It’s never been more important for HR to demonstrate commercial awareness. But what does that mean in reality, and how does the profession overcome its traditional disconnect from business metrics?
“I make a point of starting every HR meeting with an update on KPIs, sales numbers, cost of goods and customer feedback,” says Marco Reick, HR director of the fast-growing Black Sheep Coffee chain. It’s a habit he believes emphasises the importance of people practice on financial metrics and is crucial to ensuring HR is seen as a central business function rather than an outpost.
The conversation, he admits, isn’t always easy. “I’ve dealt with team members who’ve never seen a P&L in their lives and I have to educate them on that. But the best HR people don’t actually do HR – they concentrate on the bits that really add value to the organisation, to directly affect the KPIs.”
At Black Sheep, says Reick, that means the performance management process encourages employees to understand and work towards overarching organisational targets, while the HR team concentrates its efforts on retaining talent, since stores with low turnover are almost always the most profitable.
While Reick’s business may by its nature be explicitly commercial, the requirement for HR to demonstrate its business acumen transcends sectors. At its heart, it is an appeal for the function to join the conversation – about financial metrics, KPIs and external economic contexts – that departments such as marketing have successfully navigated in recent years. Yet it is also more complex than that, since the assumption that HR ‘doesn’t do the numbers’ is both a generalisation and often an attempt to downplay the important work it does in brokering and mediating human relationships.
There is, however, no escaping the fact that in a world where businesses are being increasingly digitally transformed and business models are ever more integrated, the value of people to business is better understood and more critical – which means the people profession’s role in managing talent and workforce planning is central.
This isn’t necessarily a new refrain. Dave Ulrich’s seminal business partner model – however criticised it may have been over the past couple of decades – was predicated on greater alignment between HR and business units. Ulrich believed that in private sector organisations, HR professionals should be ‘strategic positioners’ who would “be able to move beyond ‘knowing the business’ to being able to position the business to win in its marketplace.” Key to this, he said, was to communicate with external stakeholders and truly understand the drivers of value inside organisations.
Ulrich subsequently mapped the components of strong HR practice as defined by member bodies, consultancies and businesses and found business acumen had reached near ubiquity. And certainly, the new CIPD Profession Map embeds this idea, listing business acumen (“understanding your organisation, the commercial context and the wider world of work”) as part of core knowledge and commercial drive (“using a commercial mindset and enabling change to create value”) as a core behaviour.
A global survey of more than 1,000 HR leaders by financial services consultancy Leathwaite, conducted in January 2019, found that commercialism was ranked second among the characteristics of successful HR directors, beaten only by leadership skills and far exceeding stakeholder management or data insight.
Defining exactly what business acumen looks like, however, is far from easy given its intrinsic intangibility. For Pat Wright, director of the Center for Executive Succession at the University of South Carolina’s Darla Moore School of Business, it can be broken down into three areas: value creation (how the business contributes to its own financial success while delivering for customers); organisational capability (understanding the critical parts of the business and the roles within them where you need truly world-class operatives); and digitalisation (the need to acquire and retain people with the right sort of technical skills for the future).
None of this, adds Wright, is about being able to talk numbers with the same degree of fluency as the average CFO – because if you could, there would be no distinction to be made between the two functions. Rather, it is about acknowledging that intangible assets – primarily, people – are where businesses create value, and they need to be actively managed.
“For most organisations, the people cost is one of the largest they’ve got, so managing that properly will have a profound effect,” says Wright. “But also, from a customer perspective, people skills and the effort you put into customer relationships make the most profound difference to the quality of goods and services people receive.”
He points out that an intimate knowledge of this area is the difference between knowing something and valuing it, and ensures HR doesn’t “push for something you think is good for people but which actually ends up being detrimental for people”.
“It’s not about whether you can read a P&L or understand the numbers,” says Lynne Weedall, former group HR director of Selfridges Group and now non-executive director of business including Greene King and William Hill. “It’s about what levers you can pull to achieve the business’s ambitions.
“I don’t see how you’re able to do the role if you’re not commercial. What we’re trying to do in HR is enable business strategy to be delivered through people – you can’t do that if you don’t understand what the business strategy is and what the operating model is you’re working to.”
Arguably, the most profound development in accelerating the pace of business- critical discussions among people professionals has been the evolution of HR analytics. By giving HR hard data with which to argue its case, it has made other business leaders sit up and take notice. But that comes with caveats: data must serve a genuine business purpose, and those presenting it need to be able to interpret it in a way that makes it genuinely relevant.
“Business partners need to develop analytical skills,” says Wright. “They need to understand how to communicate, how to tell stories.”
He gives the example of a large retailer facing multiple layoffs, where the natural inclination of leaders was to weed out the longest servers, who were often the most expensive. The HR director was able to demonstrate that the tenure of the sales force was actually the most accurate predictor of customer service and therefore, in turn, the biggest driver of sales.
“That’s an example of where if you don’t have data, you are relying on goodwill – and that’s a dangerous place to be,” says Wright. “Everyone else around that table is talking solely about finance, but you can be talking about the long-term success of the business. It means HR can stand up for people.”
Data has become a powerful tool for Eugenio Pirri, chief people and culture officer at the Dorchester Collection hotel group. Convinced that employee engagement correlated with profitability, he engaged the services of academics who were able to demonstrate each percentage point of increased engagement led to an additional £700,000 in revenue. That helped hone the HR strategy around retention and customer service and increase its alignment to broader business goals.
Analytics also opened the door for Pirri – a self-professed “hotel guy” who worked in cleaning, food and engineering functions before entering HR – to increase the function’s scope. By demonstrating how core people metrics aligned to areas such as CSR, innovation and customer service, these soon fell naturally under his remit.
It wasn’t a case of a land grab, he adds: “Other functions almost breathed a sigh of relief because there was someone willing to take things on. We want to encourage evidence-based HR, but for me if you don’t have an overview of the whole process, how can you make evidence- based decisions? Why would you not connect that final dot? Why would you leave it to someone else?”
Such exposure and influence isn’t just good for HR – it can be critical for individual careers too, adds Gizem Weggemans, who leads the HR officers practice at executive search firm Egon Zehnder. “At the level at which we operate – among Fortune 500 companies or in the succession planning to join them – we wouldn’t know how to recruit for a non-commercial HR leader. These companies are not looking for someone to take care of the ‘softer’ side of people strategy.”
But, she says, though the pace is picking up, there are not yet enough senior HR leaders with enough business acumen to meet demand. That means firms often appoint leaders from other functions and ‘teach’ them HR, rather than promoting from within the HR function.
Wright is relatively pessimistic that the issue will be solved in the short term. “There is movement in the area, but it’s a large ship to try and change course,” he says. “There are people who have been in the profession for 20 or 30 years who have never been trained in financial acumen,” he says. “A subset of them will go out and get those skills; a subset will hope they can avoid them and a small minority will rebel against it.
“The talent coming into the profession is much more digitally oriented, yet a lot of people who go into HR Master’s programmes are quantaphobic – they don’t want to get into financial accounting. And the problem right now is not getting a seat at the table, it’s what’s your perceived role when you get that seat – too often, it’s ‘shut up until we discuss the people stuff’. HR needs to be seen as equally valid when it comes to business issues.”
Neither is it strictly necessary to spend time outside the HR function to become a more commercially aligned operator. “I’ve talked to a number of CHROs who have spent time outside the function,” says Wright. “It helps them build credibility but you don’t learn anything you wouldn’t learn inside HR if you’re intellectually curious.”
Weggemans agrees, and adds that project-based work in other functions can be every bit as valuable, alongside the simple expedient of immersing yourself in broader business conversations that might not initially appear to involve HR.
But what if your organisation is not intrinsically commercial by nature? It’s a challenge faced by Haroon Rashid when he took up his position as head of HR (commercial) at North Yorkshire County Council in 2012.
At that time, many local authority organisations were faced with a choice of encouraging schools and other partners to outsource many of their functions or acting as a not-for-profit outsourcer via their own HR department – which necessitated adopting a distinctly commercial mindset.
Today, the council offers HR advisory services, payroll, health and safety and training support – among 40 other services – to schools and other councils right across the region. The schools HR team has grown from 12 to more than 30 people over the period and now views itself as a client-facing provider of services to the sector. Last year, the council turned over £50 million through its efforts in education.
“We are commercial but with a social heart,” says Rashid. “Our staff care about schools and care about the outcomes for children, but they also care about delivering a profit because that can be reinvested in front-line services. It’s not about shareholders or people walking around with significant salaries – it’s about making a surplus to put towards services that matter to the public.”
Explaining and consistently reinforcing the link to front-line services, and the impact on schools, has helped employees buy into the more commercial ethos, Rashid believes. But it’s also helped that staff are targeted to be responsive and customer-focused but not to draw in specific amounts of revenue. And the council has brought in technology-enabled agile working methods which have empowered individuals and increased autonomy.
The key, the experts agree, is that commerciality needs to begin with HR itself. Wright says there is no substitute for curiosity – practitioners would do well, in his view, to read the business press and become ‘excited’ about the world of finance, ask questions about where value is generated in their business and undertake executive education to increase their knowledge.
For Weedall, it’s about getting out and about. “Performance always happens out in the units – whether that’s a store, a hospital or a pub, for example – so the starting point is to understand what the business model is and to go where the performance is taking place. Ideally, you would try to run one of those units for a period to understand what works and what doesn’t, because shadowing someone or reading a book will only get you so far.”
But equally, the rush to acquire business acumen cannot come at the expense of what makes HR unique – its innate understanding of human psychology. This is the ‘art’ that Weggemans says complements the ‘science’ of analytics and balance sheets and she warns: “If we try to KPI the function too narrowly, an important part of it may be lost. HR needs to deliver the bottom line where art and science intersect.”
Or as Rashid puts it: “You can be in touch with emotional intelligence and have the softer skills required in HR and still be commercial. Nobody needs to worry about losing their HR identity by becoming more commercial.” By Robert Jeffery