In recent discussions I have heard two schools of thought regarding how HR can be viewed as a profit center:
1) By reducing costs such as absenteeism, turnover, and bad hires, HR can add more to the bottom line
2) HR can add value to the organization by increasing revenue
I believe we are getting pretty good at number one and we must continue to do so and measure those efficiencies. My question is how does HR contribute to a revenue increase?
Consider this example by James Perry and Russell Lobsenz:
Let’s assume that 2,500 staff members or 25% of a 10,000-person company consists of sales professionals. Now, assume that 10% of the sales force outperforms its peers by 100% and that the annual per person sales quota is $500,000. This means that 250 sales people would be selling $1,000,000 per year and contributing $125 million more in sales than their peers (250 top performers X $500,000 = $125 million). Assume that HR has the ability to differentiate the competencies or unique behaviors of the 250 sales people considered to be top performers. With this competency profile in hand, tools can be developed and used to predict future sales performance. This profile can then be used to optimize recruiting, selection, performance management, and training and development systems. If the number of top performing sales people could be improved by 5%, or an additional 125 sales people contribute $1,000,000 in annual sales, revenue would increase by $62.5 million ($500,000 X 125). Now, let’s assume HR invests $2 million on interventions, such as software tools for improved performance evaluations to develop the next 5% of top performers. The ROI would be 31 times the $2 million investment! Is there a CEO or CFO anywhere in the world that wouldn’t make this investment?
Now, that is a great example of how HR can become a profit center. 1) HR is aligned to the goals of the organization, 2) HR holds people accountable for results, 3) HR tracks performance, and 5) HR systems(training, performance, compensation, etc) are linked to each other and the goals and objectives of the company.
HR is now ready for their very own Human Capital Profit and Loss Statement.
What do you think?
4 Comments on “Can HR REALLY be a Profit Center?”
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Posted on 20. November 2008 at 06:33
I think it is great and I hate to throw a “but” in the equation…..BUT, I haven’t work anywhere yet that would recognize HR for the contribution to the bottom line. I’ve known it all along that HR contributes to the P & L, but I have also been a big proponent of making “them” the heroes. In other words, my client, the Sales VP gets the credit for the profit or revenue improvement and, in the best cases, she knows that I helped her do it and, maybe, just maybe, she will let others know that HR was a her catalyst to making it happen.
Posted on 20. November 2008 at 06:51
Ron:
I am not trying to be a smart you know what, because I love this discussion..but here it my humble opionion..,I feel that HR is at a turning point and if we don’t let others know that we made it happen, then as the economy toughens and the way we do business is changing. will HR survive? We know the sales guy will for sure, but if we can’t prove our own value then what good are we? I say this out of concern as I love what we do!!
Posted on 24. November 2008 at 16:32
I can see both sides of this, I think it often comes down to how the CFO views HR. Does he/she see it more like personnel in the old days? Or does he/she see HR as a real value to the entire organization. Sadly, I often see CFO’s still view things the “old school” way; but the organizations that I have seen really prosper have CFO’s that are more reliant on HR for such results.
I would also add that proactive HR departments can have an impact on an organization’s bottom line through how the benefits are managed.
John Cerasani
Northwest Comprehensive, Inc.
312-640-5757
Posted on 25. November 2008 at 05:12
John:
I agree r4garding the perspective of upper management. I believe the CEO is critical in that equation as well. I also, think benefits are an area that must be managed in a strategic and efficient maneer with costs rising year on year it is an excellent place for HR to improve the bottom line.