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Human Capital Management: The Chief Financial Officer(CFO) Point Of View

Human Capital Management: The Chief Financial Officer(CFO) Point Of View*

By Mercer Consulting who can be found at www.mercerhr.com

1. INTRODUCTION

"We spend hundreds of millions of dollars a year on employees. It’s the biggest investment we have." - Sarah Meyerrose, EVP Corporate and Employee Services, First Tennessee National

Human capital—the sum of a workforce’s skills, knowledge, and experience— puts CFOs in an awkward position. Companies spend a great deal on employees, yet few finance executives understand in any detail how this investment creates value for the business. Consider the following figures: On average, companies spend 36 percent of their revenues on human capital expenses, but only 16 percent say they have anything more than a moderate understanding of the return on human capital investments.

A new attitude

As we will explain in this report, this situation is changing. CFOs—along with investors and boards—are coming to view human capital as a crucial source of value. As a result, finance executives are taking a more active role in the management of human capital, and many are seeking to apply financial discipline to these investments.

This report explores human capital management through the eyes of the CFO. What is the current status of human capital management and what is changing? What does this imply for the CFO’s role in human capital management? What steps are companies taking to manage human capital as a source of value rather than a mere cost?

 

The remainder of this chapter reviews the study’s key findings. Chapter 2 explains the CFO’s changing view of human capital. In Chapter 3, we show how finance executives are becoming more involved in human capital decisions. Finally, Chapter 4 considers the ways in which companies are attempting to apply greater financial discipline to human capital management.

 

Key findings

Our survey and interviews have led us to the following conclusions:

# Despite high spending, few know the return on human capital investments. On average, companies spend 36 percent of revenues on human capital expenses, according to our survey. Yet very few understand the return on these investments—only 16 percent report that they know the return to a "considerable" or "great" extent.

# CFOs see human capital as a key value driver. Finance executives believe that human capital is a central factor in their companies’ ability to achieve the outcomes that drive shareholder value. For example, 92 percent think that it has a great effect on the company’s ability to achieve customer satisfaction. Eighty-two percent believe this is so for profitability and 72 percent do for innovation and new product development.

# How companies manage their human capital is now an investor and board-level issue. Forty-nine percent report that investors are beginning to ask about human capital issues to at least a moderate extent. Today, 23 percent say that their boards are highly involved in human capital issues; in two years, 36 percent expect such involvement. Interviews suggest that recent board interest is partly a result of the past year’s corporate scandals, but also a growing recognition of human capital’s importance to the bottom line.

# CFOs have a balanced view of the HR function. CFOs have traditionally regarded HR as a non-strategic cost center, but they increasingly see it as a strategic partner. Thirty-nine percent consider HR more of a partner, and 33 percent see it as equally a partner and a cost center.

# The top workforce priorities are building leadership capabilities and raising workforce productivity. In addition to leadership capabilities (59 percent cited this as a priority) and productivity (58 percent), respondents also cited acquiring key talent (47 percent), retaining key talent (38 percent), and measuring human capital’s contribution to business performance (28 percent) as a priority. Large companies are especially likely to label this last item as a key concern: 40 percent of those with over $1 billion in annual revenues want to measure the influence of human capital on attaining business objectives.

# HR technology has been a major disappointment. In spite of years of technology spending, few are satisfied that these investments have improved their ability to manage human capital. Overall, only 20 percent report that their investments in technology allow them to track and measure human capital to a considerable extent. And while half of respondents are satisfied with their ability to track turnover,very few say their systems are useful for workforce planning, measuring skill levels, or assessing the return of human capital investments.

# Finance is involved in aspects of human capital management. In addition to traditional areas of CFO involvement, such as setting and allocating the company’s overall human capital budget, finance now plays a significant role in setting the HR function budget and determining how to allocate that money. Fifty-six percent say that finance has at least a 50/50 role with HR in setting the human resources budget, and 58 percent say this is so for allocating the HR budget.

# CFOs think they should be more involved in human capital decisions. Today, 38 percent of finance executives say they have an "important" or "leadership" role in human capital decisions, but 62 percent believe they should. Interviews indicate that involvement might include designing HR metrics, adding a financial perspective to HR decisions, and helping link HR policy to corporate strategy.

# Finance executives tend to think both HR and finance should report to the CEO. Today, 52 percent of top HR executives report to the CEO, and only 15 percent report to the CFO (a reporting relationship that is more common in smaller companies). Although there has been talk recently of HR reporting to finance, our interviews indicate that most feel that the ideal structure is for both finance and HR to report to the CEO, and for these functions to work collaboratively.

# Human capital is increasingly a factor in M&A pricing. A growing number of finance executives think that human capital is important in determining the price of an acquisition. Today, 45 percent report that it is very important and in two years, 59 percent believe it will be.

# Few explicitly consider human capital value when making layoff decisions. Despite a growing recognition that human capital is a source of value, relatively few make a serious attempt to weigh the value of skills, knowledge, and experience lost against payroll savings when making layoff decisions. We found that only 38 percent do so to a "considerable" or "great" extent.

2. THE CFO’S VIEW OF HUMAN CAPITAL

It’s no secret that finance executives have historically been skeptical about intangible assets such as human capital. Largely because such assets are difficult to quantify, CFOs usually treat them simply as costs—necessary, perhaps, but costs nonetheless. Likewise, CFOs have generally taken a dim view of the HR function, viewing it less as a strategic partner than as a cost center.

** Reprinted by permission of Mercer Inc. who can be contacted at www.mercer.com

 

Gary Watkins

Gary Watkins

Managing Director

BA LLB

C: +27 (0)82 416 7712

T: +27 (0)10 035 4185 (Office)

F: +27 (0)86 689 7862

Website: www.workinfo.com
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