The new metrics which are changing the relationship between finance and HR professionals
By Redline Group
More than ever before, technology companies’ HR departments need to demonstrate the ongoing impact they have on candidates, employees, the business, and customers. At Redline Group, we are seeing a dramatic change in expectations of particular functions within the finance and HR organisations to better suit companies’ financial models.
Most measurements of performance have been geared to the needs of 20th-century manufacturing companies. Times have changed. Metrics have therefore started to change as well.
Companies have focused far too much on measuring returns on invested capital (ROIC) rather than on measuring the contributions made by their talented people. The vast majority of companies still gauge their performance using systems that measure internal financial results—systems based on metrics that don’t take sufficient notice of the real engines of wealth creation today: the knowledge, relationships, reputations and other intangibles created by talented people and represented by investments in such activities as R&D, marketing, and training. The likes of Facebook, Google, Microsoft and ARM are all global leaders in their field, these companies commonly create wealth by converting these “raw” intangibles into the institutional skills, patents, brands, software, customer bases, intellectual capital, and networks that raise profit per employee and ROIC. These intangibles are true capital, in the sense of delivering cash returns, even though the sources of those returns are intangible. Indeed, the most valuable capital that companies possess today is precisely intangible rather than financial. Companies are having to redesign their financial-performance metrics for this new age.
We ask our clients about the challenges they face within their technology and engineering companies and they often talk about the need for better collaboration amongst finance and HR. Having strong and productive partnerships is critical to driving organisational growth and adapting to constant change, but many technology companies are challenged by current systems that make it difficult to share data and collaborate. There is a growing need for both finance and HR candidates to have the skills and knowledge to work seamlessly towards shared organisational goals.
It has traditionally been challenging to collaborate these teams, as many companies don’t have a technology foundation and financial methodologies to include “intangibles” that provide consistency and accuracy across finance and HR data. For example, the speed and complexity of change within technology businesses is forcing organisations to look beyond immediate headcount and plan for future workforce needs, including unique employee attributes and position requirements. The process involves more than just the normal workforce planning activities that a financial planning analyst or workforce analytics consultant might go through. Competitive advantage comes from a company's ability to model future states based on predictive outcomes, the alignment of organisational capabilities and the ability to follow through on the strategy to support these areas.
Despite the evidence that intangibles are now the true source of corporate wealth, companies often tightly control discretionary spending on them. Advertising, R&D, new-product development, training, knowledge creation, and software projects, and so forth are almost always expensed on a “What can we afford?” basis.
One reason is that accounting for intangibles is difficult. In particular, each intangible’s specific contribution is hard to assess; how, for example, do you value a brand? Companies fill their annual reports with information about how they use capital but fail to reflect sufficiently on their use of the “thinking-intensive” people who increasingly drive wealth creation in today’s technology driven economy.
Financial decisions involving staff should not be viewed as just expenses but rather as investments that are expected to bring a return. Organisations should think about how they can either minimise the cost per employee or increase the amount of revenue generated by each one. This cannot be done effectively without a joint effort between finance and HR.
The primary key to the likes of Apple, Google and Facebook’s high profit per employee is technology that scales. Each corporation excels at building a product or service with a small team, then replicating that success millions of times over, a consistent theme within the technology industry.
Rachael Palmer, Redline Group’s finance & HR recruitment manager, commented, “I have worked in specialist recruitment in finance and HR for over seven years and in the last year I have had many conversations with clients who see a fundamental difference between human resources and finance. After all they do represent different components within a business. However, this couldn’t be more wrong. While finance views HR as an unnecessary cost, HR thinks finance is out to squeeze every penny they can find, both departments function should function as gears powering the entire business based on the “intangibles”. Individually each department provides services to the business, many of which overlap. When finance and HR organisations cooperate based on the new metric, the business moves into a new era of efficiency, productivity, customer satisfaction and most importantly, profit.
“At Redline, we work with engineering and technology companies who have made adjustments in the candidate requirements of finance and HR jobs. These changes are general based on revised metrics which often help companies gauge their performance more effectively - an approach based on maximizing returns on people. As finance and HR organisation work more closely and focus on the “return on people” metric this leads to delivering increased business value. Working collectively they have the ability to drive the behaviours and outcomes needed from employees, processes and technology to provide the quickest return on investment. Finance develops measures that enable HR to have a better understanding of the business and the new financial metrics. The ultimate goal is to tie HR performance data back to financial results.”