Businesses across the world are experiencing some of the toughest operating conditions for many decades. Currently it is difficult for many companies to maintain let alone grow their profits. What might be overlooked in some organisations is the critical role that HR can play in boosting profitability. In its simplest form: profit = revenue – expenses
The two main ways to grow profits are to increase revenue and/or decrease expenses. Focusing on profit growth is often seen to be the sole domain of accountants and operational business leaders. However this should be an aspect of a business in which HR provides leadership and makes a tangible contribution.
Think about it. Labour costs are usually the largest (or near largest) expense item for a business – and this is a cost that can be planned for and managed. Every dollar of expense that is saved goes straight to the bottom line (profits). On the revenue side of the ledger, the performance of people is a major determinant of business revenue generated. So HR, often considered to be focusing on the ‘softer’ side of business, is critical to hard business outcomes.
So let’s take a look at some of the ways that HR can help drive profitability, some of which are short-term while others take a longer timeframe to come to fruition.
How HR can grow revenue
- Provide leadership in defining and then creating a culture of high performance across the organisation, resulting in higher levels of individual, team and company performance – and therefore increased revenue.
- Identify a small number of key capabilities that drive your company’s revenue growth and support the business in developing these capabilities in relevant departments and roles.
- Invest in developing the capability and performance of your company’s leaders – this will generate long-term value.
- Measure employee engagement within your company and then work on a strategy to improve engagement by focusing on 3 or 4 improvement areas which will drive higher levels of engagement (high levels of employee engagement are associated with higher company revenue and profits).
- Identify aspects of work in your company which could be done more effectively or efficiently through utilisation of new technology, and then support the change aspects of its implementation. For example, use of enterprise social networks such as Yammer may drive revenue growth through increased collaboration and innovation by employees resulting in new and improved products and services.
How HR can control expenses
- Manage and contain employee (including executives) remuneration (compensation and benefits) costs through having a solid remuneration policy and ensuring adherence to it.
- Utilise an appropriate mix of permanent and contingent (e.g. contract, casual, associate etc.) labour so that labour demand and supply can matched more effectively and labour costs reduced accordingly if company revenue declines.
- Develop and implement a strategy to improve employee retention rates and therefore reduce the costs of employee turnover such as recruitment costs, onboarding, training etc.
- Look to improve the offer and take up of flexible working arrangements for employees which may also enable your company to reduce its office costs, e.g. less office space required and therefore reduced rent payments (as a bonus, this initiative will also likely help increase your employee retention rates).
Most of us in HR know that our work can significantly impact our company’s profitability but perhaps we don’t often enough directly link HR activities to revenue, expense or profit related outcomes. HR does play a crucial role in the profitability of each company, and never more so than in these challenging economic times.
The examples above are just a few of the many ways in which HR can impact business results. What success has your HR function had in driving your company’s profitability?