Wednesday, November 18, 2009

How Does HR Add to Profits?

Sometimes, I get asked a question that really makes me stop and think.  I have had the pleasure of teaching and speaking at least 25-30 times per year.  A few weeks ago, I was teaching an HR Essentials class.  We were discussing how HR adds value to the organization when a very smart young lady asked me, "Well how does HR add to profits?"

I believe she cut to the chase...adding value really means adding dollars to the bottom line.  So, of course I threw the question out to the class and asked for their input.  Here is what they said:

1) HR prevents lawsuits
2) HR hires good people
3) HR saves money by implementing cost effective benefits programs
4) HR makes sure salaries are competitive thus saving compensation dollars

I believe all the above are true, but with the exception on number 2, those are cost saving activities.  These activities are great, but it still doesn't answer the question of ADDING to profits.

So after weeks of contemplation, I have a few to add to the list:

5) HR adds to profits by designing and IMPLEMENTING true pay for performance systems that incent those people that are truly meeting and exceeding expectations thus adding to profits by increasing revenues and reducing costs. 
6) HR adds to profits by making sure the organizations strategy is communicated and cascaded to the lowest level of the organization.  This activity makes sure that all employees know what is important, what is expected and how they will be measured.  This focus allows employees to direct their activities that lead to goal attainment and bottom line results.

I had others but you tell me what you think.....I would love to create a good list of how HR adds to profits and then create metrics to correspond with each item, thus creating a blueprint for an HR scorecard that points to what our CEO's care about...PROFIT!

Here is a motivator....I will share the results with all of please send me your comments on this subject!


Anthony said...

HR conducts competency gap analysis in the organization, base on market trends and company goals, identifies areas that require training, delivers that training, which helps to drive revenue, reduce cost and increase profits. It also coaches senior leadership on tough decisions to align the organization to the needs of its clients.

Unknown said...

Thanks Anthony. That is an excellent one. A question for you...How do you think we can measure that?

debexo said...

Cathy I think the challenge of defining HR's contribution to an organization is that except for #2, the other bullets that you have listed are likely cost avoidances and therefore won't show up/fall to the bottomline of an income statement (organizations profit & loss statement - whether they made/lost money during a specific period of time).

I personally believe that HR offers great value but the closest metric for impacting the income statement that I know is profit/per employee and assumes all of the bullets you have outlined as the ingredients for hitting whatever the defined target is for profit/per employee.

Michael D. Haberman, SPHR said...

Some thought----
Is there a distinction between contributing to the bottomline by cost savings, and bringing $$ in the door, which people think of as profit? If both activities give the company more money to work with are both not good pursuits?

Is hiring the right people really a contribution to the company profitability? It certainly facilitates it, but is it a secondary activity that leads to profitability?

I once knew a recruiting department that actually contributed dollars to the company by outsourcing their services to other companies for a fee, much like a recruiting firm. They definately contributed to $$ in the door.

Is profitability the proper measure for HR? What happens if you do all you are supposed to do, but then the company takes a charge for loan payments (or some other financial transaction) that actually puts the company in a loss situation. Does that negate all of HR's (or sales, or mfg, etc) efforts because there is no profit that year?

Just some random thoughts, that will not make me any money or contribute to my bottomline.