Thinking Like a CFO - The New HR Super Skill
Barbachano International, Inc.
Executive search and leadership advisory firm in the Americas since 1992.
Consider this June 13, 2024, comment from Gartner:
“Now more than ever, CHROs need to focus on driving profitable growth,” says Hanne Nieberg, director in the Gartner HR practice. “This will require them to ruthlessly prioritize investments that support business growth and talent retention while pausing or stopping funding for low ROI activities.”
Gallup’s latest meta-analysis of more than 183,000 business units across 53 industries and 90 countries finds that teams in the top quartile of employee engagement achieve 23% higher profitability than those in the bottom quartile. This is because they are better at retaining top talent, serving customers, achieving higher-quality output and accomplishing numerous other outcomes that lead to profit. Organizations that reach world-class levels of employee engagement steadily improve the effectiveness of management at all levels of the organization.
From a career development standpoint it seems fair to conclude that HR leaders and those who aspire to these positions must quickly become expert users of data and financial analysis techniques to drive change and make critical business decisions. It turns out that money is the universal language of business and HR leaders need to speak it fluently.
It turns out that money is the universal language of business and HR leaders need to speak it fluently.
Let me give you a small example of this type of financial thinking. In the Gallup summary – which seems exhaustive – no clues were given on how they calculated the profitability impact of fully engaged employees, but the 23% impact didn’t seem big enough for me. So using a “Moneyball for HR!” approach I tried to duplicate their findings using a different financial technique.
Convert Engagement into Productivity and Productivity into Money
Since it seems that productivity has a direct linear relationship to profitability, all we need to do is figure out how much more productive the top 25% is in comparison to the bottom 25%. For example, if the best group is 50% more productive than the “least-best” group, they should also be 50% more profitable. To figure this part out I used average revenue per employee and variable profit margin for Microsoft, Ford, Lilly and GM as a benchmark.
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Their revenue per employee is about $1 million per year (which is public information) and with some conservative assumptions figured out that their variable profit for each new hire was at least 35%. This means that each new hire on average needs to generate $350 thousand annually in pre-tax income to maintain the company’s current profitability level. Given this relationship it’s possible to calculate the ROI of any hiring or employee development initiative if it can be proven to increase engagement and productivity.
Barbachano International is the premier executive search and leadership advisory firm in the Americas (USA, Mexico, Canada, and Latin America), focusing on diversity and multicultural target markets. Outplacement, Onboarding and Executive Coaching services are provided by our sister allied company Challenger Gray & Christmas.?Forbes has recognized BIP?as America’s Best Executive Search Firms for 8 consecutive years and currently ranks?#10?and?#3 on the West Coast.
Corporate Chief Financial Officer
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