Human Resources’ interplay with finance chiefs needs delicate execution and it pays to understand each others’ priorities, says Debbie Lovewell
Case studies: Oracle, The Rank Group
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“It’s good to have money and the things that money can buy, but it’s good too to check up once in a while and make sure you haven’t lost the things that money can’t buy.” Although not intended as a comment on gaining the best return on business investment, this view from American journalist and author George Horace Lorimer nicely summarises the position on people spend that so many organisations encounter.
Namely, it sums up the tricky balance in the relationship between both HR professionals and the finance department – perks can produce measurable benefits, but they can also produce ones that are intangible and sometimes hard to quantify. And the benefits professional has the task of convincing the finance team, which is ultimately responsible for signing off expenditure, that this is the case.
Mark Rowlands, marketing development director at Axa, says: “There can turn out to be a bit of a punch-up between human resources and finance directors’ requirements. That’s the traditional view of it.”
Over the past few years, however, this relationship has begun to evolve. Whereas HR may once have viewed finance teams as being made up of hard-nosed accountants with little understanding of the importance of people in an organisation, and they in return were regarded as a relatively soft function, the two are now increasingly working alongside one another on people issues. Stephen Perkins, co-director of the comparative organisation and equality research centre in the Business School at London Metropolitan University, explains: “Once that would be the kind of stereotype we’d expect to see. It was very necessary [for HR] to educate finance director (FD) colleagues to build in people considerations to initial strategies. I won’t pretend there isn’t scope for tension but that is inevitable where there are different agendas.”
The short-lived mandatory Operating and Financial Review, which required listed companies to include people data in their annual results, prompted more interaction between the two departments. This has been one recent demonstration of the increased collaboration between business functions such as HR and finance.
However, this doesn’t mean that relations between these two departments will always be smooth. Inevitably, one of the key concerns for finance directors will be keeping an eye on spending and ensuring that the company gets the best possible return for its money. HR, meanwhile, will be focused on making sure that it offers the best possible employment package in order to maximise employee recruitment, retention and productivity to name just a few key issues. “If an organisation is spending 20% of payroll on benefits, it needs to make sure that it fits with its objectives,” says Rowlands.
When it comes to benefits, most FDs have now come to realise that offering the right package can be crucial if an organisation is to achieve the best possible return from its people. No matter how valued some options may be, finance may put up an initial resistance to them because they may not produce an immediate return that can be recorded on the balance sheet. Whatever happens, FDs need to ensure that they wouldn’t get a better return from investing the cash in other areas.
An outsourced absence management system, for example, may require an initial cost outlay but employers may not see the impact of introducing such a scheme until months or even a year later. If a scheme does succeed in reducing sickness absence levels, however, the organisation will ultimately stand to gain financially in terms of a reduction in lost productivity and any associated costs such as hiring temporary workers.
Charles Cotton, reward adviser at the Chartered Institute of Personnel and Development (CIPD), explains that justifying a return on investment and human capital reporting is now standard for many HR functions. “It will be a challenge for HR to demonstrate they are getting value for money. They’ve become more aware of the importance of it.”
Rising benefits costs have also prompted HR and benefits managers to become more financially aware. Increased premiums for options such as private medical insurance, for example, have forced many HR teams to look for cheaper alternatives, which fulfil the same people objectives. And HR and benefits teams also need to manage the relationship with their finance colleagues to ensure they devise the best people strategy for the organisation.
“It’s looking at how working together, they can bring initiatives that have real value to the organisation. [HR should] start early by engaging with finance when [it] is thinking of a project,” says Cotton.
For the two functions to establish such a close working relationship, however, a fundamental level of trust is required. Perkins explains that this is only achievable if both are prepared to open clear lines of communication and engage in two-way dialogue.
If a close working relationship can be established then it should make it easier when benefits cuts are requested as part of a general cost reduction exercise by the organisation. But given the knock-on effects that any cost-cutting programme can create for HR, such as having to alter employment contracts or dealing with disgruntled staff and unions, it is not surprising that benefits professionals often view those holding the purse strings less than favourably. Paul Clark, head of consulting at Jardine Lloyd Thompson Benefits Solutions, believes that when such situations occur, employers need to address why they are offering the perk in the first place as it may be that there is a cheaper alternative or option.
“Part of it comes down to where the driver is in terms of benefits spend. What we are seeing is a trend in increasing spend especially for pensions. There may be a view among finance directors that there may be a difficulty in introducing benefits due to lack of funds. It’s about coming up with a solution that targets finance directors’ concerns but still helps with [issues such as] recruitment and retention.”
And when a benefit hits the headlines, it may inevitably prompt FDs to take a closer look at the schemes offered by their own organisation to see if it can be provided or managed more cost efficiently. There has been much recent media coverage for instance about defined benefit (DB) pension schemes as a number of high profile organisations have closed their plans to curb costs. Roger Fairhead, former head of compensation and benefits at Rank Group, says: “That has caused FDs to become more aware not just of pensions but all benefits.”
Examining individual benefits in isolation can mean that the reasons why they are offered are overlooked. “What’s being ignored is why pension schemes are [introduced] in the first place, for example [to aid] recruitment and retention. You’ve got to look at the package as a whole,” warns Clark. Although some defined contribution schemes, for example, actually provide better retirement benefits for employees than DB schemes with a high accrual rate, final salary schemes are typically perceived as more attractive by staff. Continuing to offer a DB plan, therefore, may sit better with an organisation’s desired image. So if HR and finance are able to rationally discuss the issue they stand a much better chance of reaching a mutually acceptable compromise. “The issue is coming up with a solution that isn’t a knee-jerk reaction to increasing costs,” adds Clark.
One of the benefits of greater collaboration between HR and finance is the opportunity it provides to target spending on what employees actually want and so will value. This can throw up some surprising results, particularly in organisations that have previously based their benefits package around competitors’ offerings. In doing so, they may be overlooking cheaper options that staff would appreciate more.
Similarly, communication strategies can also be better targeted to enhance employees’ perception of their perks. “If employees don’t understand what they are getting from their employer, they won’t value it. If they don’t value it, the organisation won’t get a good return [on their investment],” says Rowlands.
So as long as HR can prove that there is a solid business case for introducing an initiative, which will produce real results for the organisation in the long term, they are likely to find that finance will typically take their proposal seriously even if it is ultimately unable to go ahead.
George McDevitt, vice president of finance at Oracle UK, Ireland and South Africa, explains that it is all down to communication. “Success depends on knowing your audience. It’s about knowing who to convince and how. HR directors should understand what drives the FD and talk in a palatable language that he or she understands. Similarly, a good FD will look at the value of something rather than solely at the cost. But in convincing FDs, it’s essential that HR directors equate the value of seemingly ‘soft’ goals, targets and drivers to the business’s bottom line. This mutual understanding will lead to a more productive dialogue between the two departments.”
Case study: Oracle
Simply viewing reward from a cost perspective means that finance directors (FDs) can run the risk of not seeing the true return on an organisation’s benefits spend.
Oracle’s low rate of employee turnover has been attributed to the company’s flexible benefits scheme, which enables staff to tailor their package to suit their needs.
George McDevitt, vice president of finance for Oracle UK, Ireland and South Africa, says that if HR and finance directors (FDs) work in partnership, it can add value to the business. “The FD and HR director should act as allies rather than business adversaries,” he adds.
The two, he says, should try and see eye-to-eye on perks, with the FD learning to view them as a retention tool rather than a cost to be cut.
He adds that human capital management is one area on which the two functions can capitalise by working together.
“Maintaining an efficient, motivated workforce is an area where HR and finance directors should agree and stand united. A successful organisation will be well aware that recruiting and training staff is expensive, and that disenchanted employees are bad for the bottom line. It is in the HR director’s and FD’s interests to keep employee churn to a minimum,” he concludes.
Factors to consider when demonstrating benefits’ return on investment
Not all benefits will produce an immediate direct financial return. When communicating their value to finance directors, the impact they have on the following areas will be central to the business case.
- Recruitment and retention
- Employee productivity and performance
- Absence levels
- Customer service levels
- Impact on profit and loss accounts
Case study: The Rank Group
When the Rank Group moved from a company car scheme to cash allowances, demonstrating potential cost savings to the finance function was a key part of the business case.
The organisation was finding that some employees were leaving its employment a number of months before the lease on their cars was up, so it sought a more cost-effective alternative. Roger Fairhead, former head of compensation and benefits, explains: “The way I engaged the finance director was to set out the cost of the leases that were outstanding. If you look at employment costs, they tend to make up a significant proportion of profits so FDs are aware of that.”
Setting out the costs and potential savings to finance at the very beginning of a proposal can also help to open up the lines of communication. “Give them the headline. You’ve got to talk [finance’s] language, and the language they understand is numbers,” says Fairhead.
But not all benefits can be explained in purely financial terms, so HR will need to demonstrate the intangible advantages such as improved employee performance and productivity. “If it doesn’t make any financial difference, it’s sometimes difficult to engage [FDs] in other things such as morale,” says Fairhead.
He adds that compensation and benefits teams can often act as a go-between for HR and finance departments. “They would ordinarily have different priorities in day-to-day activities. Compensation and benefits has to be that bridge between FDs and HR.”