Finance and HR: Strangers in Each Others’ Lands

Robert Heinlein’s Hugo Award–winning 1962 novel Stranger in a Strange Land features a character called Valentine Michael Smith, the son of astronauts from the first expedition to Mars. After being born and raised in the culture of the Martians, a second expedition 20 years later brings Smith to Earth.

A recent report by the Economist Intelligence Unit suggests that CFOs regard the world of human resources as a “strange land” populated by strange creatures. Yet the future challenges facing organizations will best be met by leaders who can skillfully bridge the finance and HR boundary.

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The EIU report surveyed 235 C-level executives about their impressions of their chief human-resources officers (CHROs). Among the 43% who were CFOs, 58% said their head of HR is “not of the same caliber as other C-level executives” and two-thirds said the CHRO “does not understand the business well enough.” At the same time, CFOs seem to recognize the potential for HR strategic leadership: although only 30% thought the head of HR was a key player in strategic planning, 75% of them wanted HR to play such a role.

More revealing is the report’s findings about how CFOs understand HR. Finance chiefs often value HR for helping them build talent in the finance department. That’s important, but even superb talent programs may not make HR a peer on the leadership team. That would be like saying, “Our chief information officer does great when ensuring that my staffers have the computers and information systems they need.” Few CFOs would equate that statement with the role of the CIO in defining how information and technology offer strategic opportunities.

It is equally revealing to see what CFOs listed as the most useful ways to measure the HR function:

• Employee satisfaction surveys (60%)
• Retention rates (53%)
• Compensation costs relative to industry benchmarks (53%)
• Benefit costs (40%)
• Time that key roles remain open (27%)
• External ranking of top employers (24%)

In Beyond HR and Investing in People and in previous columns here, I have noted the distinction between HR measures that focus on compliance with regulations and rules, versus services delivered reliably and at appropriate cost levels, versus decisions of key leaders about the talent resources under their responsibility.

It is striking how all of the measures mentioned by CFOs focus on compliance or services. That’s like measuring the finance function solely in terms of things like the time it takes to complete key reports, costs of financial systems, and the external ranking of the organization’s financial-management capability. Such measures are useful, but CFOs would be quick to point out that their direct reports and staffers should be held accountable for their impact on shareholder value and organizational performance, reflected in how they help leaders make decisions about money.

The EIU concludes by suggesting these “best” practices for successful CHROs:

• Devise metrics that help the CFO measure HR’s contribution to the business.
• Help solve the issues that the CFO feels could most harm the company.
• Enhance how well HR develops the finance team.
• Showcase HR’s strategic thinking in meetings.

Those are certainly legitimate ideas, but they reflect a traditional view of HR’s value, demonstrating high compliance and good service to the CFO. Forward-thinking organizations are doing much more to not just creatively enhance HR but to go beyond HR to enhance talent decisions throughout the organization.

Based on research on the future of HR at the Center for Effective Organizations, we might suggest a less traditional and more aggressive approach: HR must venture more boldly into the land of finance, and finance must venture more boldly into the land of HR. Here are two proposals.

Make Finance and HR Career Paths Intersect
The first way to make HR and finance less like strangers is to physically put them together. How many of your finance professionals do a stint in HR as part of their career path to CFO? In “Effective Human Resource Management: A Global Analysis,” we found that “people rotate into HR” was one of the least-prevalent practices among global organizations. Yet it was significantly related to both organizational performance and a strong HR strategic role.

Conversely, how many of your talented young HR leaders do a stint in finance on their way to the CHRO job? You may recall my earlier column about IBM’s insightful decision to tap one of its top supply-chain executives to design and implement the company’s “talent supply chain” system. Why shouldn’t HR leaders tap their top finance leaders to tackle thorny issues like talent risk and optimization?

Make Finance and HR “Mental Models” Intersect
Beyond physical proximity, there is mental proximity. Many studies show that teams and co-workers improve their performance when they have “shared mental models” about their respective roles and expertise. My prior columns showed the similarities between HR issues such as employee turnover, talent segmentation, talent pipelines, and talent risk, and financial frameworks such as portfolio theory, optimization, and return on investment. Integrating these ideas requires that HR and finance leaders think differently. For CFOs that means more than appreciating HR’s ability to reduce turnover or enhance satisfaction in the finance department. It requires fundamentally challenging the assumptions of many CFOs that HR is too “soft” for analysis or optimization.

The EIU report provides the latest reminder that, for all its progress, HR has a long way to go in building its reputation with CFOs, who seem eager to see HR step up to its potential. Some of the responsibility lies with CFOs, and the finance profession more broadly, to take the initiative and venture deeper into the land of HR.

John Boudreau is a professor at the University of Southern California’s Marshall School of Business and research director at the school’s Center for Effective Organizations.