We’ve all heard it before when it comes to business change. A new broom arrives, yet another strategic review is announced, a programme led by a recently headhunted and margin-zealous CFO is mobilised and a board populated by proponents of impending corporate doom align behind a central communications announcement of transformation necessity.
Meanwhile, further down the corporate corridor, HR receives an instruction to prepare for a root and branch review of efficiency saving opportunities and a reminder to gear up for a healthy round of restructuring related people activity. We all know what is coming next… HR is told in no uncertain terms “find us at least 25% of cost savings across your function but through this difficult time be sure to keep our employees engaged”.
A collective deep breath is taken by HR and before you can say shareholder value talk turns to the emotive topics of shared service centre transformation and operating models. But surely that is the old world, or should I say the old money, dynamics of HR. The days of quantifying HR value merely in terms of how lean it is must come to an end.
Talk to a CFO in a moment of openness about why HR cost reduction is the only answer and the reaction will always be based on the same underlying reasoning. In the absence of evidence to the contrary HR is a mere support function which consumes a disproportionate amount of resources relative to the perceived value. It is the same argument today as it was yesterday.
The reason for this is that the true value of the function and more importantly that of labour employed is misunderstood by Executives while the other main economic asset categories of a business (land, plant and capital) have figured large in the financial management disciplines of the CFO. The only justifiable excuse for this oversight is because these other ‘tangible’ assets afford themselves to the art of value measurement in a way never previously achievable in the world of labour assets.
Enter then the new kids on the block of HR asset management –Talent economics and workforce analytics.
Firstly let’s deal with talent economics. The ability to understand the impact of the function should be viewed not in terms of cost to serve as it is presently but in terms of Return on talent. Any first year student of economics would be able to articulate the importance of supply and demand on price determination. HR though has systematically shied away from calling employees what it is they exactly are and that is a collective of individual human assets. These assets have a cost of acquisition and an ongoing cost of maintenance. More importantly they also offer a rate of return. Admittedly, depending on the way in which these assets are deployed this return can be anywhere from marginally deductive to significantly additive in terms of the overall economic value generated by the enterprise. Given the overall investment level in this asset (easily north of 60% of total cost in most business models) then it is not glib to say that Business is people and people is business.
So if this is the case then why does HR refrain from articulating the capability and services of the function in terms of the benefits associated with effective asset management. Moreover why is it addicted to employing small armies within the function of HR to try and impose control on these assets? For example, how many people are in HR trying to eradicate employee relations liabilities, how many are chasing performance feedback forms, what percentage are trying to model possible pay increases and just what are the legions of HR professionals doing who spend their time discussing, building and imposing spurious competence frameworks? Through the eyes of the CFO this is nowhere near being value-adding activity. It is overhead that is inflating the price of the HR function over and above what the Board is prepared to pay.
In terms of other asset categories this level of overhead support for no inherent added value from the asset is not tolerated either. For example, the new generation of production machinery (plant) will now deploy intelligent systems embedded in the brain of the machine itself (predictive maintenance) that allows the manager (human) to determine the conditions, productivity and levels of capacity that the machine can operate at and most importantly intervene before a threat to output (value creation) can occur. In other words individual managers – not a central function -mange the asset within the confines of an environment needed for optimised production.
Predictive analytics may well be in its infancy in relation to workforce application, but that does not make it irrelevant. The ability to transparently link asset inputs to economic output sits at the heart of understanding the value architecture of the organisation. If for example retail organisations can predict the optimum price-point of a product across multiple channels through the lifecycle of customer demand and identify when to discount relative to stock levels to improve overall margin then the ability to determine the impact of investment in talent on business outcomes is not beyond the wit of man.
The key to harnessing these new capabilities of talent economics and predictive analytics interestingly does not sit with HR either. Successfully raising the perceived point at which the price of HR denotes value for money is now an integrated enterprise challenge. HR has tried in isolation for years to turn the dial on the perception of the value it creates while Boards have been universally unequivocal in their assessment. ‘We are no clearer as to what value you bring today than we were when we last looked so please keep reducing the price we pay for you’.
How to realise the potential of this (imagine if people value was quantified on the balance sheet) is now occupying the thoughts of CIMA, CIPD, ICAEW and others. And with the right level of determination to articulate the contribution of human capital the pricing model for HR services it could be transformed forever. Now what a business change that would be.
Laurence is a leader in HR analytics and a champion for insight driven transformation. Created first predictive analytics solutions over 10 years ago as a trailblazer for smarter talent decision-making. Main CIPD spokesperson analytics and media commentator