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Can finance and human resources ever see eye to eye? They'd better.
Alix Stuart, CFO Magazine
November 1, 2005
In the classic corporate paradigm, human-resources heads are the "people" people who want to make employees happy, CFOs are the "numbers" folks who just want to cut costs, and the twain never meet. Under the pressure of higher compensation and benefits costs, however, the twain are increasingly coming together in order to figure out how to spend smarter when it comes to employees. And more often than not, it's human resources imitating finance rather than the other way around.
"The human resources profession is evolving both to better understand finance and to better understand the analytic and quantitative aspect of human resources," says Jim Kochanski, senior vice president at Sibson Consulting in New York.
Take Jim Kissinger. The senior vice president of human resources for Sprint Nextel Corp. has been in HR his entire career, but has made it his mission to be as collaborative as possible with finance in the belief that "if you're not working together, you're suboptimizing your resources." He considered former Sprint CFO Robert Dellinger "one of my best friends" and expects a similar closeness with Paul Saleh, CFO of the newly merged entity.
"It's pretty clear that in most companies, people-related costs are one of the largest costs the company has to shoulder, and they need the same amount of rigor you'd apply to any capital investment," says Kissinger. The problem for many companies these days is how to regard HR — as a cost center, a strategic asset, or both. "A lot of CFOs are not really clear on what HR's role is, nor are CEOs," says Beth Carvin, CEO of Nobscot Corp., a maker of exit-interview software.
Certainly, the return on people-related investments has become more important as benefits that used to be taken for granted are hitting profits harder. Pensions are a prime example. When the markets were going strong, companies made money on their defined benefit plans. Now, with American employers pouring some $175 billion into the plans over the past five years, companies are thinking long and hard before extending the benefit to more employees. (More than half of large U.S. multinationals with a defined benefit plan have recently changed it, or are currently considering a change, according to PricewaterhouseCoopers.) The same type of scrutiny is also being applied to stock options, now that they will carry a cost, thanks to FAS 123R.
Meanwhile, health-care costs have gone up about 10 percent for each of the last five years, pushing more companies to consider ways to offload some of the burden. A recent report from Watson Wyatt Worldwide and the National Business Group on Health found that about 30 percent of employers now use hard-dollar ROI calculations in making decisions on health care, compared with 9 percent in 2003. And those analyses often feed into further study, such as how to shift or diminish the burden. Mercer Human Resource Consulting and Marsh Benefits report that more than 60 percent of large employers were planning to shift more health-benefit costs to employees, while virtually all were evaluating some type of change to the program.
For these reasons, experts say more HR people are getting trained in finance or are even coming from the finance department. Of the 40 percent or so of HR heads who come from outside HR, the largest portion comes from finance or accounting, according to Wayne Brockbank, a professor and the director of the Center for Strategic HR Leadership at the University of Michigan's Stephen M. Ross School of Business.
Sara Meyerrose, executive vice president for corporate and employee services at First Horizon and First Tennessee Bank, for example, was treasurer before becoming head of HR in 1998, and also has her CFA. J. Crew Group's new executive vice president and CFO, James S. Scully, was treasurer and then senior vice president of strategic and financial planning for Saks Inc. before becoming its executive vice president of strategic planning and human resources in 2004. For his part, Kissinger took a battery of finance courses about 10 years ago when he realized the growing importance of finance.
Even finance professionals are ceding some credit to their colleagues in human resources. "The HR role is big and powerful and immensely valued," says Joe Wilhelm, Unilever's vice president of finance. The HR member dedicated to his finance team "is very good with numbers," he says, and skilled at "choosing appropriate metrics, measuring them well, and communicating them to employees" for key initiatives. As for her attention to the bottom line, she can be "more cold-blooded than I am sometimes," jokes Wilhelm.
Grounds for Complaint
To be sure, this idyllic partnership isn't the case at every company. Some CFOs grumble about the lack of business savvy that still seems to accompany HR-related issues. "I'm still training my HR person to understand the numbers," says Lyle Richter, CFO and vice president of finance of Fox River Paper Co., in Appleton, Wisconsin.
And in some places, HR is still exasperated by being shut out of major decisions. "There's been a whole lot of discussion [about HR and finance collaborating], but whether there's been movement, it's hard to tell," says Nobscot's Carvin.
One of the dangers of having HR get too close to finance, of course, is that there may be no one left to advocate for employees. One large company recently made a decision to cut retiree medical benefits in order to meet short-term bonus targets on the strength of the CFO's argument that it would save millions of dollars, says Johnny C. Taylor Jr., chairman of the Society for Human Resource Management (SHRM) and senior vice president, human resources, for LendingTree.com. "The HR executive was trying to say, 'It's legal, but it's the wrong thing to do, and it sends the wrong message to current employees,' but she wasn't strong enough," says Taylor.
And even though about 60 percent of HR chiefs report to the CEO while only about 12 percent report to the CFO, according to a recent online survey by SHRM, "the CFO is often deemed to be right when it comes to costs, no matter where those costs come from," Taylor says.
On the flip side, many experts say that CFOs are becoming more broad-minded. "Particularly in those orgs that have been hit by high turnover, CFOs know they have to rein in costs, but they generally recognize that they can't do that irrespective of employee morale issues," says Sibson's Kochanski.
Martha Boudos, who was head of HR for Chicago-based Morningstar before becoming the firm's CFO, agrees: "I don't think that good CFOs can really divorce the numbers side from the people side." In the end, "the hit to employee morale may be worth the other benefits you stand to gain," she adds, but "you have to at least be aware of what you're giving up."
What Do Employees Want?
One of the benefits of good collaboration between finance and HR is the opportunity to better target spending at what employees actually want, rather than what other companies are offering. Many companies are taking a harder look at employee satisfaction versus the cost of the benefit to the company, with the goal of finding cheap but effective substitutes.
"We're constantly asking, 'What is the best way to increase shareholder return while maintaining employee value?'" says First Horizon's Meyerrose. For example, the company has experimented with several day-care benefits for employees, based on the widely perceived popularity of such programs. However, Meyerrose's research revealed that employees didn't value on-site day care very much, or the backup care for sick children the company tried to provide through a local hospital. Now, the bank has dropped day-care provisions altogether and instead allows employees to work flexible hours, including four 10-hour days per week.
Consultants say that as companies get more sophisticated about analyzing their internal data, they are more likely to move away from benchmarking and look more closely at the unique needs of their workforce. "More companies are asking, 'What's low cost and critical to the employees we need that we can provide?' versus saying, 'We'll do what the market is doing,'" says Kochanski.
As for return on investment, even finance executives say you can only take the analysis so far. Dennis Hernreich, executive vice president, COO, and CFO of Casual Male Retail Group Inc., considers the ROI of HR "an oxymoron." "If sales increase in a store, it's very difficult to isolate whether that related to a new sales manager, or a new product, or something else," he says. Instead, the growing retail chain looks at about 10 operating metrics at a store that give it a more dimensional view of managerial effectiveness.
"We measure a lot of things, but I don't try to create an answer that says my human capital is worth $500 million," agrees Unilever's Wilhelm. "To actually discern how much of the intangible value is attributable to people is a fruitless exercise. If I knew the answer, I don't know what I would do differently."
Alix Nyberg Stuart is senior writer at CFO.
UK Companies Must Now Assess the Value of Their Employees.
Considering the difficulties of measuring the value added by employees, most CFOs are glad to avoid the issue altogether. As of last April, however, firms listed in the United Kingdom must provide more information about their workforces (and other intangible assets) in the new "operating and financial review" (OFR) sections of their annual reports. That means in the next round of filings, regulators expect to see metrics around areas like employee recruitment, retention, safety, training, development, and morale, according to recent guidance by the UK's Accounting Standards Board.
Regulators have so far said that each business must determine its own most relevant metrics rather than prescribe specific ones. But that may be easier said than done. A survey of 295 senior managers by the UK's Chartered Management Institute in Oxford found that only 20 percent were able to state what their plans were for reporting on human capital under the new OFR regime. What's more, many companies admitted they lacked metrics for assessing the value, rather than the cost, of their staff. Less than half of the managers surveyed said their companies were able to measure the contribution employees make.
Will U.S. companies be required to account for human capital? Not anytime soon: the issue was removed last year from the current research agenda of the Financial Accounting Standards Board. — Alix Nyberg Stuart and Trevor Clawson