Vol. 48, No. 9
HR and finance are learning to team up effectively to develop strategy and resolve operational problems.
When HR Manager Christina M. Hartley, PHR, wants to talk to her company's CFO, all she has to do is go next door.
It's no accident that finance manager Ignacio Mercade has the adjacent office. Executives at their firm, SHI-APD Cryogenics Inc. of Allentown, Pa., consider the top HR and finance officials to be equals and want them to collaborate as much as possible.
While such close cooperation among HR leaders and CFOs is not the norm at U.S. companies, it is a growing trend that bears tremendous potential for organizations and HR professionals. A recent in-depth survey conducted by CFO Research Services and analyzed by Mercer Human Resource Consulting has documented what Hartley and Mercade already know: The HR and finance professions work better together than separately.
"Both have the role of the conscience of the company," says Hartley, who has learned a lot from Mercade, including "how to use spreadsheets, how to read monthly financial reports and understand them, how to see how the company is doing and where the costs are."
And Mercade has much to thank Hartley for: understanding union contracts—"We always rely on her interpretations as to which way to go"—plus changes in labor laws that must be dealt with to minimize the chances of litigation.
It hasn't always been this way at SHI-APD Cryogenics, a cryogenic equipment manufacturer that was bought by a Japanese company a few years ago and restructured to have HR report directly to top management. "In the past, HR was kind of passed around," says Mercade. But today the finance and people functions are valued equally and "are working much closer together than ever before," he says.
When Hartley wants to propose a program or spending increase related to staffing, she goes to Mercade first. He costs out the options and analyzes them with her, and together they refine a plan that they can defend before top management.
"I couldn't fathom working this closely with any other department," says Hartley. "Sometimes it's intimidating," she adds. "What am I doing here with all these financials in front of me?" But she says the benefits of working outside her previous comfort zone, plus the knowledge that she can go next door for help at almost any time, outweigh any drawbacks.
Like Venus and Mars
Even the most ardent supporters of cooperation among HR and finance concede that the two disciplines are by nature quite different. If HR is from Venus, finance is definitely from Mars. Many HR people come up with a nurturing, protective approach to employees, often supplemented with a deferential attitude toward CFOs and CEOs. Finance people, trained to focus on dollars and cents, are often imbued with an impulse to control costs and their sources.
Attitudes are shifting, however. Thirty-nine percent of respondents in the CFO Research Services survey said they view HR "mainly" or "somewhat" as a strategic partner, one-third said they see HR as an even mix of cost center and strategic partner, and 28 percent said they see HR as "somewhat" or "mainly" a cost center. Though there is no earlier survey to quantify the shift in attitudes over time, the report's authors and other experts say there is definitely a trend toward greater CFO understanding of, respect for and interest in HR.
"In the last couple of years the linkage has been accelerated because of the economy," says Mark Huselid, a professor at Rutgers University in Piscataway, N.J. Greater scrutiny of corporate governance matters also has put more pressure on businesses' HR and finance functions to cooperate, Huselid states.
The vast majority of CFOs surveyed view human capital as a key driver of shareholder value. Few finance executives say they understand their return on their human capital investments—only 16 percent of the survey respondents know that return to a "considerable" or "great" extent. But the desire to influence people management is there.
Not all CFOs think that cooperation with HR is the best way to influence people management, however. In some organizations, finance people grab power over matters traditionally considered to be HR's territory, and the results are not always positive.
In 13 percent of large corporations, HR reports to finance, not to the COO or CEO. That structure exists in 22 percent of smaller firms, according to the CFO Research/Mercer survey report.
In some firms with small HR operations, it makes sense for HR to report to finance. But in large organizations, that structure might suggest that HR isn't considered to be as trustworthy or as business-minded to play at the same level as finance.
Even so, a partnership between the disciplines can prove worthwhile. To achieve that partnership, both HR and finance will need to give a little.
"Human capital is not strictly associated with the HR function," notes Rick Guzzo, a partner with Mercer who was involved in the survey report. "As an intangible asset, it doesn't conform exactly to the finance function or the HR function."
Guzzo says that he was surprised to see just how willing finance officials are to work with HR. "CFOs probably have to make the greater leap of faith here."
Finance is recognizing that "it's not just the warm and fuzzies you've got to consider. A bad termination can outweigh your budget savings," says Stephen J. Brewer, SPHR, chief operations officer of Physicians Immediate Care in Rockford, Ill. "Finance is saying: OK, you have some valid points to make."
'More Than Worth the Risk'
David Hutchins, SPHR, CEBS, CCP, chair of the Society for Human Resource Management Board of Directors, says HR professionals must be willing to make leaps of faith and concessions to finance if necessary to develop collaboration. "In my experience it has been more than worth the risk," he states. "It's important for HR professionals to seize the idea that sound organizational financial success and creating an efficient workplace environment for peoples' success are mutually beneficial."
"It kind of reminds me of a marriage, a collaborative type of relationship in which each can exert skills and responsibilities," says David Jackson, senior vice president and CFO of Road & Rail, a Louisville, Ky.-based provider of logistical services to the transportation industry. "It's been a long time coming. I think the trend will continue," he says. "I think the lines will be blurred."
This collaboration "prevents the HR function from becoming a silo," observes Michelle Burns, CFO of Atlanta-based Delta Air Lines, where finance and HR work together closely on a regular basis. (See "Delta: Marriage of Finance and HR".) Laura Butcher, managing director of HR, reports to a Delta HR executive, but she is also linked to Burns's office by a dotted line on the organization chart, making her an unofficial but essential HR consultant to Burns and her finance team.
The two disciplines can benefit from understanding and breaking their traditional mindsets about managing the workforce, say some HR and finance leaders.
"It starts with a 'Help me understand what's driving your decision so we can reach common ground' ", says Sarah Meyerrose, who heads the HR operation at Memphis-based First Tennessee National Corp., a bank holding company and financial services firm.
"So often you sort of impute what the other person's motives are. For HR the key is not seeing HR issues as the soft, squishy sort of thing," says Meyerrose. "For finance, it's not seeing human capital as a capital asset like the lamp thats sitting on my desk."
Efforts to get HR and finance together can start small, such as by an HR leader taking the CFO to lunch or swapping jobs for a day or two with a finance staff member. It helps when HR does some homework first, say professionals in both disciplines.
That means understanding the language and principles of finance. "Learn the decision criteria of CFOs as well," suggests John Sullivan, an HR consultant, speaker and professor at San Francisco State University. "HR people should keep in mind that we're going to be much better with finance's help," he says. "When the world becomes data-driven, we can't be the last ones" to master data-intensive work.
Some experts suggest that the two disciplines might merge at some point, creating a strange new hybrid. "In most large companies, the heads of HR have MBAs," notes Brian Hackett, a director at The Hackett Group, an Atlanta-based consulting firm. "An argument can be made that the HR profession is kind of coming into the finance profession."
Productive interaction among finance and HR people can be aided by management buy-in to the concept and a culture that facilitates rotation programs in which finance professionals spend time in HR and HR people move into the business. (See Putting HR in Rotation in the March issue of HR Magazine.)
At Midland, Mich.-based Dow Chemical, blurring the lines among the functions through such techniques "is clearly ingrained in our culture," says Nancy Tootle, global design leader in the HR Workforce Planning Strategic Center. "We work in a very collaborative team environment" that is fostering development of sophisticated metric tools designed not just to manage human capital but also to quantify the return on the investment in people."
Teaming Up for Results
Quantifying return on human capital investment is almost an obsession at First Tennessee. The firm hired Meyerrose, whose background was in finance, to head its HR function in 1998 and tasked her with getting HR in sync with business strategy.
Under Meyerrose, the company launched surveys and studies seeking to establish the links among high-performing employees, customer loyalty and retention, and profitability. It also sought to find ways to stem the departures of some of its most important workers. (See First Tennessee: Talking to the People.)
HR and finance have collaborated on other projects as well, such as development of a staffing model for the company's sales forces. First Tennessee analyzed its traffic patterns and transaction volume to determine how many full- and part-time staff are needed. When one office loses an employee, the model allows management to determine if another office has more than its ideal number of workers and to redeploy an employee rather than go through a lengthy hiring process.
Examples of HR and finance teaming up to solve day-to-day problems are not limited to the for-profit world. Much like a business would go about determining how it needs to manage its people to satisfy its customers, the U.S. General Accounting Office (GAO) has conducted a series of employee surveys to identify "our critical success factors," says Sallyanne Harper, the agency's CFO, who carries the title chief mission support officer.
The agency, the investigative arm of Congress, recently discovered that its workers did not have a high level of confidence in GAO's performance management system and that a substantial number of employees believed that they were not consulted before management decided on various courses of action. As a result, GAO launched an overhaul of performance management, which Harper says "created a buzz" among agency employees, and it changed procedures to increase the ability of people to get involved in decision-making.
"GAO is only as good as our people," says Harper, echoing the emerging respect for the importance of human capital among CFOs in the business world. "It's critical that finance and human capital be very tightly tied. We look at people as an investment that needs to be made."
When her agency puts together its annual budget proposal, the starting point is "what are our human capital needs; what are the types of people we'll be recruiting; what are our expected retention rates; what are our travel costs and IT infrastructure costs" such as notebook computers and other electronic gadgets for employees on the go.
And, like some corporations, GAO has attempted to calculate the return on its investment in people. "For every dollar invested in the agencys budget," says Harper, "it provides more than $80 to the federal government in efficiencies."
In the municipal government of Haines City, Fla., HR and finance work together on a more informal basis, says Ruth Lovejoy, who is a human resources analyst and supervises a payroll clerk. And though she and the finance staff have different backgrounds, they are kindred spirits.
"We agree on a lot of things, believe it or not—processes, philosophies," says Lovejoy. By interacting on budget and payroll matters on a regular basis, she has gained a comfort level with spreadsheets and other tools to forecast salary and benefit increases. And she has developed a greater understanding of, and appreciation for, the headaches finance people encounter—"all their red tape, and dealing with the IRS."
At Circuit Check, a Maple Grove, Minn.-based company that manufactures components for electronic testing equipment, Tom Kelly heads HR, finance and IT, a combination that gives him strong insight into the benefits of overlapping finance and HR matters. "For example," he says, "last year Circuit Check was planning to change its employee health care provider, coming up with a cheaper alternative to the existing carrier. However, some workers would not have been able to keep their existing doctors and retain the same level of reimbursement. The company, concerned about the impact on workers, rejected the change."
In another recent example of interdisciplinary coordination, Kelly approached the group of employees who test electronic circuits, a staff that was running up a lot of overtime costs. He asked, "What can we do to get the cost down? What are your ideas? You're the ones who are going to make this process work, not me."
Their solution: cross-train the group in the various skills needed, resulting in more flexible work schedules and lower labor cost overall. "They created it, and they own it," Kelly says of the solution. "You just have to give them a vision and some leeway."
Ignoring the Org Chart
At New York-based Alcoa Inc., one of the large U.S. corporations in which HR reports to finance, the collaboration between the two disciplines is every bit as strong and successful as in companies where the two functions are side by side on the organizational chart, says Hamish Petrie, vice president, people and communication. "There's still a big overlap. I still work with our CFO on a number of issues," he says.
"The finance team recently assigned one of their up-and-coming people here," adds Petrie. I'm pretty excited about that."
HR professionals shouldn't spend much time and energy concerned about organization charts and the relative prestige of HR and finance, suggest some experts—nor should they worry that finance will swallow up HR. If all parties keep sight of the overall goal—aligning people and skills with the competitive needs of the business—more often than not everyone will benefit.
"If HR can show up at the table with their set of metrics like the finance people, showing trends and results and outcomes, they're obviously in a better position" to affect policy and raise the profile of the profession, says Hackett.
HR is sailing into "the perfect storm" of change and opportunity," Hackett says. "Human capital costs are through the roof. Pension costs are through the roof. Plus governance and executive compensation issues. This is a real opportunity for HR to be equal partners getting through these high-profile issues. There's no better time to show your stuff."
Steve Bates is senior writer for HR Magazine.