Transforming from Cost Centers to Profit-Generating Assets
.jpg){kind=spacer}
The original post in conjuction with Michael Rodriguez, Clinical Assistant Professor of Accounting at Baylor University can be found here.
Budget season can be a time of strategic hope – and frustration – for HR leaders. Often the excitement generated in the last ELT meeting about the “new vision” comes crashing down when it hits the wall of financial reality. HR leaders are not immune to the emotional swings of budget season as dreams evaporate, pass after pass, into a boiled down version of the same old budget with the same old limitations.
But it doesn’t have to be this way. Yes, it would help to develop your business finance skills if they’re lacking. Yes, it would be a good idea to partner with a financial analyst to glean insights into your numbers. Yes, it’s important to reach across the table so as not to work in silos. These are all critical to successful budgeting. Yet the secret to budget success is practical and doesn’t start during budget season.
Budgeting starts with value, priority and return. All business leaders with financial budgeting responsibilities must understand they are either working together or against the same pool of money. The greater the collaboration among business leaders, the better the chances of procuring the budget needed to succeed.
To help foster that understanding, I sat down with Michael Rodriguez, Clinical Assistant Professor of Accounting at Baylor University, Business Advisor, and former CFO for organizations such as Magnolia and Clarient (a GE Healthcare company) to talk about best practices for budget success.
BG: We know, as HR leaders, that we are a cost center. So when HR walks into a budget meeting, and they're sitting in front of the CEO and the CFO and talking about what they need, how is the CFO looking at the HR person, and how are they looking at their budget?
MR: I obviously can't speak for all CFOs, but I have lots of conversations with people who are sitting in that seat. From my perspective, ultimately, you can look at HR as a cost center, but I look at it with more of a balance sheet perspective.
When I think about our HR leaders, what they're overseeing is the most significant, most valuable asset that we have on the balance sheet of the business. You can talk about machinery, you can talk about factories, you can talk about all that stuff, but there's no greater, more valuable asset than our people.
Most budget processes are going to start with strategy, but we also need to be executing strategy every single day. The way I've tried to lead over the years is having a partnership with the head of HR long before you're having that budget meeting. If the CFO is overseeing the financial resources of the company and the HR leader is responsible for the other most significant asset – the people – then their cadence with one another needs to be constant. It needs to be consistent. So have those conversations strategically throughout the year.
BG: That makes sense. When I think of HR budgets, my mind goes to how I need to parcel it out to software, to headcount, to training and development, travel, gifts, whatever it is. I have all these different pieces. Is there a way to segment each piece and try to tie it to revenue and profitability instead of always being viewed as a cost center?
MR: I think the term cost center has a relatively bad association – when you hear that, you're thinking “we're just a drag on the rest of the business.” And I don't see it that way. At the end of the day, I don't think that it's erroneous to look at HR as a profit center in most regards, or to think of the budgeting process as evaluating a bunch of profit-generating investments we make from time to time.
This means we're evaluating the productivity and the contribution to the business's success from assets like software, from factories or facilities, and our people. Let's look at it on a per head count basis, and how much each person participating in that particular segment of the business is contributing – or what each team is contributing – to the overall success of the business.
It’s not to talk about people from a human perspective, but rather as an asset that can have a return on assets like any other asset class. And then we have to honestly think through the fact that not every asset we have in our portfolio contributes equally. But they need to be contributing optimally, and that's a separate and distinct evaluation.
BG: I love that word optimal. And I think that relates to what you were saying about having that CHRO/CFO relationship all year round. We need to work with the CFO to report back to the CEO about what optimal is.
So, if you're head of HR, and a lot of your HR functions are supporting the different business units and they’re not all equal in size, it could be a drag on HR if certain ones are consuming a lot of HR resources. How do you think HR can go get funding for HR initiatives from the business units? Have you seen that as part of that whole budget discussion?
ME: I used to work with Magnolia – you may know them from their Fixer Upper television show. That’s a significant aspect of the business, but they also have a six-acre property that houses a lot of their retail businesses. They have a restaurant. They also have a big distribution center that fulfills all of their online e-commerce orders. There are a whole lot of aspects of that business that are quite different from each other. And, as you might expect, different resources are required to manage retail compared to managing a warehouse or the creatives and designers who work at headquarters.
We often had discussions about how to make sure we're allocating resources in the right way. What we did was look at how teams are organized in a way that we could understand resourcing appropriately. For example, the people who work at the Magnolia Table restaurant are literally on the ground all the time, and there’s a lot of turnover in the restaurant business. So we knew that that HR investment was going to be more significant and was going to be particularly dedicated to that business.
So that discussion is not just during budget season – it’s every month, looking at budget to actuals. It's a very regular cadence of weekly meetings and understanding where everything is going.
I like to use the analogy of flying an airplane. In flying, there's this whole notion of the “rule of 60 nautical miles.” Once you’re 60 miles out from your starting point, if you're just one degree off in your trajectory, the difference in your distance from your targeted destination is a mile. So you have to be constantly course-correcting as you go. And certainly for us at Magnolia, that was a particularly important thing – to have a rhythm of constantly fine tuning what's going on.
BG: I love that analogy of constantly course correcting as you go and as resource needs change. Now let’s talk about how we put that into practice.
I gravitated to HR because I love people and I didn't particularly like working with numbers. I think there are a lot of people like me in HR, and as we find ourselves growing into HR leadership roles, suddenly understanding business finance is more critical. So for those of us who maybe didn't get those finance fundamentals and now we find ourselves budgeting, what's some advice you could give us to help us get up to speed faster?
MR: I happen to be a finance guy who loves people too. I would use another analogy here: travel. Say you want to travel to another country, like France. If you learn to speak some of the language, you’re going to have a lot more enjoyable experience. One way to get started is to take a class. Or you can take an immersion program where you just plop yourself into that world so that you understand more than the words and lingo – you also understand the cadence and the context and you become a better communicator.
This comes back to that idea of cultivating an ongoing relationship between HR and finance. If, as a finance person, I’m coming into the HR world, I need to understand the HR language and vice-versa. You need to spend time in that other world, with the leaders and their teams. That way when it’s time to have difficult conversations, you understand what they’re looking for. You’ve established a relationship, and you understand the context, so you can have difficult conversations that are productive on behalf of the business and the stakeholders.
Here’s another analogy: you can’t sharpen iron without actual contact, and sometimes sparks fly off of that, but it can be productive too.
BG: I found that once I got past my insecurity that I might be revealing I don't know numbers as well, people in finance were willing to help me understand their world. And we in HR have our own language as well.
One of the things I learned from cultivating relationships with financial analysts was to pay attention to the reports they were giving to the CEO. I realized that my HR reports – at least the quantifiable reports – were looking a little different than what the CEO was typically looking at. So when I put our numbers into a format that was more like what the CEO was used to seeing in a financial report, it changed the relationship. All of a sudden they were looking at a report that was more familiar and that helped them see it in a people perspective.
MR: That’s great. You know, one thing I think is often overlooked by accountants is that the whole purpose of financial statements is for the consumers of the information that we provide. Oftentimes we only ever take it from our perspective as the conveyor. That's not the important part. The important part is the person reading the information. So I would say when you're communicating information in a report to an audience, your audience's perspective is really all that ought to matter. It’s not just providing what but also providing the so what.
I’ve advised our controller that when they send out reports to each of our portfolio companies, I want them to just take a second in the body of the email and say, essentially, “If you don't read the report I am sending to you, here's what you need to know.” Then the person on the receiving end understands that you're trying to put yourself in their shoes and think the way they think.
Ask yourself: when I convey this, what am I actually trying to do with the information that I’m conveying? Sometimes it's great to ask the people you're sending it to: “How is this report helping you? What do you do with this? Do you even look at it?”
We used to do this. Sometimes when we were sending reports on a weekly basis, we would just stop, and if nobody said anything, we knew nobody was paying attention to the report in the first place. That's great to know.
Communication is all about the recipient of the message, not the sender of the message. If the recipient of the message isn't getting the communication, then the communication is messed up, and that comes from the sender.
BG: You’ve worked with a lot of heads of HR in your career. I'm curious, do you have an example where you've seen an HR leader grow in this area of finance and business – where you’ve seen them take these steps in growth toward becoming a mature leader?
MR: Absolutely. I have in multiple situations and I'm so blessed I've been able to work with incredible professionals in the HR world. When you do have partnership with your colleagues, there is an exchange that happens all the time, especially if you're particularly intentional about investing in that.
If you and I are working side by side, my starting point is, “I am here to serve you.” Servant leadership, to me, is such a pivotal aspect of leadership in general. So I need to be considering what I do, what I say, how I work, in the context of how it affects you and how it helps you. And if we're both focused on doing that, it's kind of like in a marriage. If I'm focused on your needs, you're focused on my needs, I never have to worry about my needs.
I think if we can cultivate organizations that are focused on that, then at the end of the day, one plus one equals far greater than two, and we raise the bar collectively. And if you raise two bars, then there's a magnifying effect of that, the bar gets raised so much higher.
BG: Any last bits of advice for HR leaders who want to grow in their understanding of finance and other aspects of the business?
MR: We never get to the point where we're done learning. We never get to the point where we're done growing. I'm well into the back part of my journey on planet earth. I'm still learning. I still love learning. And I love learning, in particular, by engaging with my teammates.
So I encourage people to constantly be looking out to improve, constantly be trying to find a better appreciation for numbers, operations, strategy, marketing, sales, whatever it might be. Because again, in the organization, everybody benefits.
Want to continue the conversation with Brenan? Reach out on Linked In.
.jpg){kind=spacer}
