Largest investment, financial execs frustrated in measuring ROI
Companies spend an estimated 36% of their revenues on human capital — pay, benefits, training, and other expenses related to their workforces — yet only 16% of the financial executives who participated in a recent study say they significantly understand the return they are getting on this huge investment.
The study, “Human capital management: The CFO’s Perspective”, was conducted by CFO Research Services in collaboration with Mercer Human Resource Consulting to examine the changing role of the finance function in managing human capital. It is based on a survey of 180 senior financial executives at large US and multinational corporations, as well as select in-depth interviews.
“CFOs are in a difficult situation,” says Rick Guzzo, PhD, a human capital strategy consultant with Mercer.
“Most see the importance of human capital to business success, yet they are unable to apply ordinary financial discipline to managing what is often their company’s largest investment. Their predicament is getting tougher. Financial executives are feeling increasing pressure from boards, investors, and analysts to show how human capital is being managed in their companies.”
According to the study, half of the financial executives surveyed (49%) report that investors are beginning to ask about human capital issues to at least a moderate extent. About a quarter (23%) say their boards currently are involved in human capital issues to a considerable or great extent, and 36% predict that their boards will be involved at this level in two years.
Relationship with HR function
The changing role of the CFO in managing human capital demands a corresponding change in the relationship between the corporate finance and human resource (HR) functions.
“Historically, there’s been little love lost between finance and HR in most companies,” Dr. Guzzo says.
“However, the changing business landscape makes it necessary for these two areas to come together in new, more collaborative ways. The financial executives surveyed acknowledge both a need and a willingness to work in partnership with HR to better manage the human capital of their enterprises.”
According to the study:
* Financial executives want to be more involved in human capital decisions — not just in setting and allocating HR budgets, which has been their traditional role. Of those surveyed, 62% say they should have an “important” or “leadership” role in human capital decisions, but only 38% say they currently play such a role.
* Financial executives today see human capital as a key value driver, not merely an expense as they once did. Among those surveyed, 92% say human capital has a great effect on the company’s ability to achieve customer satisfaction. Eighty-two percent believe this is so for profitability, 72% for innovation/new product development, 71% for success in integrating acquisitions, and 64% for growth.
* Financial executives believe both finance and HR should report directly to the CEO and work together collaboratively. “The relationship between HR and finance has changed because managing human capital is no longer just the province of the HR function,” Dr. Guzzo says. “It is a responsibility increasingly shared by senior leadership across the organization.”
The value of HR technology
As part of the study, respondents were asked to comment on the investments their companies have made in HR technology. Their assessment: It’s been a disappointment. The financial executives report that the HR technology provides some value in tracking employee turnover, but is much less valuable for systematic workforce planning, measuring employee skill levels, or measuring leadership capabilities.
Just 8% of the respondents say they are “largely” or “highly” satisfied with their HR technology’s usefulness in quantifying the company’s return on human capital investments.
“The problem may not be the technology,” Dr. Guzzo points out. “More likely, the problem is what the company does with data captured by its systems. Traditional approaches to data analysis won’t give CFOs the answers they are seeking, but new, more powerful human capital measurement techniques can provide these answers.”
“In all likelihood, the right data already is accessible and can be used to help both finance and HR leaders answer questions about what’s working, what’s not working, and what kind of return the company is getting on its human capital investments,” Dr. Guzzo adds. www.cfo-research.com.
About the study
A complimentary copy of the study report, “Human capital management:” The CFO’s perspective, is available at www.mercerHR.com/CFOstudy and www.cfo-research.com.
Mercer Human Resource Consulting, one of the world’s leading consulting organizations, helps organizations create measurable business results through their people. With more than 13,000 employees serving clients from 142 cities in 40 countries worldwide, the company is part of Mercer Inc., a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (NYSE: MMC) on the New York, Chicago, Pacific, and London stock exchanges.
CFO Research Services, based in Boston, Mass., is the sponsored publishing unit of CFO Publishing Corporation, which publishes CFO magazine, the leading business magazine written and edited specifically for senior executives with financial responsibility. CFO Publishing Corporation is an Economist Group business. At CFO Research Services, a dedicated team of business research professionals dissects emerging trends in corporate financial management using mailed surveys and personal interviews with respected financial executives.