Partnering for performance: the CFO and HR
SUITS THE C-SUITE By Ruben R. Rubio
First Published in Business World (06/23/2014)
THE MIDDLE of the year is probably one of the busiest times for human resource (HR) activities. Companies are now busy wrapping up the last of the summer team-building activities, welcoming fresh graduates, or conducting midyear performance reviews.
In many firms, this will mean different approaches for two different departments. Finance usually views human capital in terms of expenses, while HR will view it as an asset that needs training and investment. Furthermore, traditional finance will focus on hard data, while HR will generally rely on softer metrics.
However, this will have to change if companies want to step up their game. Collaboration between the two functions is the key.
In a global survey of more than 550 leaders of finance and HR, Ernst & Young (EY) found that companies with strong synergies between the two functions are more likely to enjoy higher profit growth than the rest. Among companies where the relationship has become more collaborative, 41% saw their earnings before income tax, depreciation, and amortization (EBITDA) grow by more than a tenth in the last year. In comparison, this same pace of over 10% EBITDA growth was achieved by only 14% of non-collaborating companies. Moreover, 43% of strong collaborators saw a marked increase in work force productivity in the last year compared with only 10% of other companies. These results were reported in EY’s second installment of “Partnering for Performance” as part of its Master CFO Collection.
The report clarifies that strong collaboration does not mean just goodwill and understanding between the chief finance officer (CFO) and the chief human resource officer (CHRO) or HR head. True collaboration, instead, is determined by four characteristics. First, it is indicated by greater maturity in the company’s organizational structure and operating model. These are the companies where CFOs and HR leaders spend 50% more time collaborating than the average. This is equivalent to 7.8 hours a week spent together, according to survey respondents. Strong collaborators also have a peer relationship between the two leaders, better integration of finance and HR processes and teams, and make use of shared service centers.
The second characteristic of good collaboration is greater CFO and CHRO involvement in the company’s strategy. CFOs at these companies have a hand in “strategic work force planning” and assist in studying potential scenarios concerning the work force and productivity.
Thirdly, good collaboration is marked by greater use of analytics on work force data. The report reasons that finance and HR leaders work better together when data is “consistent and mature across both functions,” thus enabling the company to make informed decisions and predictions about their work force.
According to the report, data analytics can help companies spot burnout or low productivity early on to prevent attrition. It can also help prevent fraud and identify hidden potential, particularly those employees who are frequent sources of information and therefore may be strong contributors. Data analytics also strengthen sourcing for both recruitment and succession.
The fourth characteristic of good collaboration is comprehensive HR measurement. Beyond traditional indicators such as retention rates and work force expenses, strong collaborators also track strategic metrics such as employee productivity and the return on investment from HR projects. These companies measure said metrics annually as well as continually, so that their decisions are based on up-to-date data.
To achieve such a level of finance-HR collaboration, firms will need the right knowledge and resources, the right governance and operating model, and the right technology, according to the EY report.
In terms of knowledge and resources, CFOs would do well to develop HR skills like coaching and talent development, while HR leaders should sharpen their financial literacy and analytical skills. Furthermore, to ensure the two functions are collaborative in the longer term, companies are advised to have succession programs in place such that future candidates for HR and finance leadership are exposed to both skill sets in their training.
In terms of governance and operating models, companies should look into making HR and finance processes such as payroll, benefits, and accounting more compatible. The bigger step would be to consider migrating administrative tasks to shared service centers so that finance and HR executives have more time to focus on “constructive and strategic conversations,” the EY report suggests.
Finally, in terms of technology, companies may find themselves needing “enterprise resource planning” systems, which allow leaders to view inputs and outcomes of human capital more comprehensively. Mechanisms will be needed to produce better quality work force data.
Doing so allows firms to not only achieve the abovementioned improved profits and employee engagement, but also to better respond to today’s business environment. Collaboration between finance and HR is especially needed given the scarcity of talent and increasing labor costs. The EY report mentions that this is particularly true in rapid-growth markets where firms are bent on meeting volume growth and grappling with rising wages. This is also evident elsewhere as recovery in the global economy spurs fresh recruitment efforts. Furthermore, as these times require adjustments to strategy, companies will need to better manage the impact of such decisions on both finances and people. The option for companies to decide between onshoring and offshoring also requires a closer conversation between Finance and HR.
CFOs keen to respond to this context are advised to take a 10-step approach. First, CFOs should make time for the HR leader and discover a “common commercial ground” where they agree on business thrusts. Second, CFOs should also make sure the two departments are both involved in strategy and not just implementation. Third, in addressing business challenges, CFOs should consider multiple perspectives such as implications on both finances and people.
Fourth, the HR and finance departments should be transitioned from just fulfilling support functions to being business drivers. Fifth, the staff in both areas should be given broader experience to pick up both HR and finance skills.
Sixth, CFOs should work with HR to identify the needed work force data to address unresolved staffing concerns. Seventh, HR should be encouraged to focus on key performance indicators that the organization deems the most important. Eighth, measurement should be made into a continuous and predictive process. Ninth, data should be used as a platform for stronger collaboration between finance and HR. And finally, CFOs should be more active in planning the work force strategy and participating in work force forecasting.
At the end of the day, this exercise in collaboration only reinforces what companies have known all along: a company’s work force is the main driver of its success. Greater collaboration between the CFO and HR leader will lead to better management of a company’s greatest asset: its people.
Ruben R. Rubio is the chief financial officer and head of the tax reporting and operations group of SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.