Operational expenses: The critical metric for a greater connection between HR and finance

HR must find a route to improving its relationship with finance. Research from Gartner indicates only 30% of CFOs expect their CHRO to be a key player in enterprise strategy. The rise of people analytics in recent years has begun to curb a historic inability to tie the impact of HR practices to financial outcomes. Alan Susi, Global Head of Organizational Analytics and People Insights at S&P Global argues operational expenses should be the founding metric of a closer connection between people and financial outcomes.

In this Q&A with HRD, Susi reveals his own approach to calculating ROI on people-related initiatives, the power of operational expenses as a first-order measure of financial impact, and why workforce planning is the clear path forward for greater collaboration between HR and finance.

1) What foundational steps can HR leaders take to ensure a clear connection between people outcomes and financial results?

Alan Susi: It needs to become a behavior and a practice. There are multiple ways that people outcomes are tied to financial results. It might impact the efficiency and effectiveness of the people function itself, and it might impact the operational results or expenses of the organization.

But you have to spend a lot of time with finance and business leaders to understand their financial, stakeholder, and operational factors, and then work to connect the dots to our work. Ask questions and work with people outside of the people team to understand their operational outcomes, financial outcomes, who the stakeholders are, and what their needs are.

I tend to see HR as an operational risk management function. Business leaders and people teams, in enterprise risk management terms, would be the first line of defense against risk. Do you understand how your HR activity or people activity ties to risk management outcomes? What are our risk factors to our business model? How do you govern the type of work we do? At S&P we call this organizational health.

2) How can HR leaders calculate the ROI of their people-related initiatives and use operational expenses to influence strategic decision-making?

Alan Susi: We [HR professionals] throw Return on Investment (ROI) around a lot. If you’re engaging with vendors, they’ll tell you their ROI calculations. But it’s in the eye of the beholder, or the leader that is making the decision to invest. We could calculate it very operationally by looking at capacity per employee, cost savings, or loss of productivity. These are all good operational metrics.

But opportunity cost, benefit via real value like reduced attrition, increased mobility, and better efficiency of spans or layers are all particularly important. AIHR has a good ROI calculator for productivity and cost. I tend to look for ROI related to financial outcomes like operational expenses and margins, business growth, and revenue growth. When you start telling the story between the two, even if it’s second or third-order effects, it’s going to influence strategic decision-makers.

3) Why do you recommend operating expenses as a starting point?

Alan Susi: Operating expense metrics would be the first. Depending on the type of organization, the total cost of the workforce could be upwards of 60% or 70% of the organization’s operating expenses. In most organizations where that percentage is lower, the efficiency of those people becomes more important.

Tie the impact of operating expenses to financial outcomes. If you’re a non-profit or governmental organization, it’s a more prudent use of taxpayer or donor resources. Net Promoter Score and other metrics begin getting into second-order effects, but operational expenses are the most important measures to start with.

4) How do you approach building a strong partnership with finance teams and other relevant stakeholders?

Alan Susi: Brick by brick. You’ve got to start building the relationship now. It might not be fruitful right away. But if you learn from them, and build some trust, it goes a long way.

In my experience, finance has gone through this evolution twenty years ago. Their time in the fire was in the financial crisis. Ours was through Covid-19. But we can learn from how they’ve advanced their analytics practices, and how they’ve better supported financial planning and analysis. Everybody likes to tell their war stories as they go through their practices. Listening, building trust, and collaborating on projects, is the best way to do this. Also – solve the most important shared issues together. It may sound simple but having a clear definition of the same numbers going to stakeholders becomes the ‘foundation stone’ of the relationship.

Workforce planning is a fantastic way of partnering and collaborating where there’s a shared set of outcomes to better manage operating expenses, build future human capabilities, and ensure continued growth in any type of organization.

5) Why is it so important to tie people outcomes to financial outcomes through operational expenses?

Alan Susi: HR is a corporate function. And so often, HR can become too insular. Dave Ulrich says it best. HR isn’t about HR, it’s about the business. We need to make sure we tie those threads, even if they are secondary or tertiary orders of impact away.

If we don’t resolve the connection, those who do strategic planning may interrogate us and move us away from doing the work we feel is the most important.

6) What industry advancements do you see that will further enable HR leaders to effectively tie financial outcomes to people outcomes and drive greater business success?

Alan Susi: Over the past ten years, workforce planning always seems to come up has being the next big thing. There has been so much evolution in the last few years with the pandemic and The Great Resignation, but the time is now for workforce planning. Consider Meta’s ‘Year of Efficiency’ as one example of how organizations are looking at how their workforce plans reactively to impact financial outcomes.

The best way to navigate these ups and downs and connect finance and people outcomes is to think about the future capabilities you’re building. Are you building human capabilities with an understanding of real value creation? If you have a skill, capability, or automation you are going to invest in, workforce planning drives all investment decisions that an organization makes. Tie your case for investment decisions to valued scenario planning.