Human resources as a profitability factor
September 1, 2010 | IHRM Journal
Some people take HR as a mere course that they recommend to their; children, relatives, siblings or friends to
study. However Ken and Robert take it as a profitable venture read on and find out how this can be feasible.
What would you do if you had a Human Resources manager who could:
- Improve the company’s profit margins
- reduce the cost of goods sold
- lower the day’s sales outstanding
- Increase the price/earnings ratio
- deliver flawless transactional and traditional HR services.
Most CEO’s would react two ways:
1. Why is this individual wasting his/her time in HR?
2. Why didn’t I demand this level of HR performance five years ago
The concept of Human Resources as a profitability contributor is fast gaining currency in US 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 20-20-60 proposition. 20% of executives surveyed currently use HR as active and innovative business solution partners. 20% believe that HR should remain as administrative overhead and only perform transactional work. It’s the 60% who are starting to expect HR 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.
What’s driving this thinking? The short answer is competitive pressure in a fast changing business world – pressures for sales, talent, and profits. Most CEO’s (and their CFO’s) are held accountable for three general but powerful results: Increasing revenue, generating cash, and reducing costs. In order to focus on these three accountabilities, paradigms that no longer work are being discarded as companies seek to stay in and grow their business. HR as a strictly administrative overhead and resource consumer is one of the paradigms under justifiable attack.
Transactional HR activities such as payroll, benefits administration and record keeping can now be easily outsourced or digitized (or should be) with significant cost savings. One company in New York digitized their current and past employee data bases, in the process they eliminated over 35 five-drawer file cabinets (and two rooms) and condensed them into CD’s that fit into a shoebox. With advances in technology, even the shoebox is in jeopardy as a storage device.
To many CEO’s and CFO’s, HR as a revenue enhancer takes some 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? Once they get solid answers to these questions from competent HR leaders, the CEO’s are quick to change their thinking.
There are emerging concepts in the practice of HR that bear examination:
- 1. What value does the HR team bring to the organization.
Many HR teams lack a vision that includes their value to the organization. Do their activities directly help the company achieve its broad business objectives? Are their arguments for or against a business strategy credible to the other department heads at the decision making table?
2. What value does HR generate for the customer – the end user of our company’s products or services?
Sales and quality are no longer restricted to the sales and quality assurance teams. W. Edwards Deming taught us that quality and value must be built into every step of the process. HR doesn’t just hire a salesperson based upon a manager’s request. The end result of HR’s recruiting and hiring efforts are that the customer who interacts with the new sales person receives continuing world class service from our company. HR shares the quality of the new hire with other managers to insure that our company is, or becomes, the vendor of choice for that customer.
3. What are the core business competencies that HR must possess in order to be a credible strategic partner with the rest of the executive team?
Each company and 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 by many people about how the company makes money and how it achieves its objectives, and how all of the silos are interdependent on each other. 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 division of General Electric 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. 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 at Bunzl, PLC, 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. It was determined that the chief credit officer should retire. The HR staff then began examining candidates for their ability to reduce the ratio from 45 days back to 30 days. The HR staff recommended three candidates for hire. They chose one individual and within six months, the company’s DSO 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 if the cost of the program would erode the company’s market share and competitive pricing strategy. The resulting benefit program design achieved its cost/benefit objectives without jeopardizing the company’s market share and pricing metrics.
How do HR leaders and CEO’s make the transition?
Here are some suggestions based upon the belief that the more employees become knowledgeably involved in the business the better they will be able to become a more productive asset.
1. Develop a leadership development program that includes hands on training in all of the functional disciplines. For example, in the production department, what are the barriers that prevent managers from achieving efficiencies and savings;
2. Insist that they receive financial training so they understand the impact of cash flow, receivables, billing cycles etc. If you’re a public company, teach them how to read and understand your company’s annual report and related documents;
3. Have them participate in sales strategies, customer visits, technology reviews. Encourage them to learn quality methods, process improvements techniques, terms & conditions, and contract negotiations with suppliers and customers.
4. 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. HR’s powerful value focuses on its contributions towards reversing the slide.
5. Finally, include your 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. The intense and brutally competitive business environment of our global and digital world needs the help of everyone in the company. Which group of 20-20-60 does your company belong to?
Ken Moore, President of Ken Moore Associates, an Organizational Development consulting firm in Ballston Spa, NY. Professor of Strategic Management at the State University of New York at Albany and at the Union Graduate College. firstname.lastname@example.org