Financial Analysis for HR Managers: Business Strategy, Financial Strategy, and HR Strategy
- Is HR Weakest in the Most Critical Areas?
- You Don't Need to Be a Quant to Make Good Business Decisions
- Which HR Decisions Are Important?
- What This Book Attempts to Do
What makes one company more successful than another? Is it because it has nicer office buildings, newer research labs, or better manufacturing equipment? If it is the differences in people that create differences in corporate value, then the HR function (though not necessarily the HR department) is critical to a corporation’s success. Clearly line managers have an important role in hiring, developing, and motivating the people that can make an organization successful. Perhaps surprisingly it is the role of human resource managers in this process that is less clear. Should human resource managers have primarily an administrative role focusing on the processing of transactions and compliance with regulations? Should human resource managers be business partners charged with developing and maintaining a workforce with the specific capabilities required to execute their firm’s business strategy? Or should human resource managers be true strategic partners participating along with top management, and their counterparts from other functional areas, in the actual development and monitoring of a firm’s business strategy? In many organizations HR departments play only one or two of these three roles. It is a premise of this book that many firms fail to achieve their maximum success because they do not utilize their HR departments optimally. It must be acknowledged, however, that line managers may be underutilizing their HR departments because they are not confident that HR can perform at higher levels.
Is HR Weakest in the Most Critical Areas?
A study conducted by the Corporate Leadership Council (CLC)1 found that in the opinion of the 16,000 line managers who were surveyed, fewer than one in five HR business partners were highly effective in their strategy roles. That’s a statement that the HR profession should find troubling. The good news is that there’s lots of room for improvement, and we know how to generate those improvements. The CLC study also estimated the relationship between HR staff competencies and degree of success as a strategic partner. Their findings are summarized in Exhibit 1-1. Each vertical bar represents an estimate of the maximum impact on strategic role effectiveness of a particular HR capability. The maximum impact was calculated by comparing the strategic role performance of individuals rated high and individuals rated low on each capability. Of far greater importance than expertise in any HR specialization was overall business acumen. What are the implications of that statement for the way you select and train HR professionals? Does it mean you don’t need individuals with specialized training or experience in HR? No, but it suggests that while specialized HR skills are necessary, they are not sufficient.
Exhibit 1-1. Impact of HR competencies on strategic role effectiveness
Source: Graph created using data from Corporate Leadership Council, “Building Next-Generation HR-Line Partnerships,” Corporate Executive Board, 2008, p. 32.
HR professionals need both HR knowledge and a high degree of business acumen. Most individuals in the field today have strong HR skills. There is, however, a wide range in the level of business acumen they possess. That creates substantial competitive advantages for corporations whose HR staffs possess both sets of skills. For individuals who have both sets of skills, it also creates great opportunities for them to advance within their HR careers. The specific mix of skills required depends, of course, on the individual’s job duties and position in the corporate hierarchy. In general, the higher the individual is (or hopes to be) in the corporate hierarchy, the greater the need for strong business acumen to complement their HR knowledge.
What is business acumen, anyway? At the most fundamental level, it is an understanding of how your company makes money and how your decisions and behaviors can impact the company’s financial performance. The business acumen needed by HR managers includes an understanding of their firm’s business strategy, the key drivers of their firm’s success, and the interrelationships among the different components of the organization. This understanding is necessary to develop and execute an effective HR strategy. There is no business department, function, or activity whose success is not dependent upon the firm’s HR strategy. An organization’s HR strategy determines who is employed in each functional area, how much will be invested to enhance their skills and capabilities, and what behaviors will be encouraged or discouraged through the compensation system. A firm’s HR strategy must be tailored to support its business strategy. To produce this alignment, HR managers need the ability to analyze which choices will add value to the firm and which will weaken it. Do most individuals in the HR profession have that ability? In a survey conducted by Mercer Consulting,2 HR leaders were asked to assess the skills of their staffs. They rated their staffs weakest on the following skill sets:
- Financial skills
- Business strategy skills
- Organizational assessment
- Cross-functional expertise
- Cost analysis and management
They felt their staffs were strongest at the following:
- Interpersonal skills
- Recordkeeping/data maintenance
- Team skills
- Functional HR expertise
- Customer service
The skill sets where these HR staffs were strong are important, but they are not the skill sets that drive corporate success or the career success of individual HR managers. No company is going to become an industry leader because of the interpersonal skills or recordkeeping abilities of its HR staff. It is rather striking that the areas in which these HR staffs were weakest are exactly the skill sets that are most likely to contribute to a corporation’s success, and exactly the skills that individual HR managers need to progress in their careers.