Is HR Just a Cost Center? Share Your Actions That Prove Otherwise

There have been numerous posts on this topic in CiteHR like the following:

1. https://www.citehr.com/183192-help-hr-cost-center.html
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4. https://www.citehr.com/37296-differe...it-center.html

Understanding Profitability in HR Functions

What is essential is to understand the following: Which action of yours drives profitability and by how much? If you don't have the answer to that, you will be leaning towards a cost center!

Actions Indicating HR as More Than a Cost Center

My second question for this post is, what are the actions that you are taking that indicate your function is NOT a mere cost center?

Regards,

Much water has flowed under the bridge regarding the subject of discussion, and it is futile to dwell on exploring ways to convert HR from a cost center to a profit center. The functions of HR are unique, unlike those of operations, which are directly involved in revenue generation. Just as blood circulates through the body, providing oxygen to every part to keep them functional, the head, hands, and legs cannot take all the credit for working hard to earn a living. Similarly, HR permeates every department in the organization by offering manpower support to enable their functionality.

Moreover, HR takes care of their maintenance through various initiatives such as training, motivation, employee engagement, and other welfare activities. Without HR's support, the other departments become too weak to stand on their own. Additionally, there are intangible factors like "feel-good factors" among employees that are fostered by HR initiatives, driving performance and ultimately leading to profits. How can these factors be quantified?

Therefore, labeling HR's contributions as mere costs in accounting terms and then determining what is owed to it would reflect a flawed accounting perspective. If HR is to generate profits, it should market its services to internal customers (other departments) for providing talented manpower, retaining talent, developing skills, etc. The question arises whether the other departments can afford or appreciate these services.

This perspective challenges the traditional view of HR as a cost or profit center and advocates for treating HR as HUMAN CAPITAL invested in the company, deserving its fair share.

Regards,
B. Saikumar
In-House HR & IR Advisor

There has been enough discussion about whether HR is a profit center or a cost center.

My Views

1. Do we question any organization when technology updates are required for growth, which is clearly an expense?

2. Do we question the endless expenditures on R&D to survive in the highly competitive market and still keep growing?

3. Do we question when there is a need to change the machines which are old or change a process to improve productivity?

We all know growth is a part of survival today. But we all question when there are expenditures towards the human front, especially in keeping their environment clean, on food expenditures, on travel expenditures, on uniforms, and other safety expenditures.

Worst of all, technical needs or skill needs are fulfilled by recruiting fresh graduates or those with experience and occasionally harnessed through training the existing employees.

We debate on the ROI of several moving and non-moving assets on investments made, for all lifeless objects, and we want the same to be emulated for human assets, failing to realize that the living assets are the ones responsible for all the benefits realized as a society through the machines and processes.

We are the most powerful assets and we can either make or break. We need good HRM to multiply the capacities hidden within every individual and not fuel catastrophe.

Hence, making it a profit center is in our own hands.

Regards,
Nalina R.

HR Consultant - Trainer & OD Consultant

[Phone Number Removed For Privacy Reasons]

Thanks for the response. Respecting your views, what I strenuously try to point out is to avoid assigning value to the contributions made by the component parts of an organization in purely accounting terms. An organization, though run for commercial considerations, is nevertheless a social institution like a family. Its structure is not built by bricks and mortar but by people who bring the faculties of their mind, like creativity, intelligence, learning ability, adaptability, and morale, to bear on their performance and consequently on the profits.

The Role of HR in Organizational Success

HR is entrusted not only with the significant responsibility of recruiting people and managing their physical requirements, like proper furniture, lighting, right temperature, conveyance, health, and training, but also with the most sensitive and onerous responsibility of managing their minds (morale, motivation, satisfaction, and ownership, etc.). This is to keep them constantly and consistently upbeat about their job and the workplace so that they can return to their workplace every morning with renewed energy and enthusiasm to deliver services at the desired quality standards. Thus, HR may have to invest in creating an external environment in the organization as well as an internal environment in the minds of employees that is conducive to quality performance.

HR as a Cost Center vs. Profit Center

Now, one can dub HR as a cost center for incurring expenses on recruitment, for investing in learning and training initiatives, and for engaging employees to sustain their motivation, morale, satisfaction, and zeal for performance. They may suggest that HR can save costs on all these accounts. However, they forget that it is the quality of people who ultimately set a company as a brand apart from other companies in the current stiflingly competitive market-driven business environment. These people not only work with their hands but with their emotions, feelings, and sentiments, which need to be skillfully managed by HR. If so, will the brand value be transferred to HR?

The recruitment of the right talent would avoid the entry of a bad hire who would have caused not only financial loss to the company but damage to its goodwill and brand image. How to quantify such loss thus avoided? Maintaining the right environment and culture to promote feelings of ownership and bonding among employees would have significantly reduced attrition. Then how to quantify the value of such 'feel-good factors'? By linking it to probable reduction in attrition? What about the efficient customer service rendered by a thoroughly satisfied employee? How to quantify the profit resulting from a peaceful industrial climate without strikes and demonstrations, which permits uninterrupted industrial production?

Unlike material assets whose value depreciates with time, the value of human assets increases with their experience, i.e., with the advance in time. How to quantify the value of total human assets in the company? Will it go to HR's account?

There is no issue if HR is kept on the expenses side in the balance sheet for accounting compliances, but to stick a label on it as a cost center that does not add value to business will be a flawed perception. If all the hidden benefits are quantified, HR will always be a profit center. I, therefore, would like to view a business organization as a biological organism that exists as a system as a whole, with component parts perfectly complementing each other but without competing with each other, to sustain the organism as a whole.

Regards,
B.Saikumar
In-house HR & IR Advisor

HR, like Admin, Finance/Accounts, IT, etc., are considered 'support' functions and hence traditionally termed 'cost-centres,' unlike Sales & Marketing functions, which are considered profit-centres of an organization. I disagree with this categorization in principle. While I agree that sales and marketing staff are directly responsible for generating revenue for the organization, all other functions are equally important and must be respected for their contributions towards the success of the entire organization. Also, Sales & Marketing don't operate in a vacuum and do need valuable inputs and support from other functions to achieve their business objectives. Saying Sales & Marketing is the 'profit-centre' and the rest are 'cost-centres' is like saying the hands and legs are the most important parts of the body, and the rest of the organs (particularly the invisible ones like the heart, lungs, stomach, intestines, etc.) are only playing a 'supporting' role. Nothing could be farther from this oft-cited analogy, as one can live without hands and legs, but can't live without many of the internal organs that quietly work 'behind the scenes,' if you will.

Yet, I have rarely, if ever, seen any organization treat all the functions as equally important. It takes a strong unbiased leader to do so, and we have very few of them around.

Regards,
Ramesh

I am sorry I couldn't log in for a long time due to some network issues. I find this debate rather interesting for the following reasons:

1. The argument is that the role is intrinsically focused on things that cannot 'fall within' such a categorization while everything else can! This is far from the truth in the knowledge economy.

2. It is not possible to derive 'numbers' in terms of costs and profits... Well, the question is why not?

And all along, the focus has never been on the things that can be done to make it intrinsically profitable.

Ask yourselves, does the size of the HR team in the organization not give you some indication of the realized/perceived benefits? For if everything was only costs, organizations would have struck the HR folks first...

Nalini, your experiences are great to note. So, when you hit upon a roadblock when it comes to HR expenses, how do you actually justify the need?

Now, let me ask the question in a different way:

All of you have HR in your organization and let us say their budget is X. Now, if someone were to change the budget from X to 2X or 0.5X, would it increase the profit of the company?

Please let me know your views.

Effective HR Practices for Profitability

Your question is not something new. It has been debated several times with many Directors and HR teams in several organizations. From my experience with organizations that aim to increase profits through good HR practices, the following observations have been noted:

Strategies That Work Wonders

• A simple, good meal and a clean, subsidized canteen can significantly enhance employee loyalty and commitment. This is a small additional expense compared to the regular costs of providing a basic lunch in a slipshod manner.

• Skill training and job rotation to improve the skills of existing labor can be extremely useful for technology-driven companies. Training is an expense, but it helps avoid two major costs: recruiting new people for additional skills and maintaining a large labor force without clear roles. Retrenchment is often seen as a solution, but its repercussions, such as job insecurity and a negative culture, are rarely considered.

• A good performance management system will foster excellent employee engagement. If it is both intrinsically and extrinsically motivated, the profits can be substantial. This additional HR cost is not truly a cost; it is akin to the maintenance cost of machines.

There are many more...

Areas Needing Attention but Often Neglected

• Behavioral skills training needs to be repetitive. Most of us tend to react rather than respond to situations. We are accustomed to receiving replies and justifications for wrong outcomes instead of seeking solutions with a good system in place. This training is a cost but essential for the organization's well-being—like nutrients required for smooth functioning. The compromise often made is either no training or training through weak resources to check costs.

• There is often no focus on building a climate and culture with the right values—a small reinforced cost that is frequently neglected.

• Poor-quality recruitment incurs significant recurring costs and hidden expenses, which are often left unexplained.

There are many more...

I have shared what came to my mind. It is not about whether the costs/expenses are increased to 2X or reduced to 0.5X that matters in the era of knowledge and competitive skill development. It is about whether the costs/expenses are justified and focus on the physical and mental well-being of people.

In the IT sector, the major knowledge reserve is their employees. In the manufacturing sector, with a huge skilled, semi-skilled, and unskilled labor requirement that is depleting, there is a major threat to survival today. Costs behind these operations, which ensure harmony at work, should not be magnified.

No one complains when they make excess profits, which occur when there is harmony, peace at work, and respect for human resources. This is purely my view.

Thanks,

Regards,
Nalina R.
HR Consultant
[Phone Number Removed For Privacy Reasons]