Four Ways HR Can Operate More Like A Profit Center

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January 28, 2010

**Disclaimer** I am not an accountant and don’t even play one on tv.  That said, I am not implying that ideas in my post meet the generally accepted accounting principles.  You’d have to talk to your accountant for that kind of advice.  The post is intended to explore ways HR can communicate the value of services in a way that is understood by the leadership team in terms of ROI by considering ways to operate more like a profit center and less like a cost center.

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How much would you pay for a real competitive advantage when it comes to the people knowledge of your company?

That is a question we should be asking the business leaders in the departments we support both as HR generalists and recruiters. Honestly, I am tired of hearing that the human resources department is just a cost center.  Why?  Because we add value, we support our internal clients, we are often proactive on business strategies to help the “real” profit centers succeed, we make sure you get paid, get your benefits, are able to relocate, provide your training, and more. Why aren’t we treated like the internal consultants that we are?

Now let me tell you that I talked to an accountant about this and had an hour long debate (ok, borderline argument) on why companies are not able to treat the HR department as a profit center.  In layman’s terms, it’s because a company cannot generate revenue from itself, however, it can offset expenses or offsetting revenue.  I realize that for those who are familiar with accounting this is greatly oversimplified, but it gets the point across.  Revenue and profit can come from external sources.  So, being internal, HR does not turn a profit.

Got it.

I’m not saying we throw all the accepted accounting principles and practices out the window.  My idea revolves around the way we “sell” HR and recruiting services internally.  Even though it technically does not turn a profit, why can’t we set up the way the profit centers use HR in a way that “charges” (ie. distributes the share of the expense for the HR department) out to the profit center based on the type of HR usage they have?

What if HR departments set up a fee schedule for all the ways that HR departments and recruiting teams add value to the company, then “charge” our internal clients by tracking our time spent on projects like external consultants would.  Maybe then they would place more value on the services they receive.  Here are some ways I think the department could operate more like a profit center:

1.  Charge back other departments for their use on:

  • Training courses offered
  • Recruiting and sourcing
  • Succession planning for their team
  • Conflict resolution
  • Coaching services
  • Compensation analysis
  • Employee surveys

2. Focus on expense reduction. Since HR cannot actually make revenue, the biggest impact they can have is to creatively reduce expenses.

3.  Review how vendor procurement is handled. This is an area where the HR department can take steps to being more involved.  It is usually handled by the finance department, so why not help in those business decisions if you are a recruiter or HR generalist?

4.  Use social media to aid in reducing external recruiting costs. Bring the knowledge and leadership of the sourcing process internal.

So, tell me what you think.  Should we take steps to operate more like a profit center and less like a cost center?  Share your views in the comments.

18 Comments

  • HR is a professional services firm inside an organization – if the HR outcomes (driven from practices based on the question “we will do XXXX so that the business can YYYY) drive better and sustainable business results, then HR would not be seen as a cost center but more as an investment in business growth. Same as innovation or R&D might be seen. Its a long journey to get there, but shifts the dialogue. Thanks

    • @Mike- Love 2 things you say: “HR is a professional services firm inside an organization” and your referring to them as an “investment in business growth”. Those are powerful ways to begin to capture how HR views our role and I will certainly begin using those phrases when I speak to leaders. Thank you so much for capturing what I was trying to. Thanks for commenting. 🙂

  • I think that HR as a cost-center, just like IT, is a great idea. However, I wonder how many managers would think that they could just do it themselves? You know, because it’s “easy” and to “save money”.

  • Trish, I cannot agree with you more. The HR needs to be strategic partners with the business unit and always have a seat at the table. Slowly we are getting there but increasingly important to continue to add value then showcase our contributions as much as we can.

    Nice post.

  • Very interesting post.

    I totally agree with the fact that HR should be seen as assets and not only costs, and therefore that it should be involved in the strategy conception process.

    However, it must be underlined that all sectors and all companies are not equally sensitive to HR assets. But saying that already suppose to take HR into account when defining a firm strategy.

  • In my mind, the charge back piece is one of the most important approaches of what you brought out. At my last organization I argued for this time and time again yet when it was brought up to other departments they thought it was crazy. Leadership should support this just like they would when charge-backs happen from marketing to sales and from operations to administration!
    Good points

    @BenjaminMcCall
    ReThinkHR.org

  • Trish – great post and great discussion.

    I wanted to respond to Benjamin’s comments above regarding internal charge backs. Overall the concept of internal chargebacks are used to help recover costs related to providing services – but all too often it results in unintended behaviors.

    If HR were to provide services for a fee internally, they create an environment where there are barriers to services and a disincentive for business leaders to accept assistance from HR – not the position HR wants to be in.

    Additionally this creates a possibility of business leaders shopping for HR-related services outside the company – after all, if I’m spending “my” money I should be able to get the best possible price for services, right? Unlike IT which often is run as a shared service (cost recovery) and has barriers such as access to networks, servers, and the like, there are no real barriers to sourcing leadership training externally, utilizing a third party for 360 degree reviews, etc.

    As it pertains to HR operating as a profit center, there are specific things that HR can and SHOULD DO to demonstrate their value to the organization in financial terms. First and foremost, HR needs to be able to better articulate the return on the corporate investment in their services. As many CFO’s believe, if you can’t measure it you shouldn’t be doing it. Secondly, HR should be speaking to the business as part of the business – e.g. “By redesigning our recruitment processes we have enabled the incremental recognition of 52% more tax credits under the Work Opportunity Tax Credit program resulting in $1.4m directly to the bottom line”. This is a way in which HR does generate profit.

    HR can positively (and negatively) impact the financial results of an organization and know how this can happen and speaking to it with concrete facts will go a long way towards being viewed as a true business partner and not just the department that plans parties and deals with people who can’t get along with one another

    • @Everyone- I’m loving this discussion! I have some ideas about internal charge backs (hint: I align w/Bryon’s stance pretty closely), but I’ll wait to post my thoughts until later. Hope the conversation continues.

  • Trish,

    I agree with Bryan that managers might just shop around or try to do it themselves (after all, most people think training is easy!)

    I’ve just posted some articles on excuses for not offering more training and cost is number one. I’m afraid that if HR charged departments for the training we would see an even lower level of employee training, fewer people allowed to participate in training unless they could provide proof that it was essential for their job, etc.

    In these times of fiscal belt-tightening, it’s hard enough to get CEO’s and CFO’s to agree to footing the bill for training, even in light of study after study that shows that training improves employee engagement. How much worse it would be to also have to woo department managers and other mid- to lower level purse-string holders as well.

  • Great write up. Our brain dominance research (using the HBDI) has shown that HR leaders are less inclined to think in quantitative terms and that is a real barrier. My father (whole at GE years ago) and several other successful HR leaders have found a solution: partner with finance to track savings and value. I recently heard Ted Hoff , Sr VP at IBM mention that he felt that becoming a partner with finance was THE best route to successful demonstration of value. It does require work and speaking a different language, but is well worth it.
    How many of you partner with finance and use their knowledge of how to manage the numbers?

  • Very interesting idea, but with all due respect, I don’t buy it for a minute. Let me say first that I TOTALLY agree in the strategic value of HR. As someone said, HR should have a seat at the strategic table. But you are not going to get there with this. You can only get there if leadership sees the value of your expertise and invites you to the table. Right now, everyone hates HR and for good reason. They actually INCREASE internal transaction costs, not decrease them. Most HR does not grow internal resources, they tax them. People and processes don’t get better when HR gets involved, they get more burdened and constrained. HR does not remove bottlenecks, they add new ones and make existing ones worse. THAT is the strategic issue HR needs to address and adding a “charge” to your services will only make things worse.

  • Trish,
    As the CEO of two tax credit administration companies, I have been espousing the opportunity of the HR departments to become revenue generating entities for years. With programs designed to create employment based federal and state income tax credits, Work Opportunity Tax Credit, Empowerment Zone and Renewal Community Tax Credits, Rural Renewal Community Tax Credits and many State Tax Credit opportunities, there are plenty of avenues that an HR department can demonstrate considerable value. Some of the programs are even retroactive so you may be able to capture past credits that would provide refunds. You don’t have to change your hiring practice, just add a form from our office to your new hire package. Additionally most of the tax incentive admin companies are on a contingent fee basis and only get paid if they actually provide results! This means that you don’t have to provide a budget request for our services.
    The current government administration is talking about creating, expanding and extending government incentive programs that are all related to job creation, hiring and retention. There has never been a better time to explore these valuable tax incentive programs and choose carefully when selecting an administration company to assist with this effort. With almost twenty years experience we have seen them all.

  • Trish,
    As the CEO of two tax credit administration companies, I have been espousing the opportunity of the HR departments to become revenue generating entities for years. With programs designed to create employment based federal and state income tax credits, Work Opportunity Tax Credit, Empowerment Zone and Renewal Community Tax Credits, Rural Renewal Community Tax Credits and many State Tax Credit opportunities, there are plenty of avenues that an HR department can demonstrate considerable value. Some of the programs are even retroactive so you may be able to capture past credits that would provide refunds. You don’t have to change your hiring practice, just add a form from our office to your new hire package. Additionally most of the tax incentive admin companies are on a contingent fee basis and only get paid if they actually provide results! This means that you don’t have to provide a budget request for our services.
    The current government administration is talking about creating, expanding and extending government incentive programs that are all related to job creation, hiring and retention. There has never been a better time to explore these valuable tax incentive programs and choose carefully when selecting an administration company to assist with this effort. With almost twenty years experience we have seen them all.
    http://www.acitaxbiz.com and http://www.retrotax.com

  • Trish:
    You present some very thought-provoking ideas (and I agree that once a department starts doing charge backs, the other departments will opt to do the work themselves to save money, thus making HR obsolete). However, the concept of doing this, with the charge-backs reflecting market competitive rates, would be incredibly powerful to show the value of HR, which is ultimately the goal, correct?

    I also think until companies realize that HR is not just the company party planner, things will not change. However, I also think that everything eventually comes into its own and HR is working that direction. The precedent is being set by larger, global companies in many ways and simply needs to trickle down.

  • I don’t think HR is alone in this argument. Many areas of the business do not operate as profit centers, including Accounting. We can all strive to lessen our cost burden to the business by not wasting money on useless endeavors (insert your definition of useless here), and by stepping up and focusing on things that offer a good return.

    I think you raise some good points in that you want to assign a value to the internal services you provide. Hell, that alone should have gotten your bean counters a little bit excited. I know that I would have really enjoyed having that kind of a conversation.

    However, actually allocating expenses in that manner in the books can be tedious and counterproductive (as that could decrease the usage of your services by other departments because of the “cost”), but it is a great way to show the C-suite the kind of value you are adding/creating internally. You know, if they are actually interested in helping you (and their business) grow and not just happy that HR is keeping them legal and/or planning parties, that is.

    I’m a huge believer of HR and other departments working together with Finance/Accounting to look at their internal business in new ways, but that might just be my personal bias showing through. I know sometimes you’d probably rather stab your eyes out with a spork than to have lunch with Stan from Accounting, but try to find someone to partner with internally. Sometimes, just showing an interest in improving or quantifying your processes may be the key to breaking through all that adding machine tape and having a really interesting conversation that you never thought was possible.

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About Trish

A former HR executive and HCM product leader with over 20 years of experience.

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