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HR’s Impact On The Bottom Line

28 November 2008 No Comment

listening-rizaThe Human Resources department is not a direct revenue producer, does not represent a particular business unit, nor is it a highly specialized staff function. It is mostly viewed as a ‘necessary evil’ resulting from a need to comply with ever increasing regulations, plus keep track of such details as attendance, benefits, and payroll. Because of this, HR is rarely seen as having an impact on the bottom line except maybe as a cost center.

If you buy into the ‘our people are our biggest asset’ philosophy – hard not to, especially in a service business – then surely there must be some connection between HR and profitability. It turns out there is a direct and significant correlation between HR practices and the company’s financial performance. Let’s start at the bottom line and work our way up.

According to the recent Cornell University / Gevity Institute Study, companies that use the most effective system of HR management practices experience revenue growth that is 22% higher, profit growth that is 23% higher, and turnover that is 67% lower than comparable companies not using those practices. The difference is even bigger in firms that face greater competition, are pursuing growth strategies, and are larger in size.

The best practices that produce these results revolve around three strategy sets: employee selection strategy based on person-organization fit; employee management strategy based on self-management; and employee motivation and retention strategy based on creating a family-like environment. Most people don’t realize there is a choice in how to manage employees; they just do it the way they’ve always seen it done.

These practices don’t emerge on their own, they need to be driven by the HR leadership. An HR staffer with only a compliance background and no business perspective won’t be able to effect these changes. As long as the HR department is only that ‘necessary evil’ then the opportunity for a strategic advantage will be lost.

Which brings us now to the top. A good CEO is always looking for the best way to maximize the short and long term performance and value of the business. While there is no one-size-fits-all solution, there are now plenty of options available that enable the CEO to create the right combination of internal and outsourced capability. The goal is to have the best mix of compliance, daily operations, and strategic thinking about the human capital. A CEO who recognizes the strategic value of HR will have a competitive edge in the market – and more money in the bank.

[EDIT December 5, 2008]

You can listen to more detail on this topic in a presentation made to CEO/Business owners here.

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