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Effective HR Practices Drive Profit

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1112cover.gifThe best business leaders know that their people are the driving force behind their business. Now, there is a growing appreciation of how human resource practices are directly linked to revenue and profit margins.

Recent research shows just how big of a difference effective HR practices can make: "Companies that are highly skilled in core HR practices experience up to 3.5 times the revenue growth and as much as 2.1 times the profit margins of less capable companies," according to From Capability to Profitability: Realizing the value of People Management. The report from Boston Consulting Group and the World Federation of People Management Associations is based on a cross-industry study of more than 4,200 HR and non-HR managers in more than 100 countries.

It found the greatest correlation between positive economic performance and skilled HR practice in the following areas:

  • Employee retention.
  • Employer branding.
  • Leadership development.
  • Onboarding of newly hired employees.
  • Performance management and rewards.
  • Recruiting.
  • Talent management.

Leadership development, talent management, and performance management and rewards were three areas in which "the high-performing companies differentiated themselves dramatically. In each one, these companies engaged in more activities and provided more options, did so more often, and were generally more effective," the report stated.

This recognition of the importance of effective HR practices is leading some executives to add the value of their staffs to their balance sheets. Information technology company Infosys has been assigning a financial value to its entire workforce in its accounting reports since 2008. Leaders in many other companies are looking at ways to measure and report the value of their employees and their HR practices.

For most HR professionals, none of this is new. HR metrics are a significant part of the profession's body of knowledge. But growing appreciation of the value of these measures of HR effectiveness by business leaders and business analysts outside HR will highlight them even more in the years ahead.

HR practices with the biggest impact on the bottom line will be studied in even more detail. This will influence HR strategies at companies around the globe. Leaders in many organizations will invest more time, attention and money into building a highly skilled HR team that can effectively deploy high-impact practices.

Business leaders' expectations of tomorrow's HR practitioners will be high. HR professionals will need to understand and communicate the return on investment for key HR practices even more fully than they do today. But the reward will be an even greater and more influential role in setting business strategy.

The author is manager of the Workplace Trends and Forecasting program at SHRM.

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