The Role of the CFO
If you’re a CFO, you know that your primary responsibility is to optimize the financial performance of a company: your three primary accountabilities being financial planning, management of financial risks, and financial reporting. In addition to your traditional role, you’ve probably been asked to expand your role – moving away from a pure “number-crunching” role to a more advisory role especially in the area of “resource deployment” – including the area of human capital. This doesn’t mean figuring out which employee should be in which job, but to understand how your investment in people is enhancing or detracting from bottom-line performance.
How can Human Capital (HC) Analytics help you understand the impact of human capital efficiencies on financial performance? Read on!
Human Capital Analytics
Human Capital Analytics is the discipline that allows for decisions about the collective human capital of the organization to be made in a more rigorous and data-driven manner – instead of the way these decisions have been made (primarily by CHROs) for decades — subjectively. Moving to a more evidence-based approach is critical as, for most organizations, the investment in human capital is typically the largest single line-item expense, and can be upwards of 50% of the organization’s gross profit. Relying on “gut” and making subjective decisions about the most critical business investment is unacceptable – and now there are tools that allow you to understand how these investments in human capital are performing financially.
How Human Capital Analytics Contribute to Capital Investment Decisions
- Financial Planning: HC Analytics help you understand how to predict the ROI and IRR of human capital investments. When 50% or more of your gross profits are spent on people, you should be able to understand if that investment is generating accretive value to EBITDA. Some of the HC Efficiency ratios that you should be monitoring include: productivity ratio, attrition ratio, management stability ratio, diversity ratio, etc. These are akin to other efficiency ratios including: inventory turnover, working capital turnover, receivables turnover, etc.
- Managing Financial Risks: HC Analytics help you understand where human capital underperformance poses a financial risk for the organization. High levels of attrition, for example, cost the company today and in the long run. Research has shown that attrition today increases human capital costs by 40% in the following year. HC Analytics help you understand how to interpret financial results, and especially contextualize these results compared to market benchmarks. They can be a source of insight for management and shareholders. Some of the Risk ratios you should be monitoring include: human capital value-add ratio, HC ROI, HC Expense Ratio. These are akin to other profitability ratios including: ROE, ROA, ROS, Net Profit Margin, etc.
- Financial Reporting: Jay Clayton, the Chairman of the SEC said: “…the SEC could do a better job around disclosure, specifically ‘driving disclosure toward human capital.” With increased pressure from investors and regulatory agencies for more transparency in this area, it will fall to the CFO to prepare and report on human capital analytics. The ISO recently released its standard for human capital governance (ISO 30414), so the time is approaching when this will be a normal part of your reporting responsibility.
Just a few months ago, Chuck Leddy blogged that “The CFO connects disparate corners of the organization into a cohesive entity.” And being able to understand the impact of human capital is critical to this cohesive accountability.
Dr. Solange Charas is a senior-level human resources expert with 30+ years of experience as a consultant, practice leader, top corporate executive, and board director across all industry sectors. She was the Chief Human Resources officer at Havas Worldwide, Benfield and Praetorian Financial Services Group and held senior-level positions at Ernst & Young and Arthur Andersen. She serves of the boards of 2 public companies, a non-profit organization and a higher-education institution. She is the Founder and CEO of HC Moneyball – an analytics platform company founded to provide support for enhanced decision making about spend on people in any organization.
Solange earned a PhD in Management from Case Western Reserve University’s Weatherhead School of Management, an MBA in Accounting and Finance from Cornell University’s Johnson Graduate School of Management, and a BA in International Economics from the University of California, Berkeley. She has authored numerous articles, including “The Art and Science of Valuing People” in HR Director, “6 Ways to Coach Your Company’s Teams to Be Champions” in Entrepreneur Magazine and “Why Men Have More Help Getting to the C-Suite” in Harvard Business Review.