Making people count
<b>Finance directors are becoming more interested in people issues. But where, asks Richard Donkin, will it all end?</b>Traditionally, HR and finance were not so much two separate departments, but different worlds one dealing with the soft requirements of staff, such as sickness, holidays and personal growth and the other with the nuts and bolts of business performance profit, loss and cost-cutting. In fact the two only seemed to touch on each other when HR had to deal with the fallout of the last of these, when managing the downsizing process.
But that all looks set to change. As HR begins to wield influence over fundamental yardsticks of business success, finance directors seem to be improving their feel for people issues. A recent poll of Human Resources magazines HR 100 Club showed that 76% of FTSE 100 HR directors believed that finance directors had improved their understanding of HR issues over the past five years.
As ever, the first rumblings of this have been heard in the US, where a new study, Human Capital Manage-ment, The CFOs Perspective, by CFO Research, in collaboration with Mercer Human Resource Consulting, has brought the issue into focus.
As the report points out, Human capital the sum of a workforces skills, knowledge, and experience puts chief financial officers (CFOs) in an awkward position. Companies spend a great deal on employees, yet few finance executives understand in any detail how this investment creates value for the business.
The CFO/Mercer report found that, on average, companies spend more than 36% of their revenues on employees, but only 16% of the finance people surveyed said they had more than a cursory understanding of their return on labour costs.
The glibness of that clich, people are our greatest assets, has served to obscure the historic truth that workers cost money, and the value they add is tricky to measure. Accountants were always much happier with more certain values, such as machinery and buildings, leaving HR professionals to manage the employee welfare functions. However, as knowledge workers have replaced labourers, and services have eclipsed manufacturing, it has become clear to accountants that new measures and concepts are needed to value the input of people.
Intangible assets provided by brands, R&D and employees now add to a firms stock-market valuation. This growing disparity between market and book values not only reflects the growing importance of intangible assets, it also exposes the limitations of traditional accounting practices in identifying and measuring the value-adding elements of the firm.
This has important knock-on implications for investor relations, as the CFO/Mercer study bears out. It reveals that 49% of companies surveyed report that investors are starting to ask about human capital policy although only 23% of company boards are highly involved in its formulation. This figure is set to go up in two years, 36% expect such involvement.
There is another, more worrying, finding in the report, which could put increasing pressure on HR managers. In spite of years of HR technology spending, companies are broadly dissatisfied with their ability to manage their staff. Technology hasnt helped much only 20% report that their investment in it aids them in managing, tracking and measuring the skills or ROI of their personnel.
Increasingly, therefore, finance directors will need to develop a clearer understanding of the discipline of HR and its value to the bottom line. But while it is certainly true that more than half the companies say that finance has an important role in setting and allocating HR budgets, CFOs think they should be more involved with HR decisions. While 38% of finance executives say they have an important or leadership role in HR decisions, a whopping 62% believe they should in future. This involvement could include designing HR metrics, adding a financial perspective to HR decisions and helping to
link HR policy to wider corporate strategy.
David Baty, a partner in the human resources services group
of PricewaterhouseCoopers (PwC), identifies three reasons for finance teams to take a greater interest in HR. The first, he says, is in managing a companys reputation; the second is in trying to account for the true value of employees in terms of return on investment. It is already possible to establish links with absenteeism and reducing employee turnover, he says.
The third area is corporate and social responsibility, where employees are viewed as important stakeholders in the business. In the UK the debate has begun, he adds. As yet we have no clear consensus about how you do it and what it means in practice. But it is recognised that these issues are important.
One key problem is how to translate the value that HR manages into real financial numbers. The good news for business is that a growing number of HR practitioners are convinced that they are finding effective measures of workforce performance that prove the link between HR practices and corporate performance. Such measures include the HR Scorecard devised by Brian Becker, Mark Huselid and Dave Ulrich, and the Watson Wyatt Human Capital Index, which highlights HR functions such as recruitment excellence, a clarity of pay structures and employee accountability as important components of long-term business success.
A number of companies in the US have taken this on board, including regional financial services firm First Tennessee National and chemicals giant Dow Chemical. Between them they have endeavoured to understand the cause-and-effect relationship between HR strategy and financial results (see box, below).
Clearly in the US, at least, com-panies are moving to address the lack of understanding about HR among finance teams. Most of the 180 financial directors and managers surveyed for the CFO/Mercer report admitted they had insufficient knowledge of HR, but said they planned to increase significantly their influence over the HR function within the next two years. The big question is what effect this will have on HR professionals.
Many of the comments in the report were benign, speaking of collaboration with HR, and one finance director comments that the CFO should be involved in developing human resources strategy, but not to the point where youre micro-managing it.
Others fear a turf battle. Dave Kieffer, a Washington-based partner at Mercer Human Resource Consulting, believes that HR and finance could be heading for conflict. Finance directors will not want their traditional role at the chief executives right hand usurped by HR, he says.
Duncan Brown, assistant director-general of the CIPD, sees the overlap between financial and HR disciplines as less of a threat and more of an opportunity for co-operation. You need both sets of skills, he says. Yes, you need the quantitative skills, but you need something more than that. The need for hard numbers in HR has been a recurring theme for years. Now, in the post-Enron atmosphere, there is an argument for bringing the specialisms together for internal measurement and external reporting. I think its a shared agenda, but I accept that HR professionals have to develop their quantitative and analytical skills. HR hasnt got a hope if it doesnt show it is making a contribution.
Stathis Gould, head of technical issues at the Chartered Institute of Management Accountants, agrees that the demand for cross-functional knowledge works both ways. Where companies are using methods such as the Balanced Scorecard, finance people are already working with HR and operations people, he says. If you are going to measure your returns on the bottom line, the sort of skills you need are statistical skills, modelling and forecasting. These areas are covered in finance, but there are gaps in the data produced by such analysis.
The danger for HR is that its own role is usurped by an increasingly numerically-aware cadre of human capital accountants emerging from the accounting firms and HR consultancies. From where will they draw their professional qualifications? These super-numerate HR practitioners of the future could claim as strong an allegiance to the finance function as they might do to HR. On the other hand, companies may distinguish the people counters from their finance teams and recognise them as true HR professionals. The battle here will not be for numeracy but for the hearts and minds of managers, including those of HR practitioners themselves.
If the trend towards a more meaningful use of metrics does indeed filter through to the UK, we may begin to witness a severing of HR from its social welfare roots. In this brave new world of HR, the challenge will be to retain the human side of human resources.