Embracing the principles of Autonomy & Trust and Openess & Transparency, this hack aims to establish the credibility and value of HR as a business partner by adapting the language and measurement principles of the core hack is for HR to insist on visibility to and an understanding of the company P&L/ financial statements. To provide value to the business, to start to build credibility, HR needs to understand what success looks like on the P&L/ financial statements and be able to align with business leaders in terms that are expressed and measured on a P&L/ financial statements. Ultimately, this hack is a first step to making realistic return on people calculations and marks a shift, away from people cost, to people value.
The core of my mini hack is for HR to insist on visibility to and an understanding of the company P&L. However, this is not just the costing lines of the HR fuction itself. Just looking at the cost of HR reinforces the perception of HR as a cost center and not as the value building investment core that it should be.
To provide value to to the business, to start to build credbility, HR needs to understand what sucess looks like on the P&L and be able to to to line of business leaders in terms that are expressed and measured on a P&L statement.
As long as HR continues to measure itself with the intent of proving its own worth, those results will be viewed with suspicion and will lack credibility. No one will trust someone who is out for themselves. Metrics that speak about volume of services rendered or content consumed rarely can be correlated to anything the business measures themselves on, and almost never speaks to causation or behavior. By speaking the same "language" in terms of measurements, it sends the message that the core business matters and that HR is on the same team.
- Understand the P&L/financial statements
- Identify which aspects of the P&L/financial statements directly attribute to HR
- Establish reliable and sustainable Total Cost of Workforce (TCOW)
- Establish reliable and sustainable financial/profit metrics related to people
To provide value to the business and to build credibility, HR needs to understand what success looks like on the financial statements and be able to speak to line of business leaders in terms that are currently expressed and measured.
In order to express how human elements contribute to profitability, Total Cost of Workforce (TCOW) must be established as a base metric from which numerous other metrics related to profit are calculated. If there is a desire to calculate return on people metrics, while cost is not the goal, it is a fundamental metric needed to calculate returns.
Working with line of business to establish and agree upon how fundamental data points are calculated, is a first step to establishing to the business that you are willing speak the language of the business and measure the Human Resources function in the same ways that other functional areas of the business are measured.
For the Business:
- They get a true partner focused on results
- Talent management that aligns with business
- Compensation based company financial goals and achievement
- Services provided based on value
- Quantifiable prioritization for initiatives
- Design better jobs that maximize use of available talent
Most companies employ a multitude of systems that sometimes contain divergent data. A major challenge to establishing metrics is deciding what data from which system is included in a given metric. Metrics needs to also be designed for sustainability so they are reliable over time.
The business must agree what data is included in any given calculation and document both sources and inclusions to assure reliability of data data over time. Some business leaders may lack fundamental visibility to HR service offerings and related costs and may be surprised or question data.
- Obtain company P&L/ financial statements and get on distribution list
- Integrate P&L/ financial statement training and support into HR business process
Establish definitions/inventories for:
- Workforce - typically employees plus contingents but may also include professional services when it contributes to product or service offering.
- Benefits - Inventory and document any service where the primary customer is the workforce.
Identify line items in P&L/ financial statements that contain:
- Compensation Costs
- Benefit Costs
- Other costs attributable to workforce (can include cost of outsourced functions)
- Calculate draft Total Cost of Workforce (TCOW) by adding Compensation +Benefits+Other costs
- Set-up series of meetings to review that calculation and build consensus
- Discuss useful metrics calculated from TCOW such as % of expenses and % of revenue
- Set governance plan for the continuation of established metrics as calculated according to the companies own accounting rules/processes and according to internal costing models.
- Incorporate established metrics into measures of success for HR driven initiatives to ensure benefit to business exceeds cost of initiative.
- Expand metrics to allow value-added and and predictive modalities.