Can HR Departments Really Become Profit Centers? Let's Discuss ICICI Bank's Approach

Dear Friends,

I read a topic about ICICI Bank's HR Department running as a profit center with an entirely new approach.

The concept is as follows:

A very clear and nearly 85% accurate forecast on recruitment-related information and other HR programs made this thing possible.

The department focuses on forecasting attrition in the upcoming months based on historical data, the current market scenario, such as the type of candidates chosen by competitors, the strategies adopted by competitors, etc.

Forecasting attrition and recruitment planning based on the forecast saves the company money by reducing the "benching" costs of recruits.

Instead, with the limited and actually required volume of recruits, the company would pitch in for induction which is better than benching and also more productive.

Industry analysts estimate that this could result in saving over Rs 100 crore a year.

Dear friends, please discuss your views on this topic.

Regards,

Elamurugu

Hello Elamurugu. Thanks for the interesting information. There is a world of difference between making savings and being a “profit centre”. Can you please direct me to your original source for the information? Much appreciated.
Vicki Heath
Human Resources Software and Resources
http://www.businessperform.com

Thanks Elamurugu, I had a read of the article. I detect a certain amount of hype. It starts off by saying, “The trick is to adopt a profit-centre approach …”, and then goes on to say we need to “acknowledge” that HR is a profit centre. But then it ends up with ICICI's group chief HR officer saying, “We are like cost managers in a sense …”.

Which is it: “profit centre”, “cost centre” or what”? These are opposite ways of operating. I get the strong sense that they are not operating as a profit centre at all. Sure, HR needs to be mindful of operating costs and continually introduce efficiencies, and ICICI are doing a commendable job at this.

I do detect an over emphasis on the transactional/operational aspects of ICICI's improvement efforts. Getting in Goldratt (well known for his book, The Goal, on supply chain management efficiencies) to look at their processes only highlights this focus.

How do you fit OD, leadership development and industrial relations into a profit centre model. Running HR as a true “profit centre” entails extra administrative overheads and carries with it its own peculiar risks (E.g, HR managers becoming more focused on bottom-line profit rather than improving the organization.)

I'm waiting to see some specific, actionable ideas on how HR can be made a profit centre and some hard evidence on how this would be of more benefit over and above other approaches to making HR more accountable for organizational outcomes. What do others think?

Vicki Heath

Human Resources Software and Resources

http://www.businessperform.com

Hi Vicki,

In my understanding, the concept of a profit center is a unit that generates revenue to sustain its expenditures. From that perspective, I would like to address the HR function - transitioning or transforming from a support function to a business partner, hence moving from a cost center to a profit center.

The HR function can become a specialist center adopting a consultative approach for the services it renders to the organization, covering all verticals or SBUs.

The consultation for providing all HR initiatives will be charged by the HR function to the specific SBU or organization as an entity. This money is used as consulting charges for the services rendered and will be used as remuneration for the HR associates. Although there is revenue and expenses involved between the function and SBU/organization, it is intra-organization and can be likened to transfer pricing.

This approach would entail the HR function to be a profit center if it is priced and managed effectively.

Suggestions are invited.

Rajeshb, thank you for your thoughtful comments. I would like to make the following comments:

HR, or any function for that matter, can become a “business partner” without becoming a “profit center”. The two are not synonymous, as you seem to imply.

You encourage the HR function to cross-charge other SBUs for consulting services. This is going much further than what seems to be ICICI's approach of just streamlining their operational HR processes.

My previous challenge applies to your suggested approach as well: Making HR a true “profit center” entails extra administrative overheads (e.g., cross-charging) and I'm waiting to see some hard evidence on how this would be of more benefit over and above other approaches to improving HR.

Once HR starts cross-charging for its consulting services, to be a truly responsible and accountable for its “profit”, HR should be able to tender its services to other outside clients and other internal SBUs should be able to seek consulting services from outside competing HR consultancies.

You can start to see the added complexities that are introduced once you start talking about HR being a profit center. Another risk is that HR will begin to focus on its “bottom line” instead of on what is best for the company.

And why stop at the HR function? Why not make Marketing, Quality, Engineering, Finance, etc “profit centers”? I believe we need to integrate the various functions in an organization, as they are all dependent on each other to make the whole organization achieve its objectives. This is a systems view of organizations that I have defended before.

Rajeshb, your goal to make HR more accountable has a lot of value, and I agree with you in this. I just think we need to move away from the idea that “each man is an island”.

Vicki Heath

Human Resources Software and Resources

http://www.businessperform.com