycles, and so forth. If you’re a public company, teach them how to read and understand your company’s annual report or 10-k. Reading the proxy statement is always informative – even if the information contained in it is reluctantly revealed, and occasionally masked with arcane accounting jargon;
- Have HR staff participate in sales strategies, customer visits, and technology reviews. Encourage them to learn quality methods, process improvements techniques, terms and conditions, and contract negotiations with suppliers and customers. Engage them as process consultants (have them trained if necessary) so they can assist with growth initiatives;
- Most importantly, hold all employees accountable for achieving the “critical numbers” established for your company. A superb HR department becomes irrelevant if the company is sliding into bankruptcy. The HR department's powerful value focuses on its contributions toward reversing the slide.
Include your HR employees as full business partners. They will rise to the occasion and surprise you by building your bottom line and becoming a profit center contributor as well as maintaining their traditional responsibilities - and they will be better at both.