Up with People

Companies are starting to invest in an asset that they&spamp;rsquo;ve typically viewed as a cost-cutting target in recent years: their employees.
Matt Surka and Josh HyattNovember 15, 2012

Glance through “Human-Capital Strategies in a Slow Recovery,” a recent study conducted by CFO Research in collaboration with Paychex, and it’s easy to assume that the employer-employee relationship is as tenuous — and transactional — as ever. Consider, for example, the phrase one finance executive chooses to explain how far his employer has gone in terms of controlling labor costs. “With several years of the Great Recession behind us,” says the controller of a construction company, “we have squeezed about all of the juice we’re going to get from that orange.”

Yes, many employers have beaten labor costs to a pulp — and they know it. The study, which is based on an electronic survey that drew responses from 164 CFOs and other senior finance executives at midsize companies, makes it clear that employers haven’t lightened up on their quest to maximize workforce productivity. Yet only one-quarter of respondents (26%) say they plan to do so primarily by minimizing workforce cost.

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The cost-cutting approach that has characterized the last few years — not only through dramatic reductions in head count, but also by better management of unplanned overtime and cutbacks in benefit costs and other labor-related expenses — shows signs of yielding to a different mind-set. Companies are now turning their attention to maximizing the output of their workforce. In the study, 61% of survey-takers say their employers will focus primarily on improving their ability to recruit, train, develop, and retain employees. Almost half (48%) of respondents say that they agree “strongly” that such capabilities “will be an important source of competitive advantage for my company” in the next two years. Another 38% agree at least to some extent with that statement.

It’s a strategy that should align them with their employees’ interests. “Employees nowadays attain much job satisfaction from career development, so it is critical that they see themselves given the opportunity to grow on the job,” says the CFO of a manufacturing company.

Building Better Employees
Companies, the study finds, remain eager to extract every drop of value they can from their workers. Most senior finance executives (64%) say their companies plan to increase the pace of hiring over the next two years. At the same time, two-thirds of senior finance executives say that their companies will be working with the same (49%) or lower (18%) levels of resource allocation to labor as they are now. (See “Balancing Act,” below.) In order to make the most of that situation, midsize companies (those with annual revenues of less than $100 million represented 57% of respondents) want to position their employees in such a way as to maximize their contribution to the business.

These executives aren’t looking to revive the paternalism of, say, The Pullman Co., which famously set out around 1900 to create a utopia for its workers. But CFOs are starting to see how a highly trained workforce can unlock efficiencies, while workers with low morale can be costly, both as a function of their slumping productivity and in terms of the expense of hiring and training new recruits in a high-turnover environment. “As the economy improves and companies start to hire, it will be more of a challenge to find good people,” says the CEO of a banking services firm.

Thinking Practically
Indeed, there are practical reasons that companies are rediscovering the benefits of nurturing their employees. According to the survey, 55% of companies will hire primarily high-skill workers over the next two years, while only 21% will hire primarily low-skill workers. The demand for high-skill workers will increase even as waves of employee retirements drive down the supply. As qualified employees leave the workforce, says one CFO, “I fear they will be difficult to replace.”

To forestall avoidable turnover — and improve employee output — 85% of finance executives say their companies will improve their ability to manage employee performance (see “New Development” at the end of this story). Nearly the same proportion of respondents, 82%, say that their companies will get better at training and developing employees.

Given their strained budgets, how can companies afford to tackle these challenges? Senior finance executives see room for improvement in their companies’ HR functions (see “Getting Resourceful,” below). In fact, only 13% of respondents describe the efficiency and cost-effectiveness of HR administration at their company as “excellent.” (Take heart, HR executives: 56% view you as “adequate.”) To better equip HR, 60% of survey respondents say their companies will make improved use of HR technology; the second highest proportion of respondents, 45%, say they will improve HR processes. “HR will upgrade its systems and processes to better meet our needs without adding staff,” says the controller at a manufacturing company.

For example, 63% of survey respondents favor the use of web-based HR self-service for supervisors and employees at their companies. But one survey respondent, the finance chief of an automotive dealer, points out that “some things are best answered in a self-service environment, but others need to be handled face-to-face with an employee and an HR person.” A well-trained employee, in other words, is sometimes exactly what the company needs.