Is HR a cost or a profit centre?
This has been argued and discussed for a long time whether HR is a cost centre or a profit centre.
The earlier myth can now be demolished and proven that HR can be a profit centre. The question that business leaders would now ask is How? The answer to this is very simple.
In 1996, Dr. Robert Kaplan and David Norton developed the HR Balanced Scorecard. This HR Balanced Scorecard adds Strategic Non-Financial Performance Measures to Financial Metrics.
What is a HR Balanced Scorecard?
1) Balanced Scorecard is a performance management framework used by strategic decision makers to make the right decisions about their business.
2) Balanced scorecard is not only a set of strategic goals; it is also a method for monitoring progress towards the organization’s strategic goals.
Why HR Balanced Scorecard?
1) Balanced Scorecard is Tactical and Concrete
2) Transformation of an Organization’s Strategic Plans and Goals to Execution Plans and Orders
3) Provides Performance Measures and Helps in Identification and Execution
Perspectives of HR Balanced Scorecard:
Financial:
1) Reducing costs related to HR
2) Reducing turnover rates
3) Employee absenteeism
4) Workers’ compensation
5) Employee satisfaction
6) Employee engagement
7) Employee benefits
Internal Perspective:
1) Turnover Rates
2) Manager Performance and Ratings
3) Overall Employee Satisfaction
4) Recruitment/Employee Retention
5) Recruitment Channels and Employee Success
Customer Perspective:
1) Meeting Customer Needs
2) Overall Customer Satisfaction
3) Spreading Word and Bringing New Customers
Learning and Growth:
1) Communication
2) Performance Improvements
3) Staff Development
Implementation of HR Balanced Scorecard in Business:
1) Integration of Scorecards of all Units to achieve Overall Organization Scorecard
2) Full Strategic and Management System
3) Data from IT and Accounting Systems into model to calculate Metrics
4) Comparison of Metrics with Strategic Goals and Plans
As one can note from above, HR is a profit centre if HR Balanced Scorecard is implemented in Business as all parameters can be measured against Financial Metrics. Major organizations across the globe have started implementing HR Balanced Scorecard and have yielded fruitful results.
7This has been argued and discussed for a long time whether HR is a cost centre or a profit centre.
The earlier myth can now be demolished and proven that HR can be a profit centre. The question that business leaders would now ask is How? The answer to this is very simple.
In 1996, Dr. Robert Kaplan and David Norton developed the HR Balanced Scorecard. This HR Balanced Scorecard adds Strategic Non-Financial Performance Measures to Financial Metrics.
What is a HR Balanced Scorecard?
1) Balanced Scorecard is a performance management framework used by strategic decision makers to make the right decisions about their business.
2) Balanced scorecard is not only a set of strategic goals; it is also a method for monitoring progress towards the organization’s strategic goals.
Why HR Balanced Scorecard?
1) Balanced Scorecard is Tactical and Concrete
2) Transformation of an Organization’s Strategic Plans and Goals to Execution Plans and Orders
3) Provides Performance Measures and Helps in Identification and Execution
Perspectives of HR Balanced Scorecard:
Financial:
1) Reducing costs related to HR
2) Reducing turnover rates
3) Employee absenteeism
4) Workers’ compensation
5) Employee satisfaction
6) Employee engagement
7) Employee benefits
Internal Perspective:
1) Turnover Rates
2) Manager Performance and Ratings
3) Overall Employee Satisfaction
4) Recruitment/Employee Retention
5) Recruitment Channels and Employee Success
Customer Perspective:
1) Meeting Customer Needs
2) Overall Customer Satisfaction
3) Spreading Word and Bringing New Customers
Learning and Growth:
1) Communication
2) Performance Improvements
3) Staff Development
Implementation of HR Balanced Scorecard in Business:
1) Integration of Scorecards of all Units to achieve Overall Organization Scorecard
2) Full Strategic and Management System
3) Data from IT and Accounting Systems into model to calculate Metrics
4) Comparison of Metrics with Strategic Goals and Plans
As one can note from above, HR is a profit centre if HR Balanced Scorecard is implemented in Business as all parameters can be measured against Financial Metrics. Major organizations across the globe have started implementing HR Balanced Scorecard and have yielded fruitful results.
Dear Mr Ashok Pai,
Nice to see you visiting this forum after a gap of 15 years.
You have given a theory of Balance Score Card (BSC). As you have mentioned, the theory is an old one. However, somehow it has not gained traction beyond a few MNCs. In fact, for a long time, there was a member of this forum who claimed that his company practised BSC. However, he never gave us information about how the costs were reduced and how he could convert the HR department into a profit centre in his company.
In fact, it would be interesting for us to know which company has done cost reduction by implementing BSC and how it was done. Further, we also wish to know whether or not the management of that company accepted the claims of the HR professionals.
I am a member of various HR forums and I am yet to come across an HR honcho coming up with a case study on BSC.
In view of this, in support of what you have written, would you mind providing us with a case study of the implementation of BSC and converting the HR department into a profit centre?
By the way, what about your company? Did the HR Department implement BSC to convert it into a profit centre? Would you mind educating us?
Thanks,
Dinesh Divekar
From India, Bangalore
Nice to see you visiting this forum after a gap of 15 years.
You have given a theory of Balance Score Card (BSC). As you have mentioned, the theory is an old one. However, somehow it has not gained traction beyond a few MNCs. In fact, for a long time, there was a member of this forum who claimed that his company practised BSC. However, he never gave us information about how the costs were reduced and how he could convert the HR department into a profit centre in his company.
In fact, it would be interesting for us to know which company has done cost reduction by implementing BSC and how it was done. Further, we also wish to know whether or not the management of that company accepted the claims of the HR professionals.
I am a member of various HR forums and I am yet to come across an HR honcho coming up with a case study on BSC.
In view of this, in support of what you have written, would you mind providing us with a case study of the implementation of BSC and converting the HR department into a profit centre?
By the way, what about your company? Did the HR Department implement BSC to convert it into a profit centre? Would you mind educating us?
Thanks,
Dinesh Divekar
From India, Bangalore
Good to see an insightful matter on HRM.
For information, BHEL has implemented BSC for all its business functions including HR.
Specific KPIs & KRAs have been coined for each of the functional areas and the targets have been subdivided into 5 categories, with relative stress factor for each. The performance of each quarter is analysed with the target and corrective action is planned accordingly.
Let me admit, I am much disappointed with the BSC approach. There is mad concern for the numbers at every level so those factors which are not captured or which erupt suddenly are not getting due importance, and at times it can be very costly. Even Jack Welsh (GE fame) spoke very critiucally of BSC as a practice to be careful of.
Having a BSC for HR function is one thing, making it a profit center is entirely different. Will BSC render HRM to be a profit center, before that can HRM price its services? While the cost of HR services can be estimated with some amount of certainity, is there any comparable basis for the pricing of such services. Now with most of the HR fiunctions getting outsourced, probably in the days to come it may become a reality.
From India, Mumbai
For information, BHEL has implemented BSC for all its business functions including HR.
Specific KPIs & KRAs have been coined for each of the functional areas and the targets have been subdivided into 5 categories, with relative stress factor for each. The performance of each quarter is analysed with the target and corrective action is planned accordingly.
Let me admit, I am much disappointed with the BSC approach. There is mad concern for the numbers at every level so those factors which are not captured or which erupt suddenly are not getting due importance, and at times it can be very costly. Even Jack Welsh (GE fame) spoke very critiucally of BSC as a practice to be careful of.
Having a BSC for HR function is one thing, making it a profit center is entirely different. Will BSC render HRM to be a profit center, before that can HRM price its services? While the cost of HR services can be estimated with some amount of certainity, is there any comparable basis for the pricing of such services. Now with most of the HR fiunctions getting outsourced, probably in the days to come it may become a reality.
From India, Mumbai
Dear Mr Ashok Pai,
The objective of the Balance Score Card (BSC) is not to convert the HR Department from cost to profit centre. The objective is the all-around growth of the organisation.
Nevertheless, BSC or otherwise, what you measure is important. What matters is whether the costs and ratios associated with the business are measured correctly or not, and if measured, then whether these are measured accurately or not. Otherwise, BSC just reduces to jargon and fancying about jargon is a known penchant of HR professionals.
I do not know about the nature of your industry, however, I have seen HR professionals claiming to practise BSC but not knowing as basic ratio as Inventory Turnover Ratio (ITR). I provide consulting services to establish a comprehensive Performance Management System (PMS). I have seen this contradiction in a few places. When I provide consulting services, my focus is on the identification of costs and ratios associated with each department and assigning them to each HOD. Without calling it BSC, it has worked very well and my clients could get a deeper insight into the costs and ratios impacted their businesses.
Very recently, I provided consulting services to establish PMS in a pharmaceutical company. Though the Performance Appraisal (PA) was conducted, I observed its superficialness. In my consulting services, I introduced 90 new measures across 13 major departments. It included 27 types of costs, 12 new ratios and 51 new measures. The MD was surprised at the introduction of these new measures but also expressed lament for not having done so 30 years ago!
All the best!
Dinesh Divekar
From India, Bangalore
The objective of the Balance Score Card (BSC) is not to convert the HR Department from cost to profit centre. The objective is the all-around growth of the organisation.
Nevertheless, BSC or otherwise, what you measure is important. What matters is whether the costs and ratios associated with the business are measured correctly or not, and if measured, then whether these are measured accurately or not. Otherwise, BSC just reduces to jargon and fancying about jargon is a known penchant of HR professionals.
I do not know about the nature of your industry, however, I have seen HR professionals claiming to practise BSC but not knowing as basic ratio as Inventory Turnover Ratio (ITR). I provide consulting services to establish a comprehensive Performance Management System (PMS). I have seen this contradiction in a few places. When I provide consulting services, my focus is on the identification of costs and ratios associated with each department and assigning them to each HOD. Without calling it BSC, it has worked very well and my clients could get a deeper insight into the costs and ratios impacted their businesses.
Very recently, I provided consulting services to establish PMS in a pharmaceutical company. Though the Performance Appraisal (PA) was conducted, I observed its superficialness. In my consulting services, I introduced 90 new measures across 13 major departments. It included 27 types of costs, 12 new ratios and 51 new measures. The MD was surprised at the introduction of these new measures but also expressed lament for not having done so 30 years ago!
All the best!
Dinesh Divekar
From India, Bangalore
As per my point of view HR is a cost centre. How? Many companies there are no HR. Big Companies only had it.
Now many companies simply outsource it for confidentiality and no one in the company can learn the Pay Roll, and other legal aspects related to employees.
Yes it is employees. Because HR assists the management, finance, and every area of the company to implement things easily. Many companies the technical heads directly deal with Employees-Manpower requirements as per the progress of the work.
So they talk to the Project Managers directly and seek from them he required manpower needed for another project or for some other needs. Accordingly they plan the availability of extra manpower at any project and give instructions to transfer them to another project by office order to report to the concerned persons.
If in case the required manpower is not available but they need particular employee either they instruct to handover the next senior for a while and report to an other project.
So HR is a part and parcel of the cost just like any labour cost. If project wise cost is worked out then it could be charged proportionate to the Labour cost for each area and a % is charged there to and also some % taken in Over head. If a new recruitment time is spent then that cost is worked out and taken to overhead.
On the whole HR is a part and parcel of the cost for the company. It is simply operational cost at whichever technical language you talk about it.
From Saudi Arabia
Now many companies simply outsource it for confidentiality and no one in the company can learn the Pay Roll, and other legal aspects related to employees.
Yes it is employees. Because HR assists the management, finance, and every area of the company to implement things easily. Many companies the technical heads directly deal with Employees-Manpower requirements as per the progress of the work.
So they talk to the Project Managers directly and seek from them he required manpower needed for another project or for some other needs. Accordingly they plan the availability of extra manpower at any project and give instructions to transfer them to another project by office order to report to the concerned persons.
If in case the required manpower is not available but they need particular employee either they instruct to handover the next senior for a while and report to an other project.
So HR is a part and parcel of the cost just like any labour cost. If project wise cost is worked out then it could be charged proportionate to the Labour cost for each area and a % is charged there to and also some % taken in Over head. If a new recruitment time is spent then that cost is worked out and taken to overhead.
On the whole HR is a part and parcel of the cost for the company. It is simply operational cost at whichever technical language you talk about it.
From Saudi Arabia
HR is neither a cost nor a profit center but a center for sustainability & growth. Irrespective of technological development or however digital your work place may be, but without human intervention or power nothing can work. Even a remote needs a human to operate. So, the power, presence and importance of human resource is immense for any organization. Unfortunately, this specialty function hardly receives the attention / appreciation / importance it deserves.
From India, New Delhi
From India, New Delhi
Himan resource management can not be termed as cost to company.It has wide role and responsibility in shaping the organisation into a brand.
Managements can provide every resource,but human resource management needs management of people to produce best of products or services out of given resources.
People who have the ability to make people productive is the essence of HR.
From India, Vadodara
Managements can provide every resource,but human resource management needs management of people to produce best of products or services out of given resources.
People who have the ability to make people productive is the essence of HR.
From India, Vadodara
Human Resources (HR) can be considered both a cost center and a profit center.
As a cost center, HR is responsible for managing expenses related to employee-related activities, such as recruitment, benefits administration, and employee training. These activities are considered indirect costs, as they do not directly generate revenue for the organization.
On the other hand, as a profit center, HR is responsible for implementing strategies and programs that contribute to the organization's bottom line. By attracting and retaining top talent, HR can support increased productivity and revenue growth. Additionally, by implementing effective employee engagement, retention, and development programs, HR can help to minimize employee turnover, which can also help to keep costs down.
In short, while HR activities may be considered a cost center in terms of expenses, they can also be seen as a profit center in terms of their potential to contribute to the organization's bottom line.
From India, Mumbai
As a cost center, HR is responsible for managing expenses related to employee-related activities, such as recruitment, benefits administration, and employee training. These activities are considered indirect costs, as they do not directly generate revenue for the organization.
On the other hand, as a profit center, HR is responsible for implementing strategies and programs that contribute to the organization's bottom line. By attracting and retaining top talent, HR can support increased productivity and revenue growth. Additionally, by implementing effective employee engagement, retention, and development programs, HR can help to minimize employee turnover, which can also help to keep costs down.
In short, while HR activities may be considered a cost center in terms of expenses, they can also be seen as a profit center in terms of their potential to contribute to the organization's bottom line.
From India, Mumbai
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