Tuesday, November 18, 2008

Can HR REALLY be a Profit Center?

In recent discussions I have heard two schools of thought regarding how HR can be viewed as a profit center:
1) By reducing costs such as absenteeism, turnover, and bad hires, HR can add more to the bottom line
2) HR can add value to the organization by increasing revenue

I believe we are getting pretty good at number one and we must continue to do so and measure those efficiencies. My question is how does HR contribute to a revenue increase?

Consider this example by James Perry and Russell Lobsenz:

Let's assume that 2,500 staff members or 25% of a 10,000-person company consists of sales professionals. Now, assume that 10% of the sales force outperforms its peers by 100% and that the annual per person sales quota is $500,000. This means that 250 sales people would be selling $1,000,000 per year and contributing $125 million more in sales than their peers (250 top performers X $500,000 = $125 million). Assume that HR has the ability to differentiate the competencies or unique behaviors of the 250 sales people considered to be top performers. With this competency profile in hand, tools can be developed and used to predict future sales performance. This profile can then be used to optimize recruiting, selection, performance management, and training and development systems. If the number of top performing sales people could be improved by 5%, or an additional 125 sales people contribute $1,000,000 in annual sales, revenue would increase by $62.5 million ($500,000 X 125). Now, let's assume HR invests $2 million on interventions, such as software tools for improved performance evaluations to develop the next 5% of top performers. The ROI would be 31 times the $2 million investment! Is there a CEO or CFO anywhere in the world that wouldn't make this investment?
Now, that is a great example of how HR can become a profit center. 1) HR is aligned to the goals of the organization, 2) HR holds people accountable for results, 3) HR tracks performance, and 5) HR systems(training, performance, compensation, etc) are linked to each other and the goals and objectives of the company.

HR is now ready for their very own Human Capital Profit and Loss Statement.

What do you think?

3 comments:

Chris - Manager's Sandbox said...

Cathy, I think it's an idea that's long overdue. I'm looking forward to some of the comments, thoughts and ideas on how HR can actually go about doing so.

My personal feeling is that by driving and motivating behaviors that are crucial for an organizat to be successful, we create revenue. For example, if a company needs employees who are customer oriented, an R&R program that increases the amount of service oriented behaviors employees engage in should have a positive impact on the bottom line.

You may aruge that fits more into your #1 by reducing bad behaviors, but being a glass half-full kind of guy, I'd argue that you're actually creating positive behaviors, and in turn, profit.

- Chris

Cathy Missildine-Martin, SPHR said...

Chris:

I like the glass half full...I belive that getting to those behaviors it sometimes the tough part. It requires a ton of work. We are going through that right now with a client and we have done a ton of data collection. But, the rewards are huge because then everything can be linked to those behaviors....and if you are measuring correctlky you can see the imopact to revenue...

Bruce Lewin said...

It has to be something of a holy grail - one can't dismiss its appeal or power either!