HR controlling as a cornerstone of a risk management strategy?
The question of the added value of HR for the company’s strategy requires a transformation of the long statistical graveyard of HR reports into a clear communication of a management process. This role of effective communicator falls to HR controlling.
„Our employees are our greatest value.”
By repeatedly appealing to shareholders with this phrase, some company managers find themselves reading it rather than quoting it while looking the audience in the eye. This is not to say that executives don’t believe it. On the contrary. But from an entrepreneurial point of view, no resource is as badly exploited as human resources.
As one HR controller rightly explained to me, „from an accounting point of view, the wage bill is the biggest expense item in the profit and loss account.“ It would seem, therefore, that as long as investments in HR cannot be capitalised in the balance sheet, they only appear as an expense item in the income statement. By definition, unlike investments, these expenses have no definable value and so it is not possible to depreciate them over a period of use or to establish an investment account in which the initial cash outlay is compared with the cash inflow, as is the case for any investment in machinery with an assumed period of use. But then, how do you quantify the return on an investment in your own staff?
Is there an actual ROI in HR?
The answer is best described by a well-known internet joke: „CEO: What if we train them and they leave? HR Director: What if we don’t and they stay?
In order to calculate the ROI, let’s take a quantification measure as an example and compare the costs of qualifying staff as an investment with the costs of not doing so – called opportunity costs – as a „return“. The „return on investment of qualification – ROIQ“ would in this case be the sum of all internal and external costs avoided minus the investment in the measure over a defined period of time and multiplied by a transfer rate, i.e. the share of successful completion of the qualification in the work process. Internal opportunity costs would include, for example, the costs of defects due to a lack of qualification, while external opportunity costs would include, for example, contract penalties, lost orders and costs related to customer complaints.
The question is therefore not whether opportunity costs will be generated, but when and to what extent. And this is one of the biggest problems for the justification of HR investments. There is often a time asymmetry between the time of the investment – or lack of it – and the arrival of the resulting costs. It is therefore understandable that the management of a company under pressure from shareholders prefers more economical measures in the short term, where the negative consequences only become visible later.
It is therefore the duty of HR, and especially of the HR controller, to make the added value of the requested investment transparent.
The HR Cockpit: an early warning system
In order for HR to demonstrate its added value, Human Capital Management must be strategically oriented and positioned closer to the business. Risks must be presented to the company’s management in a transparent manner with their potential damage. In order to achieve these objectives, corresponding performance indicators, instruments and key figure systems are needed and should be combined in an HR Cockpit that represents both the quantitative and qualitative part of HR value creation. Such an HR Cockpit can – similar to the instruments in an aircraft cockpit – serve as an early warning system in case of a course change or the implementation of a large-scale transformation strategy.
As the HR cockpit helps to quantify the benefits of the investment (replacement of staff, job transformation, knowledge retention, training, etc.), it should not only be quantified on the basis of positive measures, but also on the basis of the negative effects avoided:
- Reduction of HR acquisition costs
- Stabilisation of the wage and salary structure
- Reduction of training costs
- Increase in productivity
- Reduction of defect costs
- Reduction of rework costs
- Increased attractiveness of the company
- Reduction of lost turnover
The company of the future will have to ask itself what its HR controlling is for. Is it only a quantitative representation of key figures or is it the management of strategic processes?
Active steering instead of simple reporting
Strategic HR controlling offers great opportunities, but also has its limits. The effort required to collect, maintain and process basic data should not be underestimated. However, if HR controlling is not reduced to mere reporting, but is seen as a strategic management tool, then the foundation stone for value-creating HR management is laid.
If you too would like to know more about how to setup an HR Cockpit for your organisation, feel free to contact Copper Oak.