Talking Number $ : The Importance of Finance in HR Credibility

1. By Rich Burton, MBA, PHR AVP, Human Capital Management, WSFS Bank Talking Number$: The Importance of Finance in HR Credibility

2. “When you were born, you cried and the world rejoiced. Live your life so that when you die, the world cries and you rejoice” - Cherokee Expression

3. Overview • Some negative perceptions about HR. • What does HR boil down to? • Why is it hard to quantify HR’s impact? • Suggested methods to educate people about the “hard” value HR can add. • The mindset to get into as you search for opportunities to do this.

4. FastCompany– Why we hate HR- excerpts • “at best, a necessary evil” • “a dark bureaucratic force that blindly enforces nonsensical rules, resists creativity, and impedes constructive change.” • "Most human-resources managers aren't particularly interested in, or equipped for, doing business.” • “When HR professionals were asked about the worth of various academic courses toward a "successful career in HR," 83% said that classes in interpersonal communications skills had "extremely high value." Employment law and business ethics followed, at 71% and 66%, respectively. Where was change management? At 35%. Strategic management? 32%. Finance? Um, that was just 2%.”

5. FastCompany– Why we hate HR- excerpts • “can readily provide the number of people it hired, the percentage of performance evaluations completed, and the extent to which employees are satisfied or not with their benefits. But only rarely does it link any of those metrics to business performance.” • “ no point of view about the future and how organizations are going to change.” • “discovers things about the business through the lens of people and talent. That's an opportunity for competitive advantage. In most companies, that opportunity is utterly wasted.”

6. FastCompany Article – Why we hate HR - reflecting • “HR execs should be making the most of our, well, human resources -- finding the best hires, nurturing the stars, fostering a productive work environment …….HR should be joined to business strategy at the hip.” • Compare HR outcomes to meaningful things (non-HR) • Realize that executives and managers are not going to have “aha” moments about HR on their own, we have to provide them!

7. Source: Strategic Human Resource Management, Third Edition, Jeffrey A. Mello Ease of measurement Finance Controller’s Accounting Line Units Marketing Operations Information Systems Human Resources

8. What is HR? • “ designing management systems to ensure that human talent is used effectively and efficiently to accomplish organizational goals”. Mathis, Jackson, Human Resource Management (13th Edition), McGraw Hill. • “effective and efficient use of human talent to accomplish organizational goals.” SHRM Learning System 2008. • Wikipedia (on HRM): “....management of an organization's most valued assets - the people working there who individually and collectively contribute to the achievement of the objectives of the business.” • Policies, practices, and systems that influence employee’s behavior, attitudes, and performance. Noe, Hollenbeck, Gerhart, Wright, Human Resource Management (Gaining a Competitive Advantage), 5th edition, McGraw Hill.

9. The “aha” moment • Much of what HR does is to eliminate obstacles to performance. • Creating a better work environment to do what? Prevent turnover. • Employee/Labor Relations • Benefits • Payroll/Compensation • Recruiting and Staffing • Training and Development • Safety • Employee Engagement • Idea programs Tangible opportunity - HR is about increasing performance and decreasing turnover!

10. Credibility by being tangible! • We have to show how increased performance and decreased(voluntary) turnoveris worth something! • Track performance and turnover over time and relate it to other (non-HR) things • We need to correlate them to the company’s definition of success (often portrayed through financial terms).

11. Source: Strategic Human Resource Management, Third Edition, Jeffrey A. Mello Finance is a tool we can use!

12. Common Financial Terms • Asset - Resources of the firm expected to yield some future benefit for the company. Can be financial, physical, and intangible properties. • Cost (i.e. labor cost) – anything directly tied to the production of a product or service • Expense – anything with a dotted line to a product or service • Efficiency Ratio = generally speaking cost and expenses as they related to income (or sales) – express as a %

13. Common Financial Terms • ROA – Net Income/Total Assets = how effective our assets are being used to produce revenue – expressed % • ROS – Net Income/Total Sales = How much profit is being produced per dollar of sales – expressed % • ROE – NET Income/Total Equity = How much profit is generated per shareholder dollar – expressed %

14. Finance 101 – How is HR Relevant? • HR is definitely an expense. • Justify the expense! • Compare it to other positive things and make the argument for its impact! • Quantify the impact of HR through numbers that others are more used to hearing! • Keep performance of human assets high and (voluntary) turnover low. Doing this will: • Maximize ROA • Decrease costs and expenses on the income statement. • Increase accounts receivable on the balance sheet. • Ensure that assets are utilized better. • Drive sales(hence accounts receivable)

15. Finance 101 • Income Statement • A financial statement that measures a company's financial performance over a specific accounting period. • Sales – COGS – Expenses – Taxes = bottom line.

16. Finance 101 Balance Sheet Summarizes company assets, liabilities and shareholders' equity at a specific point in time. Give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

17. Show you are doing more with less • Payroll (total of all salaries, wages) compared to total company assets • Assets get off balance sheet (over time) • Payroll as a % of total company operating expenses • Expenses get off income statement (over time) • HR budget as a % of total company operating budget • Obtain from CFO, Controller’s, Treasury (over time) • FTEs per HR Associate and Benefit cost as a % of payroll • Both measures of efficiency (over time) • Total HCM budget per Associate over time (measure of efficiency)

18. Show you are efficient • Assets per FTE over time • measure of efficiency (work with managers to control staffing levels) • Profit per FTE over time • measure of efficiency (control staffing levels) • Voluntary turnover as a % of total turnoverover time • making a difference (drive engagement) • Operating Profit as a % of sales • Efficiency (i.e. $180,000/2,000,000) = 9%

19. Show you are efficient • Compare ROA, ROE, ROS (i.e. red) to: • Payroll as a % of operating expenses (decreasing is a good thing) – orange • HCM budget as a % of total operating budget (decreasing is a good thing) – orange • Voluntary turnover as a % of total turnover (decreasing is a good thing) – orange

20. Are you making a difference? • Measure the before and after state of things (i.e. major new initiatives): • Has ROA, ROE, or ROS increased or decreased (i.e. after the rollout of a new training initiative) • Has efficiency (aka ROA, ROE, ROS) increased or decreased (i.e. after the rollout of a new performance management initiative) • Have sales of products or services increased or decreased (i.e. after a new policy was put into place)

21. Possible HR Scorecard Making a difference! Associate Engagement Survey Vol. Turnover as % of Total Turnover Avg. Performance per unit HCM Budget as % of Total Budget Fiscal Measures Training program sales, ROA, ROE, ROS impact FTEs per HR Associate Payroll % of total company assets More with less! Making a difference! Connecting it all!

22. This can be HARD!

24. Recap • We must constantly show why performance and voluntary turnover are so critical in organizations • Relate performance and turnover to cost, efficiencies, ROA, ROS, ROE, net income , efficiencies, etc. on your HR scorecard • Look for positive and negative financial correlations with HR initiatives over time. • Doing this will create more “aha” moments for non-HR decision makers

25. “When you were born, you cried and the world rejoiced. Live your life so that when you die, the world cries and you rejoice” - Cherokee Expression

26. “FIGHT FOR THOSE INCHES! They’re all around us!”Thanks and have a great night!