December 15 , 2017

HR IS A PROFIT CENTER, AND HERE’S HOW TO PROVE IT

Focusing on Cost Containment is Less Strategic than Driving Revenue Growth

For the past decade the human resource function has operated under the myopic focus that process efficiency was the most critical deliverable in the enterprise.  While this misguided focus can be partially attributed to external pressure from the finance function and the budgeting process, such pressure can in most cases be evaded by proactively developing the business case for all activities undertaken in HR.  Unfortunately, developing a business case rarely happens and instead, the human resource function continues to make trade offs between quality and cost that carry on the lowest common denominator of deliverables at a slightly lower cost.  This never ending focus, while easy to accomplish and attractive to some, fails to address or solve critical business problems facing the organizations that could be remedied via HR.  Cost containment is much like periodically replacing water stained acoustic ceiling tiles versus calling out a roofer to fix the root of the problem; in the end replacing the tiles periodically will cost you much more. 

The other way to look at cost containment in HR is that of a race car spinning its wheels; it requires a lot of effort but produces little result.  When cost containment efforts are first undertaken the results can be fairly significant, however as time passes and the efforts continue the value of the savings diminish.  Today, cost containment efforts pertaining to the activities of the human resource function impact such a miniscule portion of the overall corporate budget, that the savings produced are insignificant to say the least.  This is because the total HR budget in many organizations is less than 4% of all corporate expenditures.   

While it is true that HR receives only a small portion of the total corporate budget it is charged with managing the programs, policies, and infrastructure governing the resources that on average are allocated 60% of the total corporate budget, the workforce. Which makes more sense, achieving a 7% cost savings on 4% of the total corporate budget, or a 1% growth in return on 60% of the total corporate budget?  The answer should be clear, check out the math below based on a real professional services firm traded on the New York Stock Exchange! 

Assumptions:

·        2004 Revenue: $2,262,200,000

·        2004 SG&A Expense (Budget): $2,142,900,000

·        2004 HR Budget: $69,000,000 (3.2% of total budget)

·        2004 Salaries & Benefits: $1,208,922,000 (56.4% of total budget)

·        2004 Return on Salary & Benefits Expense: 5.4% 

The Math:

·        Value of 7% Reduction in HR Costs:

o       7% X $69,000,000 = $4,830,000

·        Value of 1% Workforce Productivity Gain:

o       1% X $1,208,922,000 = $12,089,220 

That’s a difference of $7,259,220! 

How to Demonstrate the Productivity, Revenue and Profit Impact of Specific HR Activities

It's not enough to "believe" that HR activities and programs actually work; you must also be able to demonstrate to any critics (particularly the CFO’s) satisfaction that they positively impact employee productivity, revenue and profit. Unfortunately, most HR professionals go about proving that impact the wrong way.  The process of demonstrating business impact should start by assessing all current HR programs to establish a baseline and foundation point for future analysis.  Once you have caught up, then step two is to keep current by evaluating all newly proposed programs using the same process. 

General Tips for Proving Impact

There are four basic ways to provide "dead bang proof" that a program works. Each is similar to the way a new drug gets tested or that new ads and new products are tested. The most effective ones are listed first. 

1.      Split sample contrast — Use a split sample or a control group.  Instead of applying a new HR program to the entire team or division, apply it to only half to demonstrate the relative impact of the program

2.      Before and after contrast – Measure employee performance just prior to program implementation and again after implementation, show the contrast in performance.

3.      Demonstrate a correlation — Show a direct correlation between the increased usage of a tool by managers and employees and an increase in productivity, revenue or profit.  Also demonstrate that when usage goes down, so does productivity

4.      Results after implementation — Show that employee performance is high immediately after the program is implemented (In this case you do not have “before” performance data (as in #2) for precise comparisons) 

Examples by Function

Training

·        Split the sales team and provide one half of the sales team with increased sales training.  Do nothing to the other half. Contrast the difference in sales between those with increased training and the sales people without the additional training

·        Demonstrate that there is a high correlation or connection between the number of hours a worker receives in training and their productivity

·        Show that lower training hours correlates with increased error rates, accidents and lower product quality. Calculate the costs of errors and accidents to prove the business impact

·        Assess worker performance before training and then show that worker productivity increases immediately after they receive training 

Recruiting

·        Demonstrate that newly hired workers produce more than the average worker (i.e. one already on staff) by directly comparing their productivity in jobs where output is easily measurable. For example, demonstrate that the sales people you hire under your "recruiting system" produce significantly higher average sales than your current employees. Next calculate the dollar differential in output between the new hires and the average existing employee.  Next multiply that dollar differential amount by the number of new hires, to show the overall revenue impact that new hires have

·        Run a "pilot" employee referral program in one isolated division and demonstrate the decreased costs and increased quality of hires that result from the pilot program 

Compensation

·        Show that giving a worker a 10% raise increases their productivity by more than 10%

·        Provide evidence that, as the percentage of your employees pay that is tied to performance increases, so does their output and productivity

·        Demonstrate a correlation between high pay and high productivity.  Show that highly paid workers produce more than the dollar value of their wage differential (between them and the average paid worker) 

·        Calculate the ratio of the dollar value of employee output per dollar spent in compensation and benefits. Compare the difference between this year and last year.  Show that you are continually getting more for your compensation dollar and also demonstrate that your output per “comp dollar” is significantly higher than your competitors 

Employee Relations

·        Demonstrate that “problem employees" and bottom performers increase their performance and become “average or better" performers within a year after employee relations works with them. 

·        Prove the correlation between “highly rated" (by employees) managers and productivity by showing the percentage increase in productivity that occurs when a highly rated manager replaces an average rated manager in a business unit (and vice versa).  Next, show that your employee relations and training efforts significantly increase the “rating" of previously poorly rated managers

·        Demonstrate that your “bad manager" identification program identifies, fixes or removes bad managers months faster than the industry average  

Work Life Balance

·        Demonstrate that as the percentage of workers that take advantage of work life balance programs increases, so does the productivity in their department or division

·        Show that the retention rates of employees increase as work life balance usage increases.  Calculate the dollar impact of keeping key employees months longer

·        Ask new hires "why they took the job" and demonstrate that the top hires took the job primarily because of your work life balance offerings

·        Ask top performers (three months after termination) "why they left" to demonstrate that an a lack of work life balance programs wasn’t a significant factor in their decision to leave 

HRIS

·        Demonstrate a positive correlation between the increased availability of online HR "answers". And conversely, a decrease in the amount of “wasted hours” that employees and managers report that they spend “looking" for answers within the HR department.  Calculate the economic value of reducing those "wasted hours"

·        Demonstrate HRIS’s effectiveness by showing the increased accuracy of "HR answers" that are provided on the firm’s Internet site, as compared to the answers received from (the significantly more expensive) HR generalists  

Concluding Advice

CEO's are laser focused on the results that their board of directors holds them accountable to.  As a result, VP's of HR can make the transformation into a profit center more visible by identifying exactly what their CEO is measured and rewarded on and internally branding or highlighting their related successes.  To insure that your analysis passes muster, build an alliance with the finance function, after all they are responsible for measuring ROI.  Develop your profit center plan in conjunction with the CFO's office.  Be eager to learn about metrics and how to measure and report things the way finance professionals do. Be equally willing to teach the CFO about the impact that motivation, training, recruiting and retention can have on increasing employee productivity and company profit.  If you include each of the critical success factors in your plan you will see that HR will be transformed from a backwater "overhead" function into the #1 internal contributor to increased productivity, revenue and profit.  The time has come for HR to become the “next" corporate hero… are you up to the challenge?

About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.