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Does human resources impact the bottom line?
Last month, I received a survey whereby of the 700 participants (CEO, CFO, CPO), a large majority of CEOs and CFOs said the human resources function doesn’t have a positive impact on the bottom line in small to medium-sized businesses. What is even more surprising is a large number of HR managers tend to agree.
Unfortunately, this is one of those discussions that has many dimensions when you try to get your arms around it. It takes some effort that most organizations won’t or don’t want to take the time to actually investigate and reach a conclusion. Consequently, everyone reacts to the question based on their perceptions, which are shaped by various experiences and a mix of influential pieces of data.
If there were standard practice requirements, as there are in the accounting and the financial industry, we would have a sounder basis for determination. However, lacking this defined foundation, it really gets down to creating a process for each organization and then tracking it over time. Even with this approach, there is a unique aspect of judging the impact of HR on the bottom line. Unlike the factors that get recognized on financial reports, like revenue and expense, HR practices often influence events that stop or avoid negative impacts that can be very costly when they occur. Consequently, the recorded numbers only show up as an unwanted maintenance expense or a when things go badly, perhaps a large liability expense. This unbalanced documentation adds complexity to answering the question of impact on the bottom line.
Define the ground rules
To begin to resolve the question, perhaps we need to better define our objective. As I’ve indicated earlier, you can influence the bottom line by increasing or decreasing both revenue and expense. However, since the common and desired expectation is to increase profitability, even those practices that reduce expense receive limited recognition once they reach an acceptable level and remain on a constant track. Those processes and programs that avoid expense are shortchanged even more, as mentioned above since they usually add expense to implement and maintain them and rarely put anything in the pot. This is often the nature of HR activities.
This leads us to a number of key points. First, if we want everyone on the same page (CEOs, CFOs and CPOs), we need a common understanding of what is of value to the organization. Next, we need to reach a common understanding that things of value are such because they have impact over time even though circumstances change. Lastly, it is important to be able to readily understand how the value can be judged. If we can put processes in place that contribute to improving or maintaining these three objectives, we will be in a better position to know what does or does not contribute to the bottom line.
Step one in this effort is to establish the critical measure of our success. Many people will immediately state the best measure is profits. To do so may, in fact, do a disservice to many not-for-profit organizations and enforce short-term thinking and strategy. Perhaps a better overall measure is return on investment (ROI). That opens the door to doing things that have impact in a variety of ways. The return for many people is some statement about money, but it may also be about the mission of the organization. For example, we have a client that has the objective of getting clean water to a half-million people in a select geographic area over a three-year period; their goal can be stated in terms of people served for resources expended.
Now back to the issue of measuring contributions expended that impact the bottom line and increasing recognized values. The financial books do a good job for reporting the results of various practices for a set period. They have limited ability to recognize how well the organization is prepared to or has developed certain practices that will be useful in continuing desirable behaviors that will carry the organization toward long-lasting positive outcomes.
Sometimes there are notes in the financial documents that clarify certain situations and lend some perspectives that are not readily discernable by just looking at the various numbers and ratios, etc. Even in this situation, the notes usually are a one-time explanation.
It could be very beneficial to develop a series of on-going measures that reflect how good the organization is at performing certain processes that may directly or indirectly contribute to a good bottom line. For example, it may be valuable to set a standard labor and/or material expense ratios to revenue and note how things stand. Employee turnover and associated costs as a percent of labor cost targets may be another option — perhaps key investment practices: Employee development; equipment and facilities; research and product development.
Another option is the assessment and relationship of employee engagement to profitability or ROI. Each organization can develop its own list to track and manage. Some things we say we value, like transparency, may be quite valuable but difficult to demonstrate. Giving these indirect processes high profile clarifies what the organization truly values and sheds light on how the organization operates and how it performs. These measures may actually be more meaningful to employees who may have limited ownership in the organization.
Put your efforts where your mouth is
Many organizations talk the good game, but putting that talk into practice is often an entirely different matter. Employee handbooks and some recruiting materials may describe how the organization functions with its mission, vision and value statements, but getting those into concrete and measurable outcomes frequently is a different ballgame. An easy example is to say we are a profit-sharing company, but where does this really rank in the overall scheme of compensation? A $500 payout may make the statement true, but that equates to a 25 cents per hour pay raise, less than 1 percent for most employees.
Think of the impact if each organization, probably starting with the owner or board of directors, took a hard look at what it wants to achieve and how it wants to operate, based on its defined values and then developed and tracked its list of key value measurements and outcomes on a priority basis with a periodic schedule. It is likely to have very significant impact on the organization. There would never be that question of what does the human resources department contribute?
Ardon Schambers is president and principal at P3HR Consulting & Services.