Can HR Really Be a Profit Center? Exploring the Impact of the HR Balanced Scorecard

Is HR a cost or a profit centre?

This has been argued and discussed for a long time: whether HR is a cost centre or a profit centre. The earlier myth can now be demolished and proven that HR can be a profit centre. The question that business leaders would now ask is, how? The answer to this is very simple.

In 1996, Dr. Robert Kaplan and David Norton developed the HR Balanced Scorecard. This HR Balanced Scorecard adds strategic non-financial performance measures to financial metrics.

What is an HR Balanced Scorecard?

1) The Balanced Scorecard is a performance management framework used by strategic decision-makers to make the right decisions about their business.
2) The Balanced Scorecard is not only a set of strategic goals; it is also a method for monitoring progress towards the organization's strategic goals.

Why HR Balanced Scorecard?

1) The Balanced Scorecard is tactical and concrete.
2) It transforms an organization's strategic plans and goals into execution plans and orders.
3) It provides performance measures and helps in identification and execution.

Perspectives of HR Balanced Scorecard:

Financial:

1) Reducing costs related to HR
2) Reducing turnover rates
3) Employee absenteeism
4) Workers' compensation
5) Employee satisfaction
6) Employee engagement
7) Employee benefits

Internal Perspective:

1) Turnover rates
2) Manager performance and ratings
3) Overall employee satisfaction
4) Recruitment/employee retention
5) Recruitment channels and employee success

Customer Perspective:

1) Meeting customer needs
2) Overall customer satisfaction
3) Spreading word and bringing new customers

Learning and Growth:

1) Communication
2) Performance improvements
3) Staff development

Implementation of HR Balanced Scorecard in Business:

1) Integration of scorecards of all units to achieve the overall organization scorecard
2) Full strategic and management system
3) Data from IT and accounting systems into the model to calculate metrics
4) Comparison of metrics with strategic goals and plans

As one can note from above, HR is a profit centre if the HR Balanced Scorecard is implemented in business, as all parameters can be measured against financial metrics. Major organizations across the globe have started implementing the HR Balanced Scorecard and have yielded fruitful results.

Dear Mr. Ashok Pai,

Nice to see you visiting this forum after a gap of 15 years.

Balanced Scorecard (BSC) Theory

You have given a theory of Balanced Scorecard (BSC). As you have mentioned, the theory is an old one. However, somehow it has not gained traction beyond a few MNCs. In fact, for a long time, there was a member of this forum who claimed that his company practiced BSC. However, he never gave us information about how the costs were reduced and how he could convert the HR department into a profit center in his company.

Request for Case Study on BSC Implementation

It would be interesting for us to know which company has achieved cost reduction by implementing BSC and how it was accomplished. Further, we also wish to know whether or not the management of that company accepted the claims of the HR professionals.

I am a member of various HR forums and I am yet to come across an HR honcho coming up with a case study on BSC.

In view of this, in support of what you have written, would you mind providing us with a case study of the implementation of BSC and converting the HR department into a profit center?

Inquiry About Your Company's Experience

By the way, what about your company? Did the HR Department implement BSC to convert it into a profit center? Would you mind educating us?

Thanks,

Dinesh Divekar

Good to see an insightful discussion on HRM. For your information, BHEL has implemented BSC for all its business functions, including HR. Specific KPIs and KRAs have been established for each functional area, and the targets have been categorized into 5 levels, each with a relative stress factor. Performance is analyzed quarterly against the targets, and corrective actions are planned accordingly.

I must admit that I am quite disappointed with the BSC approach. There seems to be an excessive focus on numbers at every level, leading to factors not captured or sudden issues not receiving adequate attention, which can be very costly. Even Jack Welch (of GE fame) has been very critical of BSC as a practice that requires caution.

Can BSC transform HRM into a profit center?

While having a BSC for the HR function is one thing, turning it into a profit center is a different challenge. Can BSC transform HRM into a profit center, and before that, can HRM effectively price its services? While the cost of HR services can be estimated with some level of certainty, is there a comparable basis for pricing such services? With most HR functions being outsourced, it may soon become a reality in the foreseeable future.

Dear Mr. Divekar and Mr. KK, Thank you for your insights.

Mr. Divekar, I do not have any case study as this is the first year that we are implementing the Balanced Scorecard in our organization. I am really excited about it.

Dear Mr. Ashok Pai,

The objective of the Balanced Scorecard (BSC) is not to convert the HR Department from a cost to a profit center. The objective is the all-around growth of the organization.

Nevertheless, BSC or otherwise, what you measure is important. What matters is whether the costs and ratios associated with the business are measured correctly or not, and if measured, then whether these are measured accurately or not. Otherwise, BSC just reduces to jargon, and fancying about jargon is a known penchant of HR professionals.

I do not know about the nature of your industry; however, I have seen HR professionals claiming to practice BSC but not knowing as basic a ratio as Inventory Turnover Ratio (ITR). I provide consulting services to establish a comprehensive Performance Management System (PMS). I have seen this contradiction in a few places. When I provide consulting services, my focus is on the identification of costs and ratios associated with each department and assigning them to each HOD. Without calling it BSC, it has worked very well, and my clients could gain a deeper insight into the costs and ratios that impacted their businesses.

Very recently, I provided consulting services to establish PMS in a pharmaceutical company. Though the Performance Appraisal (PA) was conducted, I observed its superficiality. In my consulting services, I introduced 90 new measures across 13 major departments. It included 27 types of costs, 12 new ratios, and 51 new measures. The MD was surprised at the introduction of these new measures but also expressed lament for not having done so 30 years ago!

All the best!

Dinesh Divekar

HR as a Cost Center

As per my point of view, HR is a cost center. How? In many companies, there is no HR; only big companies have it. Now, many companies simply outsource it for confidentiality so that no one in the company can access the payroll and other legal aspects related to employees. Yes, it is employees because HR assists management, finance, and every area of the company to implement things easily.

In many companies, the technical heads directly deal with employee-manpower requirements based on the progress of the work. They talk to project managers directly to seek the required manpower needed for another project or other needs. Accordingly, they plan the availability of extra manpower at any project and give instructions to transfer them to another project by office order to report to the concerned persons.

If the required manpower is not available but they need a particular employee, they can instruct to hand over to the next senior for a while and report to another project. So, HR is a part and parcel of the cost just like any labor cost. If project-wise costs are worked out, then it could be charged proportionate to the labor cost for each area and a percentage is charged there, also some percentage taken in overhead. If new recruitment time is spent, then that cost is worked out and taken to overhead.

Overall, HR is a part and parcel of the cost for the company. It is simply an operational cost no matter which technical language you use to talk about it.

HR is neither a cost nor a profit center but a center for sustainability and growth. Irrespective of technological development or however digital your workplace may be, without human intervention or power, nothing can work. Even a remote needs a human to operate. So, the power, presence, and importance of human resources are immense for any organization. Unfortunately, this specialty function hardly receives the attention, appreciation, or importance it deserves.

Human resource management cannot be termed as a cost to the company. It has a wide role and responsibility in shaping the organization into a brand. Management can provide every resource, but human resource management needs the management of people to produce the best products or services out of the given resources. People who have the ability to make others productive are the essence of HR.

Human Resources: Cost Center or Profit Center?

Human Resources (HR) can be considered both a cost center and a profit center.

HR as a Cost Center

As a cost center, HR is responsible for managing expenses related to employee-related activities, such as recruitment, benefits administration, and employee training. These activities are considered indirect costs, as they do not directly generate revenue for the organization.

HR as a Profit Center

On the other hand, as a profit center, HR is responsible for implementing strategies and programs that contribute to the organization's bottom line. By attracting and retaining top talent, HR can support increased productivity and revenue growth. Additionally, by implementing effective employee engagement, retention, and development programs, HR can help to minimize employee turnover, which can also help to keep costs down.

In short, while HR activities may be considered a cost center in terms of expenses, they can also be seen as a profit center in terms of their potential to contribute to the organization's bottom line.