The human resource:From cost to asset

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While CFOs focus on numbers, and CHROs on people, both have the ultimate goal of maximising profitability.

The human resource: From cost to asset

Julien Schmidt, HR Director at body products firm L’Occitane, saw a challenge looming in 2015. Rapid growth had expanded L’Occitane’s global headcount to 10,000 but the company lacked a central human resources IT system to support recruitment, retention and staff evaluation. This compromised L’Occitane’s competitiveness, and slowed the implementation of global processes. “This is difficult when you don’t have common tools,” says Schmidt. He needed a human resources IT system, and a CFO who saw the need for it.

While finance chiefs often focus on numbers, and human resource chiefs on people, both have the ultimate goal of maximising profitability, Schmidt says. With that shared goal in mind, the CFO signed off on an investment for HR to support the growth of the company. Enlightened CFOs, claims Schmidt, welcome HR heads to the table “because we are completely aware of the fact that people will make the difference”.

That view was shared by Jack Welch, who ran GE for two decades. By Welch’s estimation, companies that subordinate human resources to finance chiefs have it backwards. HR heads should figure prominently in executive suites because nothing shapes performance more than putting the right people in place and incentivising them properly. “HR should be every company’s killer app,” Welch told Leadership & Management magazine. “You would never know it, though, to look at the companies today where the CFO reigns supreme and HR is relegated to the background. It just doesn’t make sense.”

Challenges today include:

Battle for talent

Deepening role of technology

Corporate reporting in a 24/7 media age

The series covers the evolving role of the Chief Financial Officer from three vantage points: Chief Human Resources Officer, Chief Executive Officer and Chief Information Officer/Chief Technology Officer.

The insights are based on C-suite or senior management interviews, desk research, business literature and interviews with analysts and covers a range of sectors: natural resources, technology, consumer goods, financial services, ICT and automotive – interlinked trends including the deepening role of technology in business, the battle for talent, the challenges of corporate reporting in a 24/7 media age, trade-offs around organisational structures (in-sourcing/out-sourcing) and between operational expenditure for today versus capital expenditure for tomorrow.

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The human resource: From cost to asset

To less-enlightened CFOs, human capital is viewed as a cost to be managed. Even after many advances in productivity, average human capital costs are, admittedly, still a major operational expense. But in the modern global economy, where ideas and digital skills – rather than physical resources – are increasingly where economic value is realised, people can be a company’s greatest asset.

When Apple overtook Exxon in 2011 to become the world’s most valuable company, it was a watermark in post-industrial capitalism. A consumer products company, whose technologies were not a fundamental need for anyone, had become more valuable than a corporation pumping the fuel on which the global economy depends. Later, multi-billion dollar valuations and acquisitions of the likes of LinkedIn and WhatsApp further demonstrated the commercial value of ideas that, in turn, underscores the importance of people: successfully incentivising the smartest workers, and ensuring they stay. Far from seeing staff as a cost, CFOs must view them as a growth engine.

Since human capital is now central to the creation of value in the modern organisation, that in turn makes it relevant to profitability and shareholder value. CFOs thus need to see a company’s workforce as an engine of innovation, rather than a cost to be managed.

A closer tie

CFOs need to see the workforce as an engine of innovation, rather than a cost to be managed.

In the modern global economy, where ideas and digital skills - rather than physical resources - are increasingly where economic value is realised, people can be a company’s greatest asset.

33%

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“In this increasingly global workforce and business, we’re finding that HR partnership is critical.”

Karen Quint, Spencer Stuart

85% of CFOs say their roles have expanded outside of traditional accounting and finance in the past three years.1

The human resource: From cost to asset

Since the 1970s, the role of the CFO steadily expanded as companies became more complex. Forty years of globalisation transformed the CFO function from accounting to management to high-level strategy, deal-making and even public relations.

In a survey by Robert Half Management Resources, 85% of CFOs said their roles have expanded outside of traditional accounting and finance in the three years prior to the study.1

Human resources topped the list of new skills, followed by IT, operations, and marketing and sales. Indeed, when looking for CFOs the executive search firm Spencer Stuart notes their ability to collaborate across all segments of the business. “In this increasingly global workforce and business, we’re finding that HR partnership is critical,” says Karen Quint, a consultant in the financial officer practice at Spencer Stuart.

Learning people skills

1. Robert Half Management Resources Survey 2014

85%

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The human resource: From cost to asset

L’Occitane’s experience shows how the silos that separated CFOs and HR chiefs have started coming down. According to EY, a global management consultancy, there are four drivers of greater collaboration: talent scarcity and rising labour costs; elevation of HR within the corporate hierarchy; changes in strategy and the creation of new products and services; and changes to operating models in pursuit of greater efficiencies, standardisation and scale.2

As a result, the two respective chiefs are increasingly on a level footing. “You’ll see both of us in steering committee meetings on a regular basis, much more than before,” says Kerstin Renard, Senior Vice President for Human Resources at Volvo Group, an automotive company.

A fourth factor driving collaboration is the shifting role of the CEO. They have become more public-facing figures over the last decade, from addressing investors to the 24/7 media and the markets. In turn, they have shifted some duties to others in the C-suite.

“My CFO and I take a lot more responsibility for strategic organisational development.”

Kerstin Renard, Volvo Group

Main drivers of greater collaboration:

Elevation of HR within the corporate hierarchy

Talent scarcity and rising labour costs

The creation of new products and services

2. EY “Partnering for performance. Part two: the CFO and HR”, 2014

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Greater cooperation between finance and HR chiefs bears fruit, studies find.

3. IRRC Institute “The Materiality of Human Capital to Corporate Financial Performance”, 2015

37%

The human resource: From cost to asset

Aaron Bernstein and Larry Beeferman at the Harvard Law School explored the link between people and profits. Their report showed “sufficiently compelling” evidence that human capital drives bottom line success.3

Towers Perrin, a management consultancy, also found that a strong relationship between the CFO and the CHRO is linked with superior performance. When relationships were collaborative over the prior three years, companies “report average higher EBITDA growth and stronger improvement across a range of human capital metrics, including employee engagement and productivity”.

CFOs who fail to recognise the importance of talent to success, by contrast, will put their organisation at a disadvantage. If their company cannot attract the smartest people in the field due to inadequate investments, their rivals will. And companies that cannot keep their employees lose valuable experience and waste resources in re-training replacements.

A fruitful partnership

CFOs who fail to recognize the importance of talent on business success, are putting their organization at a disadvantage.

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About ADP (NASDAQ-ADP)

Powerful technology plus a human touch. Companies of all types and sizes around the world rely on ADP’s cloud software and expert insights to help unlock the potential of their people. HR. Talent. Benefits. Payroll. Compliance. Working together to build a better workforce. For more information, visit www.ADP.com.

About The Economist Intelligence Unit

The Economist Intelligence Unit is the world leader in global business intelligence. It is the business-to-business arm of The Economist Group, which publishes The Economist newspaper. The Economist Intelligence Unit helps executives make better decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies. More information can be found at www.eiu.com or www.twitter.com/theeiu.

About the Series

Together with the Economist Intelligence Unit, ADP has sponsored this series of articles to guide you through the challenges shaping the role of the CFO. Find out how ADP can help you link financial and human capital, data and technology together contact us on:

800-225-5237

www.adp.com

@ADP

www.linkedin.com/company/adp

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