HR impacts profit but it’s not as visible as functions like sales, marketing and customer success. The reason behind this is that the impact is not direct. HR impacts the functions that have a direct impact on profit.
The question is “how profitable”? The answer to that depends on the quality of the HR function. Looking at a metric such as new hire turnover, research shows that best practice organizations can increase new hire retention by up to 50%. Total turnover cost is estimated between 100 and 300% of a person’s salary. Assuming a company hires 1,000 people a year with an average salary of $70,000 and a turnover cost of 200% that equates to a saving of $70M each year by using best practice HR. That’s a big impact on profit and just one metric.
Over the long term measures like revenue per employee will tell you how effectively a company is utilizing its employees, but HR is not the sole contributor to that metric.
https://www.cognology.net/wp-content/uploads/2017/05/How-profitable-is-human-resources-management.gif210210Jon Windusthttps://www.cognology.com.au/wp-content/uploads/2017/01/Cognology-logo-colour-300x101.pngJon Windust2017-05-01 01:50:452021-12-01 13:02:24How profitable is human resources management?
Warmest thoughts and best wishes for a wonderful holiday and a very happy new year.
Karen, Brad, Jon and Louise of Cognology
Disrupting Human Resources
This isn’t a new topic. Everyone from world famous entrepreneurs to the guy on the street has an opinion on Human Resources – and they’re rarely flattering.
We’ve all read articles arguing that the industry needs to change and, with 2017 dawning, I think now is the time to put words into action. As a HR professional – and the CEO of a HR Technology company that itself needs HR management – I thought I’d share my somewhat unique perspective on the subject.
Why does HR need to change?
Before we get down and dirty with what needs to change, let’s take a moment to consider why we need change.
Less than a year ago, The Australian reported that the average time it took to fill a vacant position had topped a record-breaking 68 days, and they estimated that those vacancies were costing AU$558 million per ASX100 company¹. The authors championed a shake up, citing a problem with recruitment as a clear indication that HR needs to change.
I agree that these numbers indicate a problem worth fixing but, to my mind, they hint at a bigger issue; HR is still widely viewed as a compliance and admin department.
Yes, Human Resources didn’t walk into the workplace fully grown – it started life as the Personnel Department, an administrative team that managed everything concerning the workforce at a human level – but it’s grown beyond that.
We know good Human Resource management practices address skills gaps, increase engagement, reduce churn, and improve job satisfaction². This fact was acknowledged by Ram Charan (the bestselling author and advisor) back in 2014, when he argued that we needed a complete overhaul and a new structure. That particular article may have caused quite a stir, but the message wasn’t a new one. Industry leaders including John Boudreau, Mark Herbert, and Carol Anderson have been calling for a change for years.
And the reason we need a shake up, the problem that’s plaguing our industry? HR departments often lack skilled team members and the wider respect of the organisation (Edward Lawler once shared an anecdote about a manager who not-so-fondly referred to his colleagues in HR as the ‘Business Prevention Unit’). So, unless we disrupt Human Resources and turn it on its head, we’re going to struggle to effect real change and improve organisational efficiency.
Strategic Human Resource Management
That’s not to say that we haven’t made strides in the right direction. The last few years have seen Strategic Human Resource Management (SHRM) take a step closer to the top table, aligning HR practices with organisational strategy and growth initiatives.
But the fact that only 5% of HR professionals feel their department is seen as a strategic partner within their organisation⁴ proves that there’s more than a few problems with SHRM. Which is where I come in.
Disrupting Human Resources
I have a plan to disrupt Human Resources, and it involves a two-pronged attack:
Move administration and legal responsibilities away from HR.
Replace HR with a Business Performance Group.
I’m not the first to argue for removing the administrative, compliance, or legal aspects of HR to other organisational groups. In 2015, Edward Lawler suggested splitting the department in two: administrators on one side, highly skilled analysts with a keen strategic understanding of the business on the other. I would go even further though, and say surely it’s more efficient to remove administrative responsibilities altogether?
Because efficiency is key and, when it comes to streamlining HR and repurposing it to drive organisational growth, there’s a lot to be learned from the manufacturing world.
Many of you will be familiar with Toyota’s ‘Lean Methodology’³, a process that focuses on optimising the customer experience while minimising waste. ‘Lean’ organisations work at peak efficiency, creating more value with fewer resources. They understand what the customer values and continually innovate and refine their processes to enhance customer experience. The end goal? To deliver maximum value with no waste.
This is the function HR should perform within an organisation. We should be data driven and strategically focused, responsible for identifying the most efficient processes to deliver on organisational goals.
The Business Performance Group (BPG)
The real disruption in my idea stems from the Business Performance Group (BPG). This completely new organisational unit will replace the HR department in much the same way that Human Resources replaced Personnel.
The idea for this group came from thinking about the HR function and what I want from it as a business owner. Those of you who caught my blog post on work and happiness won’t be surprised to discover that, for me and my business, performance and happiness are at the top of my list.
I want a business that performs because I’m committed to creating the best talent management technology for my customers. I need performance to achieve that.
I also want the people who work with me to be happy. As I see it, we nailed survival a long time ago (for most of the world at least). Today, working is more a group effort to progress, innovate, and improve each other’s lives. So work should really make us happy.
The Aim of BPG
So, with an objective to optimise efficiency and deliver on organisational goals, the BPG has three key responsibilities:
Identify ways to improve performance and happiness.
Implement improvements and manage change.
Advise the organisation on people management.
The BPG will not be a department of ill-equipped administrators. It will be a highly productive, results driven team made up of experts from specialist fields.
The first specialty is leadership, which is critical to performance and something most organisations are failing miserably at. In fact, 70% of leaders say they carry out regular performance conversations, but only 56% of their employees agree⁴.
BPG leadership experts will address this disconnect, spearheading individual development, coaching, and mentoring programs. An apprenticeship approach to management training will provide a strong leadership succession strategy, something only 14% of businesses feel they currently have⁴.
Analysts and productivity experts will also feature highly in the BPG. Supported by data scientists, they will be responsible for assessing current processes, uncovering improvements, and managing change. This team will enhance efficiency and identify future trends – a critical performance metric we undervalue as a nation. Don’t believe me? Employers in Italy, Japan, and China all cite a ‘global mindset’ as one of the most important skills a new hire can possess, while Australian employers view the same trait as the least important to long-term business success⁴. Who do you think is right?
Learning and Development specialists will form the third pillar of the BPG, and their work will support the initiatives of the rest of the team. Data driven, these guys will provide learning opportunities to the workforce, efficiently addressing skills gaps before they hinder organisational growth, and ensuring all learning is relevant to the workplace. That may sound extraneous to a highly efficient, lean organisation but, by 2020, one third of the skills we see as core today will have changed⁴. Businesses that intend to keep pace will need to prioritise education.
Of course, the BPG isn’t going to walk in and solve every problem overnight. This is a team of analysts, and they’ll require data to assess value.
I propose borrowing a stalwart of the Silicon Valley design process (after all, their performance management techniques were worth stealing); split testing. It’s the same approach the folks in marketing call A/B testing, and it simply involves testing two competing strategies alongside each other to see which performs best.
Companies like Google have gained real value from split testing at a product level, and I firmly believe the approach could work well at an organisational level as well. The BPG could split test everything from training methods to customer enquiry responses, creating in the process a business that performs at optimum efficiency and a HR alternative that delivers quantifiable results and adds real value to your organisation.
To Sum Up…
Until we as business owners and managers recognise that the value of Human Resources goes far beyond recruitment and administration, we’ll never unlock the full potential of our employees, our businesses, and our markets. HR doesn’t need a revamp, it needs disruption.