When asked about the value of Human Resources in recently acquired companies, one investor proudly explained that his first move is usually to get rid of HR, no matter what the sector. Administration, he argued, can be absorbed by Finance, and the rest was simply not worth doing. His view was not alone: stories abound of how CHROs cause havoc when given free reins, turning dynamic firms into directionless bloats with an HR cast of thousand that becomes a net impediment to both Executive Teams and employees.
Not so fast: Human Resources executives quickly argue that their function creates value and significantly improves bottom-line performance. In a world chasing productivity and growth, this should be an appealing proposition. Multiple publications repeat this claim, with one recent addition asserting that companies with revenues above £400m need what is curiously referred to as 'true HR' to sustain their growth. It feels almost tribal.
The Scale Question: When Does HR Actually Matter?
At this scale, the case is easily made: large workforces require coordinated administration. People need to be paid on time. Recruitment and training can be more efficient if handled centrally. Bragging rights from competitive benefits can positively affect attractiveness while retaining key personnel can substantially increase the Company's valuation. Succession planning helps prevent growth impediments and a thriving culture can deliver strategic advantage. And of course, risks of non-compliance with legal and social standards during restructurings or staff turnover are much lower.
But valued at 4 times revenues, using a 'back of the envelope' computation method the UK has around 8000 companies with a market capitalisation above £0.4 billion and 250 employees, so 0.2% of the 5.5 million registered firms would require 'true HR'. Given the call for growth, the far larger percentage of smaller, faster-growth businesses could be a fertile breath of life into a UK industrial strategy. Do they need HR too?
The Hidden Costs of HR in Growth Companies
For companies at this stage, ruthlessly focused and coherent strategies matter. Cash is scarce. Effective capital allocation is critical. But HR executives are costly and their impact on valuations is not proven: the arrival or departure of a CEO or CFO can easily swing a stock price by mid-single-digit percentages. Changes in CHROs seldom register, suggesting a negligible marginal impact on future cash flows, restructuring plans or future sales.
Even value-adding HR projects can distract management for months and cost hundreds of thousands of dollars. Yet, best-in-class talent processes are neither necessary nor sufficient to prevent bankruptcy or guarantee hypergrowth. HR's portion of SG&A can rise to over £3,000 per employee, diverting cash from worthier projects and creating a drag on growth. Large-scale culture change projects are very visible, but do they succeed if they do not claim real economic gains? And there is the question of whether, given HR functions' wide toolkits, they might be so adept at finding new challenges that they tend to expand by themselves?
This in no way implies that HR teams are not unarguable sources of competitive edge. Many of their activities are needed and need to be well executed.
Yet given its claims to create value, if a mid-cap Executive Team sees an HR team as valuable but cannot justify the cost, would their upstart Company be economically disadvantaged without?
Distributed HR: A Different Approach
A priority for growth companies is usually to keep the lights on as they expand. Financial and revenue goals are met by successfully marketing products and services that customers value, delivered by well-managed organizations with effective infrastructures, and staffed by suitably skilled individuals who work productively. These goals translate into specified tasks to be delivered by competent, focused and accountable executives. Fine-tuning this launch pad of value creation plans and effective leaders requires the kind of strategy & psychology expertise that Morg&Co is known for.
Although traditional human resources activities of hiring, rewarding, and training are integral to these goals and should appear as items on the list of priorities, increasing numbers of companies are thinking twice about how these objectives are distributed across the business. Sometimes, the final decision is to avoid hiring an HR executive altogether and to train the Executive Team to manage these responsibilities directly - and such noises are growing.
A Case Study in Alternative Accountability
When a US-based renewable energy distribution company needed 350 inbound customer associates to onboard millions of customers each year, the Chief Revenue Officer saw this as part of delivering her revenue targets. She sourced and managed a specialist partner organization to build and train the pipeline. The Chief Operating Officer was accountable for expansion into 10 US states that required real estate acquisition and staffing of commercial leaders to market their technology to the physical supply chain, and systems. Payroll was outsourced and managed by the CFO's team. Skill building and succession planning were a permanent focus of executives, senior leaders and employees themselves. A section of ExCo meetings was given over to team stability. The company culture had become a strategic asset that the CEO did not want to lose during the growth. He owned this himself and through his team, the Company created an environment of achievement, progress and teamwork in which 'People topics' were central to the core business. And the few compliance cases were triaged by individual managers and then moved to the legal counsel if needed.
Perhaps there are some imaginative clues here about accountability and focus: By sharing HR roles across the business so that no one person is accountable for its entire execution, its locus of accountability shifts back to those directly responsible for more obviously value-creating roles. For a long time, some professional services firms and some investment banks have put a partner in charge of HR alongside their other responsibilities, so this idea is not exactly in terrible company.
Perhaps, as our earlier investor might say, perhaps the promise of creating value through HR is only finally realised when the HR team is no longer there.
Or perhaps, it is for HR to show, in terms of numbers, that he is wrong.
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