Senior finance leaders have long taken special interest in human resources, given that compensation and benefits constitute a large portion of any organization’s expenses. But according to a recent study, American chief financial officers (CFOs) might be ratcheting up their oversight of HR because of the tough economy and concerns about health care reform legislation.
A Robert Half Management Resources study found that CFOs are spending more time delving into areas outside of traditional financial responsibilities, including HR. Some 19 percent of responding CFOs said they’ve been more involved in human resources over the past three years, their second most common area of expanded responsibility after company operations. The survey included responses from 1,400 CFOs from a random sample of U.S. companies with more than 20 employees.
What do the findings portend for HR? While it might be easy to interpret them as a sign of diminished influence for HR executives, experts say the study instead reflects a trend toward enhanced collaboration between senior finance and human resource leaders as the flagging global economy and rising health care costs demand an “all hands on deck,” team-based approach to keeping bottom lines healthy.
Health Costs a Driving Factor
Paul McDonald, senior executive director of Robert Half Management, said CFOs are more concerned than ever about maximizing investments and increasing efficiencies in this still-wobbly economy. The Patient Protection and Affordable Care Act, with several expensive provisions set to take effect in 2014, is a driving factor in their increased involvement in HR, McDonald said.
“A lot of CFOs we know are running cost-benefit analyses on how the health care law will impact their organizations and what it will do to overall costs and bottom lines,” McDonald said. “Our research shows the number one fear of CFOs is managing health care insurance costs as a result of the increase in government regulation.”
In a separate Robert Half survey of top CFO concerns, senior finance leaders put health care insurance expenses near the top of the list. When asked about their chief concerns in the regulatory arena, 62 percent of CFOs pointed to recently passed health care reforms. Regarding health care costs, 34 percent of CFOs said their companies are responding to rising health insurance costs by increasing employees’ contributions to their premiums.
McDonald said CFOs also are keeping closer tabs on benefits costs outside of health care such as retirement plans and 401(k)s as well as scrutinizing training expenses to ensure that they’re contributing to increased employee productivity.
“Everything is up for a vote in a down-draft economy, which is why CFOs are diving into all of these other areas,” McDonald said.
David McCann, a senior editor with CFO magazine who covers human capital issues for that publication, said that as HR and talent management become viewed as more of a strategic resource in the board room, it follows naturally that CFOs—who have evolved from number-crunching to more strategic, decision-making roles—will take a growing interest.
“As HR and IT are looked at as being more strategic, it’s been a natural evolution for CFOs to get more involved in those two areas,” McCann said.
Collaboration vs. Command and Control
Some HR executives argue that CFOs have always been involved closely in their business and that the only change from years past is a growth in the collaborative nature of working relationships rather than one-sided or dictatorial exchanges.
Ann Rhoades, president of People Ink, a firm that helps create workplace cultures based on values and performance and who has led compensation committees at JetBlue Airways and P.F. Chang’s China Bistro, said CFOs have long been a valued resource in helping her teams make decisions on employee benefits.
“On every compensation committee I sit on, we examine benefits packages that involve large sums of money, so we always get the CFO involved regarding choosing vendors and other issues,” Rhoades said. “They bring up ideas we often might miss from an HR perspective that can reduce costs without dramatically changing employee benefits.”
Problems arise only in the working relationship, Rhoades said, if CFOs adopt an “old school” mentality of dictating cost cuts. “These are the CFOs who come to HR and say ‘I need a 10 percent cut across the top’ instead of, ‘How can we get together and get these expenses lowered?’ ” Rhoades said. “In my experience, when you make it a team effort, you almost always get better outcomes.”
McDonald agreed that the Robert Half research reflects a new level of collaboration between finance and HR rather than a growing “no trust or adversarial” relationship between the two functions.
“In the more progressive organizations we talk to, CFOs are involved with HR executives in an effort to solve problems or control costs together, rather than in separate silos or from a dictating position,” McDonald said. “I think that’s a change from the past, where the two were operating more independently and sometimes saying, ‘We’ll run our own analysis, and you run yours.’ ”
On progressive executive teams, Rhoades said, HR is encouraged to bring expertise to the table that finance doesn’t possess, and vice versa, in efforts to craft balanced solutions that consider multiple stakeholders.
“We can define the benefits that help attract and retain top employees, and the CFO can ensure the company gets those benefits at the lowest cost,” Rhoades said. For example, with health care costs rising on average 8 to 12 percent in 2011, finance and HR leaders could consider options such as whether employees might pay more in co-pays in exchange for assurance of little change in benefits coverage.
The good news, Rhoades said, is that the new breed of CFO usually has improved communication skills and a better grasp of the business beyond finance. “I think most CFOs now understand the people equation better and are more willing to work in collaborative ways,” she said.
One CFO’s Experience with HR
If Amanda Casey’s experience is any barometer, more CFOs are indeed working hand in glove with HR executives to control benefits costs and even improve HR efficiencies. Casey, CFO with Playworks Education Energized, an Oakland, Calif.-based organization that provides activities programs to schools, works closely with a certified compensation professional in the company’s HR group on compensation strategy.
Because salary and benefits account for 85 percent of the company’s costs, it’s a high-priority area. “I consider HR a key business partner in executing our strategic plan in a cost-effective way,” Casey said.
Casey works collaboratively with HR to examine geographic pay differentials and pay grades and to ensure internal and external equity on compensation practices. She works with HR in reviewing Playworks’ mix of employee benefits, including medical, which accounts for 8 percent of the company budget. While human resources usually runs its financial analyses on a per-person basis, Casey will run those numbers through her own models to determine total financial impact on the company.
“Our goal isn’t to cut benefits costs to bare bones, but rather to continue to offer competitive compensation and benefits packages that help attract and retain talent here,” Casey said.
Casey has consulted with HR on process automation initiatives. With a growing, geographically-dispersed business, it became important to create a seamless interface between HR and the company’s payroll system to ensure fast, effective hiring.
“This year we made our hiring, orientation and open enrollment processes paperless,” Casey said. “That’s 42 paper documents that became electronic documents, which not only translated to cost savings, it made those processes more efficient and reduced errors.”
HR also has implemented a new predictive hiring index that boosted its hiring performance. The index has been particularly valuable in hiring for executive director positions, where high turnover can have a big impact on the bottom line.
“Those leaders do a lot of relationship-based fund raising, and it takes time to build those relationships, so churn in those positions can negatively affect our financial performance,” Casey said.
Expanded Skill Sets
The need to control rising compensation and benefits costs without affecting recruiting or retention initiatives—in addition to challenges presented by the troubled global economy—have required HR executives and CFOs to expand traditional skill sets, experts say.
As one result, it’s no longer unusual to find HR leaders with high-level finance skills, Rhoades said.
“In 2014 the health care changes will be mandated, and we need to start thinking about that now, to bestrategic and not reactive, and to consult with CFOs about it,” Rhoades said. “If we approach it last minute, the odds increase of making cost cuts that have negative ramifications in terms of employees and organizations.”
On the CFO side, McDonald said he is seeing increased demand for CFOs, not just with world-class finance skills but with a more holistic understanding of business functions and experience in collaborative decision-making.
“When I receive search requests for CFO positions, it’s more common today to have the board or CEO ask for those who have some experience in the HR arena than it was a decade ago,” McDonald said. “That doesn’t mean CFOs need to be able to manage an HR function, but only to understand it and work together with it for the organizational good.”
Dave Zielinski is a freelance business journalist in Minneapolis.