CFO’s changing view on human resources: From cost to assets
Posted by: on 21 February 2017 in Human Capital Management
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. Human resources topped the list of new skills, followed by IT, operations, and marketing and sales. Executive search firm Spencer Stuart also states that when looking for CFOs they will note their ability to collaborate across all segments of the business, among which HR partnership is critical.
As the chief responsible person for a company’s financial issues, the role of CFO expanded steadily in the past years. The CFO function has transformed from accounting to management and then to high-level strategy, deal-making and even public relations. During the process, their partnership with CHRO is strengthening. You may now often see CFO and CHRO work together in areas like strategic workforce planning or employee productivity to make joint decisions. The way how CFO perceives human resources is also changing.
Human capital: From cost to assets
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, multibillion 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 incentivizing the smartest workers, and ensuring they stay.
Even after many advances in productivity, average human capital costs are still a major operational expense for most companies. One study has estimated that total human capital costs average nearly 70% of operating expenses. No wonder that financial executives often tend to view human capital as a cost to be managed. But in today’s global economy, ideas and digital skills – rather than physical resources – are increasingly where economic value is realized, people can be a company’s greatest asset, which makes it relevant to profitability and shareholder value. This requires CFOs to view a company’s workforce more as an engine of innovation, rather than a cost to be managed. Ms. Jessica Zhang, CFO at ADP APAC commented, “Today’s Finance and HR have reached a strong consensus on the importance of critical talents, we both agree that good talents are more effective and can bring more value to the company, it is our common focus to attract and retain key talents. As a CFO, one of my duties is to make sure that we’ve allocated enough capital and resources in talent attraction and development.”
A closer tie between CFO and CHRO
In a modern organizational structure, CFO is often considered as an important business partner to CEO and plays a critical role in business and operation decisions, while the role of HR is relatively neglected. Jack Welch, who ran GE for two decades, told Leadership and Management Magazine: “HR should be every company’s killer app. 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.” 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 incentivizing them properly.
With the importance of human capital getting prominent, HR is elevating in the corporate hierarchy in recent years, and CFO, who is in charge of resources allocation to achieve organizational goals, apparently needs to know more about human resources. “CFO relies on CHRO for workforce analytic to make the right decision on capital investment,” said Vashist Kommunuri, HR director at ADP China, “for example, when a company expands its business into a new field, CHRO will give suggestions from people’s perspective, like how many existing talents and skills are available to support the new business, what is the shortage, and for that shortage, shall we buy or build? CFO and CHRO often work together in areas like strategic workforce planning, talent decisions, employee productivity and process integration across finance and HR. They decide on the plan together and also review the progress regularly to make necessary adjustments. Their effective cooperation is critical to right talent decisions.”
Big data and development of related technologies have enhanced the communication between CFO and CHRO. Nowadays, it is possible for corporate HR to access real time human resources data via some cloud-based platforms, they can also do visualized analysis on key metrics like retention rates, compensation, etc., benchmarking with peer companies in the industry. Moreover, based on the commute and a range of other factors, HR may use predictive models to pinpoint key employees most likely to leave, so they can take actions or prepare in advance before those highly skilled employees officially hand in their resignations. All these have enabled CHRO to talk to CFO more efficiently, reaching common ground with compelling data analytics.
A fruitful partnership
Towers Perrin, a management consultancy, 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 recognize the importance of talent to success, by contrast, will put their organization at a disadvantage. If their company cannot attract the smartest people in the field due to inadequate investments, their rivals will. Moreover, companies that cannot keep their employees lose valuable experience and waste resources in re-training replacements. A global study conducted by EY revealed that the way CFOs and CHROs from high-performing companies collaborates differs from the rest in four areas: the two roles spend more time together and are more likely to be peers; better collaboration on business strategy; stronger at using data analytics to understand the workforce and improve HR performance; and CFO is more involved in identifying and tracking HR metrics.
In general, today’s CFOs need to be fully aware of the importance of human capital and collaborates closely with CHROs in human capital strategy and investment. Their close relationship is not only important to talent attraction and retention, but also affects a company’s overall competiveness and profitability.
About the CFO article series
Together with the Economist Intelligence Unit, ADP has sponsored this series of articles to guide you through the challenges shaping the evolving role of the CFO 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 organizational structures (in-sourcing/out-sourcing) and between operational expenditure for today versus capital expenditure for tomorrow.
The series include three articles, respectively “CFO and CEO: Business partners, or married couple?”, “CFO’s view on human resources: From cost to assets” and “CFO’s evolving role in big data age”. To download the full article series, go to http://www.adp.com.hk/insights-and-resources/whitepapers/the-economist