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Wise up - people count

Wise up - people count

There is pressure to trim staff in a downturn, but it makes sense to slash smarter rather than deeper.

At engineering consultants Sinclair Knight Merz, the finance and human resources teams have been working to improve their communication with

each other, as both divisions seek to move out of the back office and

into a business partnering role.

Three years ago, a personnel and finance liaison group was set up to

address the communication problems. The meetings began with set

agendas and were originally marked by some arguments over the impact

of decisions each department made.

When current SKM chief financial officer Craig Wildermuth and human

resources general manager Steve Dorian joined the company, they

decided to continue to use the regular meeting to foster good working

relations between the groups.

"The meeting had started off with a lot of goodwill, [but] before

Craig and I arrived at SKM, I think there had been some friction between human resources

and finance," Dorian says. "On both sides, people do make mistakes

occasionally."

Both say the regular meetings, which are now held about every six

weeks, have helped break down barriers and improve understanding.

"[Formal meetings] mean all other forms of communication flourish,"

Dorian says. "In a sense, you have kind of broken the back of any

impediment to the communication process."

The closer relationships that have been forged help fix problems

early. "You tend to forgive people and give them a phone call and talk

about it, rather than let it fester."

The ageing population means a skills shortage still awaits down the

road - and so more companies will have to make an effort to improve

relations between the human resources department and finance, as

Dorian and Wildermuth are doing.

Cost of human capital

In the past few years, companies have become accustomed to fighting for talent.

Labour is one of the biggest costs for many companies, but "our people

are our most important asset!" became the mantra for attracting and

retaining restless staff when the economy was hitting its straps.

We may hear this less during the downturn, but uncertainty over how

tough it will be for Australia, combined with demographic realities,

means those who have put words into action, and tried to pin down the

value and costs of their human capital, may survive in better shape.

A human resources partner at Pricewaterhouse­Coopers, Debra Eckersley,

says human resources and finance need to work together even more now.

"That's more true in this economic cycle than it has been in the

past," she says.

"If you look forward a couple of years, there won't be as many people

entering the workforce."

Some sectors - such as those focused on heavy industry - understand this well.

Bilfinger Berger Services managing director Mark Elliott says labour

requirements in specific areas of his industry are reducing,

particularly the mining services sector so far. But underinvestment in

training for engineering and trades means long-term shortages will

remain an ongoing problem as workers retire.

"My personal view is that we have a fundamental skills shortage in

engineering and some other key trades, probably worldwide," he says.

"The financial crisis may produce a bit of a false hope that will ease

the pressure for a few years. Following that, we will revert to a time

of too few skills for too much work."

To navigate through a downturn while still keeping and investing in

the requisite skills for the future will require human resources and

finance to work hand in hand.

UGM Consulting principal consultant Margaret Byrne says getting it

right requires a close strategic relationship between the two

departments, but unfortunately they often are not speaking the same

language.

"Increasingly, the partnership in organisations is seen as being

between CFO and HR. They are the logical partners in how the profit is

being derived," she adds. "[But] it is these two that are seen as

diametrically opposed."

The current economic climate is putting more pressure on human

resources managers to justify labour costs to CFOs in the language of

finance.

For human resources, it's a case of realising that finance people need

to hear about staff with the use of metrics that they understand, such

as productivity and cost per employee.

For some categories of workers, such as sales staff, this has never

been a problem. But for other roles, it can be a tricky equation to

formulate. On the other side, finance teams need to be willing to hear

the long-term costs and benefits of how employees are treated, rather

than seeing them only as a flexible cost on the balance sheet.

"There are lots of organisations focused on reducing headcount,"

Eckersley says. "But people have long memories, so [organisations]

must ensure that this does not damage the long-term value for that

company."

Coca-Cola Amatil group managing director Terry Davis endorses this

approach. For instance, he was staggered to hear of companies

cancelling Christmas parties. "Investing in your people in troubled

times is a very important differentiator for leadership companies," he

told the annual Group of 100 Congress late last year - the association

is made up of senior finance executives. And he called on finance

heads to prune judiciously.

"When the cost pressures are greater," Davis says, "those leading

companies that continue to invest in their brands, their customers and

their capabilities come out the other side with a greater lead over

their competition. He urges CFOs to be careful not to destroy a

valuable culture when they cut costs.

The need to gather information on employees often becomes more

relevant the bigger and more complex a company becomes.

Wildermuth says that as Sinclair Knight Merz expands overseas, it is

trying to get better data on the service it's providing to customers.

"We are looking at our metrics at the moment," he says. "The last

umpteen years they have been a very standard set. As we get into a

more demanding environment, we're now starting to look at whether we

can get return measured as a product of a lot more variables,

including ... really trying to hone in on profitability per employee."

SKM human resources manager Dorian says that along with improving

personal collaboration, what's important now is combining data from

various sources on the performance of the business, such as

financials, staff turnover and client feedback.

"It is much more trying to put information together to get a sense of

the whole, rather than a series of individual measures not connected

or not related," he says. "The issue now is not so much the numbers,

but [looking] at patterns in the overall business."

The regular meetings between the two groups are vital for this.

"It is more of a safety valve to say 'Are we connecting to get the

best outcomes for the business, and if not, let's start and have a

look at what's happening in a particular area'," Wildermuth explains.

tricky to measure

However, some are yet to be convinced of the validity of putting a

figure on employee value, especially in terms of trying to report it.

"Anything you can do to give more information to people who are

looking at accounts is obviously beneficial," says Jennifer Stibbard,

senior vice-president and former CFO at data communications company

Transaction Network Services.

"The problem with something like this is it requires a lot of

judgement calls," she says. "It is very hard as an empirical

measurement to actually say a person is worth X dollars. From an

auditor's point of view, they still have to rely on your word, to a

certain extent, as to how much that person is worth."

Certain employee roles make it easy to measure performance in dollar

terms, such as sales or presales, where there's a direct revenue

target associated with the staff and they are judged on that basis.

But for "people like [those in] marketing or HR, it is a lot harder to

judge and put value on their work," Stibbard says. For human

resources, she says, you might use staff turnover - although she

points out that it is clearly not totally under the control of HR - or

how quickly they are able to fill vacancies.

Overall, she says, managers tend to turn the question around and ask:

"If we didn't have staff, what would happen? What doesn't get done if

you don't have those people there and how many of those people do you

need?"

In determining solutions to these issues, finance and HR must work

closely, and this requires a collaborative effort throughout all

senior management.

Qantas values sustainable cuts

Qantas has invested a lot of time and energy in trying to come up with

quantitative measures of employee value. By the end of 2008, the

airline had to make one of the biggest staff cuts of any company in

Australia - 1500 across all non-operational areas.

The closer integration between finance and line management, including

human resources, which was set up a couple of years ago under the

stewardship of the previous CFO, Peter Gregg, has helped the company

achieve this.

The group general manager of global workforce initiatives at Qantas,

Gail Symons, says HR and finance have traditionally struggled to get

along but it is important that they do, especially when making a major

staff cull.

"[Finance] has the tangible side, I own the people stuff - human

capital - and quite often there is a misunderstanding in that middle

ground." However, she believes Qantas is ahead of many of its rivals.

The airline's HR department has been introducing more sophisticated

ways to measure employee value over the past 12 months, with the help

of modelling that the internal finance team conducted. These include

dashboards tailored for line management and senior executives. Metrics

include cost of attrition, hiring and labour, critical role succession, cross-functional talent moves and total cost of labour.

The dashboards allow management to model different scenarios in real

time, providing estimates of the impact of changes on the performance

of the business.

Some of the latest measures Qantas is developing use both historical

and future operational activity to gauge productivity. HR and finance

have also begun to combine separate streams of analytics, originating

from different sources.

"This has given more complex and complete business intelligence and

also helped speed up decision making," Symons explains.

For instance, "you don't want to lose an employee from a highly

skilled group" such as a pilot, says Symons, as those workers are

costly to train and remain hard to find.

HR actively scans and identifies emerging trends among the skilled

population groups within industry and on a global scale.

"With finance measuring performance against the financials and people

measuring performance against the cost of attraction, training and

hiring, HR and finance are able to provide senior management with

clarity for informed decisions. This helps retain and build on the

investment we have made in our skilled groups," Symons explains.

"You can't cost [everything]," she says, but there are fairly

practical guideposts for some intangibles. "For instance, the length

of time it takes to make a decision is one measure of management

culture."

Symons says acting on the mantra "people are our greatest asset"

requires finance heads to meet HR halfway.

She suggests CFOs should ask how they can include people on the

balance sheet and then ask HR to contribute to answering that

question. Rather than writing off the people function, finance chiefs

should ask HR to provide both data and ways to unlock it.

Finance chiefs can also request a rundown on the cost of labour, the

cost of bad culture in an organisation and for examples of where

communication doesn't work. And lastly, CFOs should remember that

quantifiable costs have their shortcomings, and that taking the

approach that "all that counts is what I can measure" can cause a

massive oversight.

CFO, Fairfax Business Media

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