The Human Resources Department As a Profitability Factor

The Human Resources Department As a Profitability Factor

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The role of the Human Resources department is the subject of much discussion in recent years. I’ve often argued that HR staff belong at the executive table helping with strategy and the business. But, this argument assumes that the HR staff are thoroughly immersed in the business of the organization and the financials.

Too long have people argued that the organization is devaluing the potential of HR staff to contribute. Sure there is some of that in organizations. Many retain a traditional view that HR means administration and error-free transactions.

But, it’s the HR department members themselves who need to change this world view. HR staff need to re-educate management and themselves about their potential contribution to the business. Robert Furlong (pictured above) and Kenneth W. Moore (pictured below), discuss this issue and suggest that HR as a profit center would transform the field – and the organization’s view of the HR department. Groundwork must be accomplished first.

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/earning 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.

Expectations of the Human Resources Department Have Changed

These three emerging concepts in the practice of HR bear examination:

  • What value does the HR department bring to the organization. Many HR teams lack a vision that includes their value to the organization. Do the HR department’s activities directly help the company achieve its broad business objectives? Are the HR team’s arguments for or against a business strategy credible to the other department heads at the decision making table? How are the HR department strategies, that benefit the employees, the shareholders, the customers, and all other stakeholders in the organization, selected and implemented?
  • What value does the HR department generate for the customer – the end user of the company’s product or service? Sales and quality are no longer restricted to the sales and quality assurance teams. Edwards Deming taught organizations that quality and value must be built into every step of the process. The HR department doesn’t just hire a salesperson based upon a manager’s request. The end result of HR’s recruiting and hiring efforts is that the customer who interacts with the new sales person receives continuing world class service from the company. HR shares the quality of the new hire with the other departmental silos to insure that the company is, or becomes, the vendor of choice for that customer.

Find out more about the third emerging concept and the HR department’s contribution to company profitability.

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