Is HR Weakest in the Areas Most Likely to Impact Corporate Success?

Sep 1, 2016
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Steven Director, Ph.D., Professor, School of Management and Labor Relations, Rutgers University


Steven Director
Steven M. Director, Ph.D., is a professor at the School for Management and Labor Relations at Rutgers University and author of Financial Analysis for HR Managers: Tools for Linking HR Strategy to Business Strategy (Financial Times Press, 2013). He also acts as economic advisor to the SHRM Leading Indicators of National Employment (LINE) project.


Which HR Competencies Have the Greatest Impact on Corporate Performance?

A study conducted by the Corporate Leadership Council (CLC) found that in the opinion of the 16,000 line managers who were surveyed, fewer than one in five HR business partners were highly effective in their strategy roles.1 That's a statement that the HR profession should find troubling. The good news is that there is lots of room for improvement, and we know how to generate those improvements. The CLC study also estimated the relationship between HR staff competencies and degree of success as a strategic partner. The maximum impact was calculated by comparing the strategic role performance of individuals rated high and individuals rated low on each capability.

Of far greater importance than expertise in any HR specialization was overall business acumen (21%). What is business acumen, anyway? At the most fundamental level it is an understanding of how your company makes money and how your decisions and behaviors can impact the company's financial performance. The business acumen needed by HR professionals includes understanding their firm's business strategy, the key drivers of their firm's success and the interrelationships among the different components of the organization. This understanding and an appropriate level of analytical skills are essential to develop and execute an effective HR strategy.

Do these findings suggest that expertise in the traditional HR functions is unimportant? No, they suggest that although specialized HR skills are necessary, they are not sufficient. HR professionals need both HR knowledge and a high degree of business acumen. Most individuals in the field today have strong HR skills. There is, however, a wide range in the level of business acumen they possess.

That creates substantial competitive advantages for corporations whose HR staffs possess both sets of skills. For individuals who have both sets of skills, it also creates great opportunities to advance within their HR careers. In general, the higher the individuals are (or hope to be) in the corporate hierarchy the greater the need for strong business acumen to complement their HR knowledge.

Do HR Professionals Have the Required Level of Business Acumen?

In a survey conducted by Mercer Consulting,2 HR leaders were asked to assess the skills of their staff. They felt their staff members were strongest at interpersonal skills, recordkeeping/data maintenance, team skills, functional HR expertise, and customer service. The skill sets where these HR team members were strong are important, but they are not the skill sets that drive corporate success or the career success of individual HR managers. No company is going to become an industry leader because of the interpersonal skills or recordkeeping abilities of its HR staff.

The HR leaders responding to the Mercer survey rated their staff weakest on the following skill sets: financial skills, business strategy skills, organizational assessment, cross-functional expertise, and cost analysis and management. Compare the areas where HR leaders in the Mercer survey thought theirs staff members were weakest with the areas the line managers in the CLC survey thought were most critical to HR's effectiveness. It is striking that taken together the two studies suggest that HR is weakest in the skills most likely to impact corporate success. Remedying this problem should be one of the highest priorities for the HR profession.

How Can HR Enhance Its Business Acumen?

An understanding of one's industry, business, customers, products and internal operations comes with experience, maybe. There are certainly many cases where bright individuals are siloed within the HR function, denying them the opportunity to gain the necessary insights into their firm's internal and external business context. Once firms realize the importance of providing their HR staff with such exposure, there are a range of mechanisms that could be used (job rotation, training programs, cross functional teams, etc.). An understanding of the business context is critical, but not sufficient. HR professionals (like all business professionals) also need a set of tools they can use to analyze that business context and evaluate alternative courses of action.

The toolset that HR professionals most often lack is financial analysis skills. All HR professionals need to understand concepts such as the difference between profit and cash flow, why the time value of money has to be considered when making any expenditure, that value is created only when the return on investment is greater than the cost of the funds used to make that investment, and the importance of assessing and managing risk.

This basic understanding of financial logic is necessary to support all HR decision-making. Some HR professionals also need an understanding of specific areas where HR and finance intersect. For example, one cannot design a pay-for-performance system that supports a firm's business strategy without understanding what is captured in alternative measures of corporate financial performance. The finance department may estimate the cost difference that would result from paying in stock instead of in options, but the HR department still needs to understand these instruments well enough to judge which instrument would produce the most beneficial incentive effects. 

The finance department may estimate the savings from changes to the company's pension plans, but the HR department still needs to understand these plans well enough to estimate how these changes would affect employee behavior. There are countless other examples. Most HR professionals can acquire the general and specialized finance understanding they need without pursuing a degree in finance or business.

The alternatives are to either participate in a well-designed training program or devote time to working through appropriate self-study materials. The challenge is to find programs or materials that demonstrate both how financial analysis tools can be used to improve the return on investment from HR initiatives and how they can be used to evaluate business strategy. Many finance for nonfinancial manager classes ignore the latter topic completely.

Use Those Business Acumen Skills to Play Offense, not just Defense

In many organizations, human resource costs (recruitment, selection, compensation, training and workforce administration) are the largest component of the firm's operating expenses. Properly managing those costs is critical to the success of any corporation. In many organizations, a 10% reduction in HR costs could, other things equal, produce an increase of 30% or more in the firm's bottom line profit. Still, of far greater importance than managing workforce costs is creating workforce value. Firms do not become industry leaders because they have the lowest turnover rate, the smallest health insurance premiums or the lowest cost per hire. 

Firms succeed because they create value for their customers and shareholders. Consider these two firms. Company A's management and workforce are by far the most talented and engaged in the industry. Company B's management and workforce are about average for the industry, but its cost per hire is much less than average. Which HR department is doing the better job? In which firm will more value be created for shareholders? The amount a firm can save by reducing inefficiencies in HR processes is usually insignificant compared to the amount it can gain by building a more talented and engaged workforce. Of course, if you can do both, that's fantastic.

Too often those arguing for greater business acumen among HR professionals use a defensive rationale. They emphasize measuring the ROI from specific HR initiatives as a way to demonstrate HR's value to others in the organization. The rationale for increasing HR's business acumen should not be to demonstrate HR's impact on the bottom line but to increase HR's impact on the bottom line. CFOs don't spend their time looking for ways to justify the importance or legitimacy of their function. They devote their time, energy and abilities to making their firm as successful as possible.

HR should not ignore the importance of calculating the ROI from individual programs and initiatives. It should, however, recognize that the more important use of its business acumen and financial analysis skills is to think broadly and creatively about what is required to create value for the firm's customers and shareholders. If HR acquires the necessary business acumen skills and applies them in this manner, an improved image of the HR profession will be an unavoidable side effect.

Endnotes

  1. Corporate Leadership Council. (2008). Building next-generation HR line partnerships. Washington, DC: Corporate Executive Board.
  2. Mercer Human Resource Consulting. (2007). HR transformation v2.0: It's all about the business. Retrieved from http://www.imercer.com/products/2012/us-human-resources.aspx
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