Magic, Science and Art: Should Finance Take Over HR?

Absolutely not, says USC professor John Boudreau. HR has much to learn about finance, but the opposite is true too.
John BoudreauAugust 28, 2014
Magic, Science and Art: Should Finance Take Over HR?

John Boudreau

John Boudreau

Are you thinking about absorbing the HR function into your finance function? The Harvard Business Review recently published a high-profile recommendation to CEOs and organization leaders, written by a leading organizational consultant, Ram Charan. He suggests that the best leaders of HR have operational and business experience but that there are too few of them. So, he suggests (1) eliminating the CHRO position entirely; (2) having compensation and benefits report to the CFO; and (3) having activities aimed at improving the organization’s people capabilities report to the CEO and be led by “high potentials” from finance or operations with strong “people skills.”

This is a harmful idea. The principles and processes of finance are not sufficient to guide decisions about compensation, benefits and employee rewards. Yet there is something about the tangibility, logic and strategic focus of finance that many leaders would like to see incorporated into HR. Finance seems more “scientific.” HR seems more like “magic.”

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A careful consideration of the value of not only magic and science, but also art, can help guide how finance and HR should work together.

HR as Magic
The wizard Gandalf in “The Lord of the Rings” has a pointed hat, a powerful staff that can emit thunderbolts, and an enigmatic ability to see the future. HR can seem like magic when its value emanates from “soft” phenomena that only a lucky few understand. You see this magical approach when corporate executives say, “My HR leaders are strategic because they sense when something’s not right with our workforce, and I rely on their gut.” This can be powerful and tantalizing for HR, because it bestows respect and deference, just as for wizards like Gandalf. It explains why leaders “shop around” for an HR executive they like or trust as a confidante. With magic as the value proposition, leaders ask finance to take over HR because they already like and trust their CFO. Yet magic is ultimately unsustainable, because you can’t develop a reliable way to make decisions if you’re only as good as your particular wizard.

HR as Science
Science can predict chemical reactions, physical tolerances and astronomical cycles. It can predict things, such as the Higgs boson particle, before we can observe them. The fascination with “big data” applied to talent and HR emanates from this science value proposition. It has produced massive investments in HR data systems and HR analytics teams. Big data and analytics now routinely predict employee turnover, sometimes even before employees themselves know they’re going to be looking at leaving.

Decades of social science research can guide those predictions. Employees create data through emails, fitness devices and web activity, making it possible to predict employee performance and health. And intelligent algorithms based on that data may be better predictors than human recruiters.

The science value proposition often motivates leaders to ask finance to take over HR. Finance has long been based on fundamental economic principles about how money and markets create value. However, people are not financial assets that can be easily bought or sold. Just because we can use personal data to predict worker behavior doesn’t mean that we should, when you consider ethics of privacy.

HR as Art
HR as an art combines magic and science. True artists are well grounded in the principles or science behind the art. Visual art has principles of perspective and proportion. Musical art has principles of music theory, harmony and acoustics. Artistic mastery requires “dedicated practice,” much of it devoted to fundamentals (such as repeatedly playing scales on the piano). An accomplished artist masters the science, and then applies it in new and creative ways to create artistic “magic.” Art requires neither abandoning all scientific principles to “magic,” nor rigidly following only rules that have been proven. In HR, artistic balance combines evidence-based principles with the artistic license necessary to create strategic success through talent and organization capability.

Finance may be more art than many realize. CFOs tell me they rely on financial principles, rules and guidelines, but also judgment. The “story” of how an organization creates value through money can be told in many ways. Interpretations of rules such as how to account for sales and depreciation may legitimately vary. CFOs are often strategic confidantes to the CEO, just like their HR colleagues.

In the “The Capitalist’s Dilemma,” Clay Christensen and Derek van Bever suggest that leaders have been socialized to their role as capitalists and thus may rely too heavily on traditional finance principles. That can produce strategic missteps, if financial capital is more commoditized, while talent resources are increasingly scarce and pivotal. We need better organizational systems for decisions about human resources.

That requires extending traditional finance systems to support decisions about HR and talent. The balance will not be achieved simply by tucking HR into the finance function. Nor will it be achieved by a stubborn refusal by HR to welcome financial insights. Finance and HR have much to gain by closer collaboration, with the right balance between magic, science and art.

John Boudreau is professor and research director at the University of Southern California’s Marshall School of Business and Center for Effective Organizations, and author of Retooling HR: Using Proven Business Tools to Make Better Decisions About Talent.