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More About the Human Resources Department As a Profitability Factor

Can You Link HR to Profitability Metrics?

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HR Can Enhance the Value of Business Services

Copyright Brandon Alms / iStockphoto

The final of the three emerging concepts for the Human Resources department is: 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.

The Human Resources Department and Profitability

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.

Transition the Human Resources Department to a Profitability Factor

How do HR leaders and CEOs make the transition? Here are suggestions based upon our 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.

The intense and brutally competitive business environment of our global and digital world needs the help of everyone in the company. To which group of 20-20-60, mentioned on page one, does your company belong?

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