The Human Resources Department As a Profitability Factor
Perhaps most of us (who study business or part of a company) believe that human resources department is an extra cost to the company since it is not a productive department.
And most of us know that HR department deals only with staff skills and company recruitment, and it doesn't deal with "numbers", like production, profitability, loss …etc.
So What would you do if you had a Human Resources employee who could improve the company’s profit margins, positively impact the cost of goods sold, lower the day’s sales outstanding, and increase the price/earnings ratio while liquidating overhead costs to the business - and still deliver flawless transactional and traditional HR services? Most CEO’s would react in two ways:
- Why is this individual wasting his/her time in an HR department?
- Why didn’t I demand this level of HR department performance five years ago?
The concept of the Human Resources department as a profitability contributor is fast gaining currency in U.S. 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 a 20-20-60 proposition. Of executives surveyed, 20% currently use the HR department as active and innovative business solution partners. 20% believe that the HR department should remain as administrative overhead and only perform transactional work.
But, 60% of the executives are starting to expect the HR department to partner with others 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, executives are discarding paradigms that no longer work as companies seek to stay in and grow their business.
The HR department as a strictly administrative overhead and resource consumer is one of the paradigms under justifiable attack. Transactional HR departmental activities such as payroll, benefits administration and records keeping are easily outsourced or digitized (or should be) with significant cost savings.
We have worked with companies who have digitized their current and past employee data bases. In one company, they eliminated over 35 five-drawer file cabinets (and two rooms) and condensed them into CDs that fit into a shoebox. With advances in technology, even the shoebox is in jeopardy as a storage device.
To many CEOs and CFOs, the HR department as a revenue enhancer takes 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? How does this get us new customers and retain our current customers. Where is the proof of corporate performance enhancement metrics?
Once they get solid answers to these questions from competent HR leaders, the CEOs are quick to change their thinking. To answer the payoff questions, recognize that a continual company-wide value chain analysis is critical to the success of any organization. Over the past decade, CEOs began demanding that their Human Resources departments deliver flawless functional work and become a knowledgeable partner with all other disciplines to advance the business plan of the company.
Individual professional silos are breaking down. Disciplines such as finance, sales, marketing, operations, and HR no longer exist as stand alone entities. They are inter-dependent with one another. Weakness of any one of the links inhibits other links from maximizing their efficiency and productivity. *Wall street