HR Is a Revenue Generator, Not a Cost Center

An unpredictable year tossed a massive wrench into the budgeting process for businesses of all shapes and sizes. I’ll be the first to say that I understand the impulse toward risk aversion in the new year after what we experienced in 2020. We’re seeing many business leaders turn to the traditional, conservative approach of curtailing spending in the business’s cost centers while trying to fire up the revenue generators amid an unstable economy.

What some executives fail to realize, though, is the power HR has as a revenue generator.

Your People Are Your Business

There is a penchant among number crunchers to view HR as a necessary evil. While HR teams receive only a small fraction of the total corporate budget, C-suite executives charge these teams with managing the programs, policies, and infrastructure supporting the company’s most profitable resource — its workforce. People, especially in a customer-focused, high-volume workforce that acts as the face of the brand, should be a business’s most valued and supported asset.

Depending on the industry, labor costs may average upwards of 50 percent of gross sales — yet the HR department that hires people, trains them, and supports them is vastly undervalued as a revenue-generating department.

A Better Workforce Pays for Itself

The labor pool from which businesses can recruit has drastically transformed over the past months. Before the pandemic, the labor market was quite shallow, forcing many businesses to hire candidates who may not have been perfect fits simply to fill open positions. Now, roughly five million more people are looking for work than were in February 2020, according to a December 2020 report from the Bureau of Labor Statistics.

If companies are going to climb their way to stability in 2021, they need better talent and more productive workforces. High-performing employees can be up to eight times more productive than their peers in complex jobs, and between 50 and 80 percent more productive in lower-complexity jobs like retail and customer service, according to SmartRecruiters founder Jerome Ternynck’s book, Hiring Success. It’s up to your HR team to identify and engage the high-performing individuals in the growing pool of candidates. A positive candidate experience can be a vital tool in this endeavor. HR departments must be properly resourced if they are to find the best candidates who, in turn, will increase the business’s ability to prosper. Over time, as HR brings that talent in, the department’s value will ultimately overtake its costs.

Taking the Long View

The central issue causing executives to wrongly categorize HR departments as cost centers is a failure to look to the long term. When executives view the HR budget through a short-term lens, as they often do, they get a false picture of what that money is being spent on.

“Under current accounting systems, workforce investments are reported as a direct hit to earnings with no recognition of the value created, while reductions receive favorable treatment and are excluded from core earnings,” Ravin Jesuthasan, managing director at Willis Towers Watson, told SHRM in October 2020. “This creates incentives that encourage management to reduce investment in the workforce and treat talent as disposable. There are more incentives to automate work rather than invest in upskilling or reskilling, for example.”

A new report from the World Economic Forum, coauthored by Jesuthasan, challenges the notion that short-term balance sheets tell the whole story. Instead, the report urges a shift in how human capital is valued, arguing that we must take a long view of workforce value, looking at recruiting and retention efforts as immediate investments needed for long-term value gain. There’s good reason to do so: 2018 research from University of Southampton and Trinity College, Dublin, found that Financial Times Stock Exchange 100 firms that placed greater emphasis on investing in human capital and tracking employee-level value meaningfully outperformed those firms that tracked HR spending only as a cost rather than an investment. It turns out investing more in HR technology and giving your HR teams more authority to shape the future of the business is a forward-looking strategy.

My plea to the C-suite in 2021 is to invest in HR and your employees despite the challenges presented by the pandemic. This is the time to focus on the core of your business: people. Cutting HR might make the bottom line look better for a quarter or two, but you will soon feel the effects of diminished growth and a lack of institutional knowledge. Time and time again, data has shown us that our people are our most valuable assets, and your HR department is the system that finds, recruits, and retains those people.

Dan Sines is CEO of Traitify.