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The CFO Connection

July 1, 2003
Related Topics: HR Services and Administration, The HR Profession, Financial Impact, Featured Article
As executive vice president of human resources for closeout chain Big Lots Inc., Brad A. Waite manages 45,000 employees. But he would be the first to say that his title doesn’t describe his job. His most important task is serving as a member of the executive team that turned the company around by creating a performance powerhouse. Big Lots’ earnings per share soared 154 percent in 2002, and comparable-store sales are still rising despite tough times for retailers. The firm’s stores--spread across 45 states--now form the nation’s largest broadline closeout chain. They sell everything from cookies to computers at 70 percent off retail prices, an approach that quickens the pulse rates of bargain hunters and stock analysts alike.

Waite is head of human resources, but he also runs risk management and loss prevention, corporate and internal communications, and executive recruiting and staffing. "I value the human resources role and I’ve chosen it as my profession, but I’ve always viewed myself as a business leader who just happens to be in a human resources position," he says. "That’s the way I define myself to everyone within my HR organization and within the executive team, and that’s how I want people in the HR function to think."

Among human resources executives, however, he remains the exception rather than the rule. Despite a full decade of talk about human capital, metrics and the strategic-partner role, human resources is still a silo system in most companies. The most successful workforce executives, however, have expanded their responsibilities beyond traditional human resources functions. They sit on the executive committee, have access to the CEO and the board, and participate in the highest levels of company-wide strategic decision-making.

These executives understand the business and fully grasp financial issues. They may have moved up through the ranks within human resources, or entered from another area such as operations, but at some point in their careers, they abandoned the traditional idea that human resources is part art and part science. They set their course directly on a business-driven approach. And, perhaps most important, they mastered finance and built an alliance with their CFO. Like Waite, these executives are no longer running human resources. They are running the company.

The Alliance
    Waite’s strong alliance with Big Lots CFO Jeff Naylor began when Naylor was recruited. In most large organizations, executive recruitment and staffing is farmed out to search firms or other third parties. Waite developed a different approach. He built an executive-staffing function within the human resources group so that every position in the company, including CFO, is recruited by human resources. "HR builds a bond with every executive we bring in right from the beginning," Waite says. "This is an area where we can be a great business partner, have a tremendous impact on the business, and perform an incredible service. The value goes well beyond how many dollars we are saving each month to what’s being done to move the company further down the path toward our vision."

The alliance between human resources and finance expanded when Waite took over risk management and loss prevention, traditionally part of the finance domain. The human resources/loss prevention combination is extraordinarily rare, but Waite saw the benefits and pursued the opportunity. "If you are really focused on running profitable business units, human resources and loss prevention are entirely aligned," he says. "If someone in the company is violating company policy or acting in a dishonest way, then human resources and loss prevention have the identical goal of ridding the company of the problem." Since taking over loss prevention, Waite’s team has saved the company several million dollars a year by reducing inventory shrink with a leaner, more focused team.

"The relationship between human resources and finance has changed because managing human capital is no longer just the province of the HR function, but a responsibility increasingly shared by senior leadership across the organization."

Workforce management executives increasingly need and want influence over issues that commonly fall within the finance area. At the same time, CFOs increasingly recognize the size and importance of the investment in human capital and are becoming more involved in how it is managed. "The relationship between human resources and finance has changed because managing human capital is no longer just the province of the HR function, but a responsibility increasingly shared by senior leadership across the organization," says Rick Guzzo, a human capital strategy consultant at Mercer Human Resource Consulting. CFOs want a larger role in human resources, and given their level of power in most organizations, they are likely to get it. A 2003 Mercer study found that 38 percent of CFOs play an "important" or "leadership" role in human resources, but 62 percent believe that they should. CFOs increasingly see human capital as a key factor in boosting customer satisfaction, profitability and innovation, and to the extent that they recognize its value to the organization, they want more control over how it is managed.

CFOs already wield considerable power over the human resources function. Although only 13 percent of HR executives actually report to the CFO, according to the Mercer study, the CFO traditionally sits at the right hand of the CEO, the ultimate arbiter in all workforce-management decisions. In most companies, the CFO sets the overall human-capital budget and then shares responsibility with human resources for allocating that budget. In some companies, the CFO sets the budget for the HR function and determines its allocation.

At Sprint, E. J. Holland Jr., vice president of compensation, benefits, labor and employee relations, says the CFO is involved in most major decisions. The global communications giant reports $27 billion a year in annual revenues and has 70,000 employees. The senior vice president for human resources, James G. Kissinger, sits with CFO Robert J. Dellinger on the executive committee. "In today’s ever-changing telecommunications industry, it’s more important than ever that our finance and human resources groups work together to control costs, increase efficiencies and improve company performance," says Dellinger, who sits on the employee benefits committee and takes part in every discussion.

Money and Metrics
    CFOs know that labor costs commonly consume 40 percent of revenues. Yet Mercer found that only 16 percent believe they have a significant understanding of the return the company receives on its investment in human capital. Most want better tools and metrics to guide decision-making, and most express disappointment in their HRIS investments and the data produced by human resources.

Sprint isn’t short of metrics. "Our metrics fill a volume the size of the Oxford English Dictionary and include everything from detailed succession-planning analysis to how long it takes us to fill a particular job to the dollar cost of benefits for a specific employee and his or her dependents," Holland says. "The CFO does not have to call to my attention the financial implications of HR actions. It’s my job to know what they are. If you are in HR at Sprint, you have to be able to count. It is my fiduciary responsibility to the shareholders to make all HR decisions with an understanding and awareness of the financial impact. When I put together our salary budget or make any compensation or benefits-related decision, I know exactly what the EPS impact will be."

The earnings per share impact of relatively small parts of the human resources realm is potentially enormous. "The biggest number in my book right now is health care," Holland says, "but we will make a cash contribution to our pension fund for the first time this year, and it could become a large problem." Sprint estimates that increased pension and retiree benefits costs in 2003 will reduce earnings per share by 10 cents, or 7 percent. "Our financial investment in our benefits is huge, and we have to know the impact on our financials," Kissinger says.

The metrics typically used to measure the effectiveness of benefits programs--employee satisfaction, retention and dollar costs--don’t satisfy the CFO’s quest for growth and performance measures. Senior finance executives believe there is a link between the quality of their companies’ health benefits and the bottom line, according to a December 2002 survey by the Integrated Benefits Institute. But their preferred measures are cash flow, revenue growth, earnings growth and operating-profit growth.

"What CFOs want from HR is changing," says Guzzo. "They want basic cost reductions in the HR administrative processes, and they want as much efficiency as possible in compensation and benefits spending. But they also want HR to perform in the strategic-partner role, which means that HR can speak to broad business outcomes." This means that HR must bring to the table two sets of "absolute facts," Guzzo says. One set is facts generated outside HR about the business outcomes that are important to the company. The relevant outcomes might be profitability or customer retention.

The second set is HR facts that are embedded in the HRIS system about employees, their experience on the job and their performance.

"The trick is the ability to marry these two sets of facts to see how HR policies and practices are linked to variations in business results across units, locations or divisions," Guzzo says. For example, HR can begin to document how compensation affects customer retention, or determine the return on the company’s investment in training.

At Big Lots, both Waite and the CFO sit on the operating review committee, which meets every month to go over financial results. "We discuss labor cost metrics right along with sales, gross margin and our markdown rates," Waite says. He also presents metrics on loss prevention and on the employee and customer engagement project that he directs. "But human resources is doing so much to support the strategic initiatives of the business, and we’re such a central part of the organization, that no one is standing around asking, ‘What’s the return on what you guys are doing?’ In companies where the value of HR is challenged, it’s not because HR has failed to come to the table with the right return-on-investment metric. It’s because HR is not doing the right things. The administrative functions, such as compensation and benefits, are part of delivering great service, and they are a given. Beyond that, the link to business strategy is the value you deliver."

Beyond Human Resources
    At Big Lots, the most forward-looking link between workforce management and finance lies less in the cross-functional interactions and more in the relatively seamless approach to corporate leadership that has emerged. This is where human resources occupies the strategic-partner role and works with the CFO and other C-level executives to build a company’s financial success. At Big Lots, the executive team includes Waite, the CEO, the CFO, the CAO and the executive vice president of store operations. Waite and the CFO both report to the CAO. "The whole team works together so closely that it’s hard to isolate the HR component or my role within the group," Waite says.

His responsibilities now stretch deep into customer-relationship management, the very core of the company’s successful turnaround. When the executive team determined that the company had to become more customer centered, Waite proposed an expensive project to measure the correlation between employee and customer engagement and business outcomes, including sales, profitability, inventory shrink and customer satisfaction at every store. His initial conversations with the CFO centered on the financial justifications for the project and how Waite’s team will identify the right metrics to determine whether it works. "I approached it in the same way that you would justify spending capital or making any significant investment," he says.

Guzzo believes that the ability of a human resources executive to perform in the strategic-partner role depends, in part, on who the person is. "The HR function is increasingly populated by people with diverse backgrounds rather than narrow HR training alone," he says. Waite, for example, began his career in operations, working in retail stores. He was a finance major in college and developed more finance skills as he pursued an MBA. Holland is a lawyer. His background in finance comes largely from representing corporate clients. "I spend almost as much time with finance people as I do with HR people," he says. Of the five people who report directly to Holland, four have a finance background.

Those close to the emerging relationship say that the very best human resources initiatives are not HR initiatives at all. They are business initiatives, which require close work among all top executives. "If you find yourself pushing HR initiatives in a company and defining them in that way, then that’s all they will ever be," Waite says. "HR organizations get caught up in justifying their position at the table and explaining why they should be there. If you are involved in doing the right work within the company as a business partner, you don’t have to justify anything."

Workforce, July 2003, pp. 50-54 -- Subscribe Now!

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