Making friends with finance

by 18 Mar 2008

Understanding the key drivers of the business from a financial point of view can help HR in its quest to become more strategic. However, exactly how much of the financials are HR expected to know and what are the most important attributes of an effective HR team? Sarah O Carroll asks some CFOs about how HR can better partner with finance

It is often said that a strategically effective HR department is one that is commercially savvy, knows the workings of the entire business and industry drivers and can propose ideas backed up with figures. But what exactly do the CFOs expect from HR and what are the most important attributes of a HR team that will allow them to successfully partner with finance?

According to some top CFOs, the finance department do not expect HR to draft comprehensive balance sheets and profit and loss accounts for every human capital project they propose. Nor do they expect specific proposed returns on investment. However there are other key HR department skills that CFOs would like to see that would help them partner more effectively with finance.

Some of these include producing the turnover and engagement level statistics of each department; displaying networking skills and having a presence within the company; adopting the role of company mentors and coaches for all departments; and being proactive.

According to John Nesbitt, CFO of Perpetual, HR should have a good set of skills around understanding the key financial drivers of the business so that they can communicate better with the finance team members.

“If HR come in with facts and figures to help the finance team it’s going to be: what are the turnover statistics in the business, what’s the engagement level of all the people in your team, and how can you help me, as the leader of the finance team, influence those two things? Effectively if your engagement is improving then your turnover is usually going down. So from a finance point of view that reduces the costs in the business,” says Nesbitt.

Providing this type of information can in turn help HR partner more effectively with finance as it helps the finance team to assess where the allocation of funds may be needed.

“Then we know, do we need to invest more in leadership, do we need to invest more in remuneration, invest more time in communicating. Should we invest more time in training? What are the aspects that we should be investing in the business to ensure that the team engagement is maximised,” he says.

Tony Reeves, CFO of OneSteel, also believes that it is not overly important for the HR team to calculate exact return on investment. Instead, there are other success measures which would be more important for him as a CFO to see.

“They may not be dollars and cents but there’d be a need there to demonstrate what values can be derived from the initiative. That might be in soft areas like greater staff retention, better output by the team that’s in place, same team, fewer hours, higher productivity, those sorts of things would all be benefits,” says Reeves.

It is not essential to come with exact figures, he says. “If you could quantify it would be great but it you can’t quantify it, it wouldn’t be essential.”

Overall, Reeves, who has a very positive relationship with HR in OneSteel, believes that disseminating their HR expertise within the entire company is a key characteristic of a successful HR function from a finance point of view. “Overall, being well-networked within the company, having a knowledge of the business, being proactive and demonstrating leadership in their own profession –they’re all important factors for me,” he says.

Coach and mentor

According to Nesbitt, the key role of the HR department in his opinion is not to take complete ownership of HR, but rather adopt more of a coaching role. He believes they should impart their expertise and advice to all department managers and coach and train managers in how to deal with their own team’s HR issues.

For Nesbitt, an effective HR team is one that supports, nurtures, mentors and coaches the various business leaders within the company. Within Perpetual he has a HR team which he looks to, to help him deal with particular issues within his department such as how to deal with certain people who may have a skill problem or an attitude problem.

“The key thing for me with a HR team is for them not to own HR but for them to coach the managers of the business to own HR … What I don’t want is for HR to take ownership of the problem and go and deal with the issue themselves. Instead, coach the manager or that person to address those issues. This is really a critical thing for me,” he says.

It is particularly important for HR to take this coaching role with the finance department, who may sometimes become lost in a world of numbers and become detached from the people issues within the company.

“A lot of the times the accounting community is very focused on counting the beans rather than the relationships that exist in the business. And it’s encouraging them to have a broader view too; less analytical and more feeling about how the team is performing and coming together and working as a team,” he says.

Be well-networked

Both Nesbitt and Reeves believe that an effective HR department is one that is proactive and well-networked within the business. It is important for the HR team to make themselves known to the company and the finance team. Both believe that HR have a lot of value to add to the business and therefore in order to successfully partner with finance they must stand up, let themselves be known, disseminate their knowledge through all departments and be well-networked.

“The HR function should sit at the group executive table and have a real voice in where the business is going. It shouldn’t be some subsidiary back office function just doing payroll. It’s really much more at the front helping drive the business, particularly having the right people lined up. I like to see people coming through the HR area that have an ambition to go into a business role,” says Nesbitt.

Benefits of knowing the financials

There are some basic and simple financial tools that HR people can learn to really benefit them in their role, according to Baljit Sidhu, professor of accounting and finance at the Australian Graduate School of Management. They don’t have to acquire all the knowledge of accountants but they can learn the broad financial drivers easily and this can have numerous benefits.

One such benefit is in the hiring of people. As studies have shown candidates often decide which company to work for based on the impressions of the people who interview them. A financially-aware HR person who can sell the business accurately and answer questions comprehensively on the company performance can be a great benefit in hiring the right people.

“They have to know whether they’re worse than their benchmark peers, are they better than their industry, are they best in the industry, how do they know they are best in the industry? How do they know they’re the worst in the industry? I mean HR are involved in hiring and firing the talent pool so they’ve got to understand what’s happening on the financials,” says Sidhu.

So there are some simple financial skills, specific to their own company, which HR professionals can acquire in quite a short time, according to Sidhu.

“What is profit? What is cash flow? What does that mean? What does it mean to have a strong balance sheet? One company’s strong balance sheet might be another company’s weak balance sheet depending on the industry they’re in. Just having some basic understanding of these things would be helpful to them in just conversing about their company either to prospective employers or employees or just generally in terms of their role as HR managers of the company,” says Sidhu.

Another benefit is in the measurement of performance of employees which is often done in figures.

“A lot of the performance measures can be in terms of financial matrix, finance numbers, accounting numbers and it would be so much more comfortable for everybody who is talking about performance indicators. Because the financials are the language people use to communicate performance and value,” she says.

There is also the personal benefit in learning the financials of the business in terms of promotion and moving departments. If HR people want to move into a different area, into a business role, or even want to get on a path to becoming CEO, knowing these financials and how the industry benchmarks work put them on a much better footing in terms of promotion.

“In the promotion stakes the person who is going to get the first look in is the person who actually understands what the company does and how it does it and what the outcomes are and these outcomes are often measured in financial terms,” says Sidhu.