Published on 7/03/2007

In the past HR has often been satisfied with achieving business partner status. Now HR must be able to prove its impact on the bottom line. This change will require a change of language, new data to be collected and a new approach

Departments that have not been able to demonstrate the impact they have on the bottom line have traditionally lost internal company recognition, had their funding reduced and in the worst cases have had their function outsourced.

To maintain representation as part of the executive committee HR leaders must shift their approach from maintaining the status quo with only incremental gains in efficiency to a new model that can demonstrate a measurable business impact.

Measuring Impact

The primary measure of any business function, according to most senior-level executives, should be demonstrated impact on the bottom line (preferably a positive impact). Obviously, functions that have the most visible impact on profit receive the largest amount of recognition and respect. Finance, for example, directly increases profits by making effective investments. Marketing increases profits by increasing the volume of prospects that can be processed by sales. In contrast, functions that do not have a clearly visible impact on profits (accounting, IT, HR, etc.) are doomed to battle for funding or may face elimination.

To ensure a demonstrable profit contribution HR must shift human resources away from its current process-efficiency focus and instead adopt a goal of delivering a demonstrated business impact. The concept is borrowed directly from the most powerful business functions: marketing, finance and product development.

The mission of this new HR is to understand the business and identify the specific areas where great people and talent management can directly affect business results. HR can then focus on those activities and develop credible metrics so that the CEO, CFO and other functional leaders will irrefutably see the direct connection between investing in these areas of HR and increased revenue, margins and profitability."

To make that kind of shift, the first step is to identify high-impact activities. HR leaders must shift their talent and budget to focus on these high-impact activities. Also assume that line managers will be skeptical, so educate them with examples and correlations that show that high-performing business units also rate extremely high in their people management practices.

In the financial area, HR learn how to convert HR results into dollar impacts. You would convert a typical HR statement, such as "Our turnover rate is 2 percent," into something more meaningful, such as "Turnover cost us $17 million last year and our total firm profit was only $12 million." This will demonstrate in dollar terms the need to invest in retention programs.

HR also must redefine its primary customer. It should be the firm's external customers, because if you focus on the paying customer, you increase your chances of affecting profits. Other critical actions include changing to data-based decision-making, focusing on preventing people problems, and shifting the language of HR professionals toward the language of business (which includes productivity, ROI and profit).

The last step is a longer-term action requiring HR to lead a company-wide effort to shift the organization to a performance culture in which all rewards, recognition and people-related programs are focused on business performance.

HR must like all other departments show a substantial competitive advantage and be able to demonstrate its irrefutable impact on the bottom line.