RSM Resources

At Air Products, an industrial gas and chemical company based near Allentown, Pa., senior managers view human resources (HR) as much more than an administrative function.

"When people say HR is nonstrategic and does not understand the business, here it is just the opposite," says Vince Kraft, an Air Products director of industrial relations who reports to the vice president of human resources. "We are imbedded in a variety of operational issues, especially in the field. We are out there among the employees, customers and the distribution network."

At best, HR professionals help drive business strategy and performance. At worst, they focus on administrative work, such as payroll and benefits — which midsized companies are increasingly outsourcing for cost savings. Where on the spectrum is your HR department?

If yours is like most midsized companies, your HR function is somewhere between directing and administering your business, but it’s not unusual to be unclear how HR functions strategically.

According to Beth Carvin, CEO of Nobscot Corp., a maker of exit-interview software, "A lot of CFOs are not really clear on what HR’s role is; nor are CEOs."

Perception of HR
"Too many years of focusing on day-to-day transactions has left HR professionals without critical skills to become valued business advisors," says Andrew Kris, chairman of the Shared Services and Business Process Outsourcing Association (SBPOA) advisory board. "A lack of [business] skills in HR is the biggest hurdle to transformation."

Kris is not alone in his thinking. "Business acumen is the single biggest factor that HR professionals in the U.S. lack today," says Anthony J. Rucci, executive vice president at Cardinal Health Inc., a health-care supply distributor.

Growing demands, particularly financial and legal,fuel the perception that HR personnel haven’t kept up with the knowledge and skills their jobs require. Indeed, a smaller percentage of HR professionals today pursue education beyond a bachelor’s degree than in 1990, according to the Society for Human Resource Management (SHRM). When SHRM asked its members what courses would contribute to a successful HR career, 83 percent ranked classes in interpersonal skills extremely high. Only 32 percent placed importance on strategic management training, and just 2 percent said developing financial skills would lead to a successful HR career.

Furthermore, HR is not a popular career choice among business school graduates. At the University of Michigan’s Ross School of Business, which has a nationally recognized faculty for organizational issues, just more than 1 percent of 2004 grads went into HR,according to Fast Company.

HR benefits from finance, accounting background
Increasingly complex and costly employment issues require HR professionals with specialized skills, particularly financial. For example, since health-care costs have increased an average of 10percent during each of the past five years, companies have appointed more HR directors from finance and accounting departments.

Also, there’s a growing need for HR directors to master quantitative analytical practices. HR departments increasingly are responsible for identifying appropriate metrics, conducting comprehensive measurements and analyses, and communicating results to executives and employees. A recent report from the National Business Group on Health found 30 percent of employers now use hard-dollar return-on-investment calculations when making decisions about health care, compared with 9 percent in 2003.

Ironically, one of the financial assessments companies are asking HR leaders to conduct is the potential for outsourcing HR functions. A survey of larger employers conducted in 2005 showed 94 percent were outsourcing at least one HR activity, and many said they plan to expand outsourcing by 2008. The most frequently outsourced HR functions are payroll, benefits administration, health and welfare benefits, and stock-options administration.

Assessing the effectiveness of your HR department
Outsourcing administrative functions may create opportunities for HR departments to become more strategic. An SHRM report, "HR Benchmarks: How to Become a World-Class HR Organization," finds that companies with integrated HR and business strategies share some best practices. They:

• Outsource nearly 50 percent of HR administrative functions to reduce costs.
• Use Web-based self-service programs for greater efficiency.
• Retain key employees by investing in training programs.
• Keep employee, customer and supplier integration in mind when implementing new processes and technology.

Adopting world-class HR practices can save you money, according to SHRM. While some companies have HR administrative costs approaching $5,000 per employee, world-class organizations spend $1,100 or less per employee. Their benefits administration costs have declined, and their recruiting and staffing costs have increased at half the rate of average companies. Many channel the savings into employee development and retention.

Making your HR department more strategic
Experts recommend including HR directors in strategic planning initiatives from the beginning. Participating in brainstorming provides a good foundation toward understanding business direction, enabling HR leaders to assess early how various initiatives may affect staffing plans, and to anticipate employee concerns and answer their questions.

Additional methods for making HR more strategic include:

• Involving HR directors in the development and implementation of your business plan, challenging them to design metrics to measure their progress.
• Continuing to streamline and outsource HR administrative functions, freeing directors’ time for higher-level activity.
• Investing in training for your HR professionals.
• Pairing HR directors with other senior-level managers in interdepartmental mentorships, further integrating them with your finance and accounting professionals.

How HR can be effective in merger situations
Mergers and acquisitions present the perfect opportunity for HR to play a more strategic role. If your company is considering merging with or acquiring another business, have your HR professionals participate in the due-diligence process to investigate any liabilities you might incur. For example, your HR directors should be able to tell you if the other business has any issues or citations with any of the following: Office of Federal Contract Compliance Programs, Equal Employment Opportunity Commission, Americans with Disabilities Act, Family and Medical Leave Act, Age Discrimination in Employment Act, and Occupational Safety and Health Act. They also can determine the company’s status with respect to I-9 compliance, collective bargaining agreements and possible employee relations lawsuits. HR personnel also can research and report on the company’s compensation structure and employee contracts.

Once the companies have agreed to join forces, HR can design and implement new policies and procedures for the combined organization, unite benefit plans, resolve payroll issues and assemble severance packages, when necessary. HR also is more likely to be aware of issues affecting employee morale — unique insight that’s beneficial in strategic planning — and may be responsible for communicating organizational changes to your employees.

The management of these HR-related issues could make or break your merger — and your company.

Effective HR departments can help drive an organization’s success. Assigning HR to project future staffing and training needs, recommend processes to be outsourced and implement strategic plans enables them to help you achieve your business goals.