The Role of HR in Enhancing Profitability
What would you do if you had an employee who could improve the company's profit margins, positively impact the cost of goods sold, lower the days sales outstanding, and increase the price/earning ratio while liquidating some overhead costs to the business—and still deliver flawless transactional and traditional HR services? Most CEOs would react in two ways:
- Why is this individual wasting his/her time in HR?
- Why didn't I demand this level of HR performance five years ago?
The concept of Human Resources as a profitability contributor is fast gaining currency in US businesses and bears closer examination. Professor David Ulrich of the University of Michigan, a leading expert on HR competency models, sees the changing business world as a 20-20-60 proposition. Twenty percent of executives surveyed currently use HR as active and innovative business solution partners. Another 20 percent believe that HR should remain as administrative overhead and only perform transactional work. It's the remaining 60 percent who are starting to expect HR to partner with other departments to improve the company's core competencies and competitive advantages. More HR professionals are stepping up to the plate and delivering the goods.
Driving Factors Behind HR's Evolving Role
What's driving this thinking? The short answer is competitive pressure in a fast-changing business world—pressures for sales, talent, and profits. Most CEOs (and their CFOs) are held accountable for three general but powerful results:
- Increasing revenue
- Generating cash
- Reducing costs
In order to focus on these three accountabilities, paradigms that no longer work are being discarded as companies seek to stay in and grow their business. HR as a strictly administrative overhead and resource consumer is one of the paradigms under justifiable attack.
The Shift to Outsourcing and Digitization
Transactional HR activities such as payroll, benefits administration, and records keeping can now be easily outsourced or digitized (or should be) with significant cost savings. We have worked with companies that have digitized their current and past employee databases. In one company, they eliminated over 35 five-drawer file cabinets (and two rooms) and condensed them into CDs that fit into a shoebox. With advances in technology, even the shoebox is in jeopardy as a storage device.
HR as a Revenue Enhancer
To many CEOs and CFOs, HR as a revenue enhancer takes some getting used to. That's not the way they were taught. They are more interested in the payoff and are asking appropriate questions: What's in it for the company? Where is the improvement in the revenue stream? How does this get us new customers and retain our current customers? Where is the proof of corporate performance enhancement metrics? Once they get solid answers to these questions from competent HR leaders, the CEOs are quick to change their thinking.
The Importance of Value Chain Analysis
To answer the payoff questions, we must understand that a continual company-wide value chain analysis is critical to the success of any organization. Over the past decade, CEOs began demanding that their teams deliver flawless functional work and become knowledgeable partners with all other disciplines to advance the business plan of the company. Individual professional silos are breaking down. Disciplines such as finance, sales, marketing, operations, and HR no longer exist as standalone entities. They are interdependent with one another. Weakness in any one of the links inhibits other links from maximizing their efficiencies and productivities.
"Sales and quality are no longer restricted to the sales and quality assurance teams. Edwards Deming taught us that quality and value must be built into every step of the process."
What would you do if you had an employee who could improve the company's profit margins, positively impact the cost of goods sold, lower the days sales outstanding, and increase the price/earning ratio while liquidating some overhead costs to the business—and still deliver flawless transactional and traditional HR services? Most CEOs would react in two ways:
- Why is this individual wasting his/her time in HR?
- Why didn't I demand this level of HR performance five years ago?
The concept of Human Resources as a profitability contributor is fast gaining currency in US businesses and bears closer examination. Professor David Ulrich of the University of Michigan, a leading expert on HR competency models, sees the changing business world as a 20-20-60 proposition. Twenty percent of executives surveyed currently use HR as active and innovative business solution partners. Another 20 percent believe that HR should remain as administrative overhead and only perform transactional work. It's the remaining 60 percent who are starting to expect HR to partner with other departments to improve the company's core competencies and competitive advantages. More HR professionals are stepping up to the plate and delivering the goods.
Driving Factors Behind HR's Evolving Role
What's driving this thinking? The short answer is competitive pressure in a fast-changing business world—pressures for sales, talent, and profits. Most CEOs (and their CFOs) are held accountable for three general but powerful results:
- Increasing revenue
- Generating cash
- Reducing costs
In order to focus on these three accountabilities, paradigms that no longer work are being discarded as companies seek to stay in and grow their business. HR as a strictly administrative overhead and resource consumer is one of the paradigms under justifiable attack.
The Shift to Outsourcing and Digitization
Transactional HR activities such as payroll, benefits administration, and records keeping can now be easily outsourced or digitized (or should be) with significant cost savings. We have worked with companies that have digitized their current and past employee databases. In one company, they eliminated over 35 five-drawer file cabinets (and two rooms) and condensed them into CDs that fit into a shoebox. With advances in technology, even the shoebox is in jeopardy as a storage device.
HR as a Revenue Enhancer
To many CEOs and CFOs, HR as a revenue enhancer takes some getting used to. That's not the way they were taught. They are more interested in the payoff and are asking appropriate questions: What's in it for the company? Where is the improvement in the revenue stream? How does this get us new customers and retain our current customers? Where is the proof of corporate performance enhancement metrics? Once they get solid answers to these questions from competent HR leaders, the CEOs are quick to change their thinking.
The Importance of Value Chain Analysis
To answer the payoff questions, we must understand that a continual company-wide value chain analysis is critical to the success of any organization. Over the past decade, CEOs began demanding that their teams deliver flawless functional work and become knowledgeable partners with all other disciplines to advance the business plan of the company. Individual professional silos are breaking down. Disciplines such as finance, sales, marketing, operations, and HR no longer exist as standalone entities. They are interdependent with one another. Weakness in any one of the links inhibits other links from maximizing their efficiencies and productivities.
"Sales and quality are no longer restricted to the sales and quality assurance teams. Edwards Deming taught us that quality and value must be built into every step of the process."