HR’s No. 1 Priority Profit

The days of being satisfied with achieving “business partner” status are over. The rapid flattening of the business world presents nearly every business function with an opportunity to dramatically affect results and renders overhead functions that are merely efficient invisible.

    To keep that seat at the table and remain a viable part of the executive committee, HR leaders must shift their approach from maintaining the status quo with only incremental gains in efficiency to a new model that I call “business impact HR.” Failure to abandon the satisfaction that comes from past successes and embrace new realities will result in the decline of the HR function’s scope or a total outsourcing of the function.

    Let’s start with the fundamentals. The primary measure of any business function, according to most senior-level executives, should be demonstrated impact on the bottom line (preferably a positive impact). Obviously, functions that have the most visible impact on profit receive the largest amount of recognition and respect. Finance, for example, directly increases profits by making effective investments. Marketing increases profits by increasing the volume of prospects that can be processed by sales. In contrast, functions that do not have a clearly visible impact on profits (accounting, IT, HR, etc.) are doomed to battle for funding or may face elimination. It’s either “show me the money” or you will be “shown the door.”

    Business impact HR shifts human resources away from its current process-efficiency focus and instead adopts a goal of delivering a demonstrated business impact. The concept is borrowed directly from the most powerful business functions: marketing, finance and product development. The mission statement for this approach is short and to the point:

    “The mission of business impact HR is to understand the business and identify the specific areas where great people and talent management can directly affect business results. HR then focuses on those activities and develops credible metrics so that the CEO, CFO and other functional leaders will irrefutably see the direct connection between investing in these areas of HR and increased revenue, margins and profitability.”

    Proving an impact on profit is, of course, not easy. But all strategic things are almost by definition difficult to do. Fear not; others have already found a way to make the shift. For example, up until the 1990s, purchasing, inventory control and warehousing were considered overhead functions and, as a result, were treated with little respect. But when a few visionaries at companies like Wal-Mart and Dell decided that by adding a little technology and a lot of metrics they could transform these “backwater” functions into the profit-generating supply-chain powerhouse that we know today, they changed the game.

    If you’re ready to make that kind of shift, the first step is to identify high-impact activities. Start by talking to managers and taking a look at the research done by Watson Wyatt. The consultancy’s Human Capital Index identifies high-impact HR activities by correlating the performance of companies to the existence of world-class, average and pitiful HR practices. HR leaders must shift their talent and budget to focus on these high-impact activities. Also assume that line managers will be skeptical, so educate them with examples and correlations that show that high-performing business units also rate extremely high in their people management practices.

    In the financial area, HR must work with the CFO’s office to learn how to convert HR results into dollar impacts. You would convert a typical HR statement, such as “Our turnover rate is 2 percent,” into something more meaningful, such as “Turnover cost us $17 million last year and our total firm profit was only $12 million.”

    HR also must redefine its primary customer. It should be the firm’s external customers, because if you focus on the paying customer, you increase your chances of affecting profits. Other critical actions include changing to data-based decision-making, focusing on preventing people problems, and shifting the language of HR professionals toward the language of business (which includes productivity, ROI and profit).

    The last step is a longer-term action requiring HR to lead a companywide effort to shift the organization to a performance culture in which all rewards, recognition and people-related programs are focused on business performance.

    A final thought: In tomorrow’s business world, every function will be fast, agile, low-cost and will provide a substantial competitive advantage. It will also be expected to be innovative and, above all, able to demonstrate its irrefutable impact on the bottom line. Unfortunately for many in HR, there is no “option B” available.

Workforce Management, February 26, 2007, p. 50 — Subscribe Now!