Is HR a Cost Center or Value Added

HR can influence revenue significantly – often indirectly, but there are instances of directly influencing the revenue.

Like corporate IT, HR is traditionally perceived by business as a support function and a cost center. Generally what HR does is to hire the right people, putting them in the right positions to develop a long-term working relationship using an agreed upon development plan which will lower turnover, reducing the termination cost. Turnover reduction ultimately falls on HR and is highly visible to executive leadership in every organization. HR laser focuses on people, but how does HR improve business profitability?

First of all every department in a company is a cost center including the top management team. However, each contributes to profit in a different way, but none to date can measure that in terms of actual dollar contribution. All departments want to define that and data analytics will emerge to do exactly that. HR can and does make an enormous contribution to profit. You can improve that by doing what you do better like hiring practices, employee retention; training at all levels; labor contracts, etc. All fall to the bottom line. Management development and succession planning at the senior levels always seem to be a weakness as many senior line executives like to do their own.

HR should be a good business partner, and HR function does add the value to the business bottom line. Gone are the days when HR was limited to the traditional HR departmental operations only, HR should equally key-into mainstream organizational operations to assist management efforts in any way possible for a better organization. By doing so,  productivity will be enhanced and profitability will also improve tremendously. How? From the people that they hire, the intention is to grow the individuals in your teams, in the workspace, thus, increasing your bottom line. However, it is the life thereafter of that individual gets hired, that lays in the line manager’s hands, that should be looked into as well. You as HR can set up all the necessary T&D, onboarding, various on the job initiatives, but the person is still guided by their line management.

HR minds the talent gaps and sets metrics to improve productivity. HR measures and improves the level of current resources productivity or if any gap exists, then HR develops and hire right people, improves key talent retention, employer branding, and proper succession planning that all impact the company’s ultimate profitability. In addition to ensuring that right candidates are hired with proper orientation/induction, HR should equally ensure effective liaison between the management and employees for proper learning and development, career management, compensation and benefit, employee and industrial relations, and the creation of an ideal workplace which will ultimately enhance output and performances. HR are mostly people focused while the other departments are number focused. So HR needs to develop the right set of metrics in appropriate measurement to ensure profitability. Let’s take an example of manpower planning: is the manpower plans worked out in accordance with the required skills to operate the organization systems to achieve their purpose, while keeping in mind the cost of these plans. Most of the CXOs think equally, they want to see numbers in front of them, and frankly, HR is about people investment. Be careful when you expect HR to bring profit to the company and cutting cost. You might end up with losing people.

The biggest challenge for HR has always been quantifying their contribution in the only language that anyone really cares about - profit! HR is undoubtedly considered and viewed as a soft skill expense to most average organizations. The key for the winning organizations is to see HR as a driving engine behind profits by empowering their HR leaders to inspire employees to give their best each and every single day they shop up. This starts with open-minded discussions that place no blame but instead seeks to implement solutions with effective processes. Engaging employees produces profits. There is plenty of lip service paid to 'softer' wins but all shareholders, C-Levels are measuring numbers. If HR wants to deliver profitability they need to be asking the right questions rather than being ready with stock answers. Take 'Engagement' as a great example. What value does an engaged employee deliver to your organization vs. a disengaged employee? In most cases, for most organizations the answer will be - we don't know! And for a CXO, it is the start of a great conversation that could lead to a well-funded project that seeks to discover and innovate to find the answer to the question and learn how to profit from the knowledge.

HR can raise its game and demonstrate its contribution with hard data in the following areas.

1). Clarify every 'mission critical' role in the organization: what is critical about it and what distinctive capabilities its holder requires to deliver the distinctive value. Then ensure that each of these roles has a person in place delivering and improving that value. For HR this means deep business and process understanding, business focused job analysis and evaluation, assessment of the capability of the potential of critical jobholders, plans for succession/disaster recovery if roles become vacant.

2) Hard evaluation of HR processes and interventions in terms that CXO top management team can understand. In particular, HR would do well to become the organizational role model at identifying, delivering and evaluating improvement opportunities. Why, because it requires meaningful engagement with workforce HR users and stakeholders - something they keep banging on about and do little to improve!!

Everything about business equates to numbers P&L for its shareholders, including HR. HR has the same business plan with the same numbers in place with yearly, quarterly, monthly numbers. Human Resource has targets and metrics to achieve. The challenge is how to get there, do you use data analytics only, social media, branding, with the right recruiting methods, competitive compensation. Do you have that great partnership with CXOs? When metrics is achieved, turnover is better, best and brightest people are on board, profit plans are met, money will come a bit easier for HR. The biggest contribution HR can make to profitability will vary depending on the business with which you are working. Company strategy has to be your guide to determining the biggest impact you can have on profitability. if you are part of a fast growing start-up company, the biggest impact might be the recruitment to cope with the production/delivery needs of the business. If you are in a downsizing phase it may be the ability to influence key employees to stay and regroup for the future. There is no one size fits all solutions. But whatever it is you are doing, you need to be able to communicate it in terms that make sense to your peers in the organization, your industry, and your shareholders. The credibility of all HR professionals depends on it. HR has to be disciplined in providing regular metrics. They should be consistent in what they measure over time so that impacts can be easily identified during analysis.

People are important. Like IT, HRs can become one of the most strategic department to achieve business goals and values if they act as a great coach, select the key players, continue to play an active role throughout the whole time, not just in the beginning and end, keeping an eye on the competitor (score), and regularly getting feedback from management and staff members. Every person is a cost and associates cost/expense with oneself. You purchase costs to make a profit in the end - directly or indirectly. The quality of investments will determine the profitability and long-term sustainability in the end. HR should be the main driver of quality philosophy because all decisions regarding the organizational survival will be dependent on the induction at each and every level of planning and execution. HR can influence revenue significantly – often indirectly but there are instances of directly influencing the revenue.

Posted in: Talent Master