How Does HR Influence A Company’s Profitability?

Full Transcript Below

[ANNOUNCER]: Breaking down everyday workplace issues and diagnosing the hidden sickness not just the obvious symptom, our hosts James and Coby.


[COBY]: Did we lose a patient?


[JAMES]: No that’s just my lunch.


[COBY]: Hey thanks for joining us. I’m Coby, he’s James. Let’s get started with a question. How does HR influence a company’s profitability?


[JAMES]: Okay I’m going to give you my super secret, amazingly helpful answer and say that it depends. Which is how I seem to start all of our conversations, is well “yes and no” or “it depends”, but hear me out. Because I’m not saying that it depends on stupid things like, it depends on every individual company, or it depends on what industry, or size you are. Those things are actually irrelevant largely, to my point. The reason why I say it depends, is because how HR affects profitability of an organization is largely dependent on who HR reports to. So if HR reports directly to the CEO, that’s where we’ve seen the best success. Because it signals to us, and it signals to the employees, that this is a company that is far more likely to take a progressive approach to Human Resource Management. That they see employees as an asset that needs to be invested in, rather than an expense that needs to be managed. So on the opposite side of that, when we’ve seen HR reporting directly to finance, or reporting directly to operations, we tend to see more of that cost mitigation mentality, than the investment in and a people-centered approach. So if the organization doesn’t have a CHRO or a CPO, a Chief People Officer, and there’s lots of titles that they could go by, but if HR does is not part of that C-Suite and doesn’t report directly to the CEO then it’s far more likely that they’re going to have a far less impact on a company’s bottom line. And they’re going to have a much harder time trying to implement any cultural change because everything is focused on financial risk mitigation.


[COBY]: Yeah, and that is probably like the crux of the answer to the question. So you know like really when it comes to the idea of… because we talked about this in another podcast, kind of how cultures is so important to business performance and outcomes. We talked about when we’re talking about the Workplace Culture Hierarchy, and the top of the Hierarchy is the state that we call a Strive that’s about growth, and innovation, and collaboration, and all that kind of stuff that has to be built on a culture that supports it. So largely how influential HR is towards all of the conditions that need to be in place, all the environment, all the stuff that has to happen to maximize profitability, performance, productivity, all that kind of stuff like that. If HR is empowered by having a seat at the table, like you said, then that really kind of is where the need or the ability I should say to kind of have that impact on the bottom line, has to be there because we really can’t expect that, you know, for HR to have any kind of real influence on a company’s bottom line, if they don’t really have any real influence, right And if everything they say is if… if all the reporting is to someone that’s going to filter it through you know the operational requirements and operational kind of balancing, or the financial balancing, then you know it really does water down what HR can do. And they become, like you said, they’re a risks or cost mitigation tool ,or you know or role, then you know everything’s reactive. So it’s hard for them to really get ahead of anything, if everything’s always reactive.


[JAMES]: Well and that’s that’s the crux of it. And this is the challenge that a lot of HR professional experience, and it’s one of the reasons why burnout is so high among HR professionals. Is because oftentimes in far too many companies still HR is viewed as legal compliance. “Keep us from being sued, let’s do just enough so that we are not violating the law, and then spend all of your time putting out fires, responding to crisis”. Which takes a toll on people and it causes a huge amount of stress. Because there, like you said, they’re always reacting, HR is relegated to a position of just keep us legally compliant and leave me alone.


[COBY]: Yeah, like handle inappropriate comments, or if there’s relationships happening in the company, or manage the scheduling, and hire people when they quit. Just do that, so we can focus on the business, right? And we see that mentality most often when HR does not report directly to the CEO. It’s not that the reporting itself is what causes the benefits, or the negative pieces. It’s not the reporting structure that is actually the crux of it, although that is the indicator that tells us the mentality that the company takes towards HR. And I think it’s fair to say, just to add on to that real quickly, that sometimes there are companies where it was structured in a way that HR and doesn’t have a seat at the table, but they have the ear and influence because the people may not put their position into… at the table. But they’re considered at the table. So it’s not like, I say the reporting itself isn’t as important as the actual influence that they do have. Through the use of it and how they view it, whereas in some companies sometimes HR is like giving in a position at the table. But it’s a tokenistic position in the table, they’re more the glorified, you know, board reporters, right? That sort of thing. So again, it’s not that you know it’s as direct as if they’re at the table everything’s going to be sunshine and roses. And it’s a complete utter disaster if they’re not. But like it’s an indicator. And it’s a strong indicator because more often than not it. If HR can report to the CEO, then the people side of the business is as influential as a financial side, as the operational side, as the marketing side, and so on.


[JAMES]: And this is why I started with it depends, right? Because it really… there aren’t one-size-fits all answers to these problems. There’s a lot of contextual information that needs to go into it. But what we are largely looking for, and what informs our work, are questions like this. This is a question when we are onboarding new clients, when we are getting to know prospective clients, and whether or not we’re going to be a good fit. This is a question that we ask, because it will provide a lot of context to the intelligence that we gather. We use a lot of tools to… We’re often hired to solve a problem, right? We’re struggling with x, y, and z, how can you help us the problems that aren’t the…


[COBY]: Symptoms.


[JAMES]: The symptoms, right. We need to get to the root cause. And what we see is that when HR reports to finance, I’m going to pick on finance because it that’s where I’ve seen the the most problems.


[COBY]: Its pretty common.


[JAMES]: It unfortunately is pretty common. Because when they report to finance, the problems usually stem from looking at HR merely as a financial risk mitigation activity. Rather than an investment. Because we… I don’t know how many times we’ve actually talked about this but central to everything that we do is a people focus, right? If you, we firmly believe that you can create a strong, profitable, productive, competitive business while taking a people-centered approach. While investing in people. Because if you invest in the people who are creating your products, if you invest in the people who are delivering your services, they will provide better value to your customers. When your customers have receive better value from you, than they do from your competitors, that’s going to increase your competition in the Consumer Market. That will increase your ability to scale, and grow, and to increase your market share, right? We do a lot of work with organizations, helping them to link organizational outcomes at Strive, which is the top of the Hierarchy, to how they invest in their people.


[COBY]: Yeah and I mean and one thing that I think is worth calling back to… we talked about about this in, I think it was the episode we did on what to expect from 2023. Where we talked about the Fragile Grip Principle, right? The Fragile Grip Principle, just as a refresher, is the idea of it’s how an organization, how an employer handles the fragile relationship that it has with employees. It’s very, very telling on the organization’s level of sustainability, and growth, and success, and that if they have what we call The Harsh Grip. It means they squeeze the employees too tight and they try and get every ounce of work out of them. They overly monitor them, they overly police them in a way of trying to like maximize output through almost like aggressive actions. Then there’s The Weak Grip. Where it’s almost the opposite, they let them go at a moment’s notice. First move is layoffs, or they kind of just let them free into the wild and they’re almost like never looked at or never watched. Then there’s The Stable Grip. Which is the one that we all want. We all want to be working towards. Where they handle it with support, they take care of that fragile relationship. Acknowledging its fragility, but they handle it well. And that involves knowing about how vital it is, that it’s a mutually beneficial relationship between the employer and the employee. And that success is going to only really come when they when they work together. So it’s cared for, that relationship, and I think that kind of going back to the beginning towards influence. When it comes to profitability, when you have a company that focuses on The Stable Grip, and they care for that relationship, like you said, it improves customer relations, improves growth and output, it  improves how the employees feel respected, and understood, and that they belong. Allowing them to be more adaptable to change management, to be more engaged, to bring more of their best work, possibly advocate for how can their employer maximize their success, so they can maximize the company’s profitability. Whereas, and that… sorry, that tends to come from when, or be more present, or more of a reality, when HR reports directly to the CEO. Whereas we see more common, The Harsh Grip and The Weak Grip be more present, or kind of more of a common trend when HR reports to you know the CFO or the COO. Because like we say a lot of the value of the people side of the business is filtered through that, you know, that risk mitigation idea. So you know, the costs are going up so we got to cut things here and there. And so its all about removing our financial liability our financial risk, so I think that there’s a lot of connection between The Fragile Grip Principle and the idea of how HR influences a company’s profitability, through who HR reports to.


[JAMES]: Yeah I think that’s a good connection. What we’re seeing right now, I mean we’re recording this in, you know, the end of March 2023. And you know we’re seeing huge inflation, and a bit of a recession, and massive layoffs across the board. Companies are, a lot of companies unfortunately are taking the loose grip… The Weak Grip of approach, and they’re just letting that fall to the wayside. Companies that take The Harsh Grip approach are going to see high levels of turnover, high levels of burnout, high levels of… even though I hate the buzzword, high levels of quiet quitting. The idea that people are just going to show up and deal with your crap so that they can get a paycheck and go home. Companies that deal with that subscribe to The Weak Grip principle are going to see, are going to have massive challenges getting back up to speed when the economy starts to rebound, right? They’re going to have… we saw this all through COVID as companies would lay off huge numbers of staff, and then try to bring everybody back as “Oh yeah we didn’t just cut your livelihood in the middle of a global pandemic with no thought or regard for how that would affect, you know, half of our employees. Yeah come on back for the same pay in the same crappy conditions and everything will just be swell!”, right?


[COBY]: Until next recession.


[JAMES]: Yeah until the next recession, which happened like a year after COVID finish, if we can even say that. All of these things are connected. It’s not that they are dependent on one another and it’s not that just because a company is takes a certain approach to the reporting structure for HR, that they are necessarily going to subscribe to The Weak Grip or The Harsh Grip, but they’re all indications of the type, of the priorities that the company has. And this is really at the heart of it. That HR needs to be given a priority. It needs to be a priority in your organization. If you are not prioritizing the health and welfare of your employees, then you are setting yourself up for a lot of difficulties. You are creating the challenges that, I’m sorry, but that you b*tch and moan about, right? like you’re causing a lot of your own hardships. And this is unfortunately the reality that we see a lot of people are in. Complaining about, you know, “I can’t attract people, or you know people don’t want to work anymore, or why are people leaving the organization?”. Well it’s time to look inward, it’s time to look at what are we doing as an organization. What’s our value proposition? How are we adding value to our employees, because there’s tons of competition out there right now for skilled labor. Regardless of the industry you’re in, you have a lot of direct and indirect competitors all looking for the same types of skilled employees that you are looking for. And if you aren’t doing something to set yourself apart by prioritizing HR and giving them the tools and resources that they need to be proactive, rather than just focused on putting out fires, then you are causing a lot of your own problem.


[COBY]: Yeah and I think, so there’s two things that kind of come up from the mind, and I brought this up in a few of our, like YouTube videos, and some of the talks we give. And so the first one is the idea of like, the reality is, especially with the collective realization that people are more,  kind of since 2020, people realize what they need from their jobs more. And their expectations are a lot higher. We talk about that in our Hierarchy and the Job Dissatisfaction about you know about The 7×3 Rule a lot. I don’t want to get back into that, but the idea of things are different now. What worked in 2019 the world, people’s minds have changed. Priorities have changed, so we have to adapt. So we have to realize that we have to give HR, like you know, the People and Culture, the same influence on Human Capital, that Finance has on Capital. It has, we have to have that comparable level of influence. And what’s funny is like, again we talked to companies kind of around the world. Because people are starting to get this, like you know we’re not the only ones talking about this. This is being talked about everywhere, and you know there’s this big kind of uptick in companies having interest to work with, to have supports and services that will improve, you know, wellness, and talent analytics, and the ideas of improving recruitment, and improving their employer brand. These are things that people are starting to now, they’re ready for. And it’s interesting though because we’re, you know, trying to build partnerships and collaborations. Especially into in the US, into Europe, we’re really starting to kind of find some great, like-minded, companies to help address these massive issues. But what’s so funny is, like again, I was just talking to a company out of Germany this week and last week I was talking to a company out of Belgium. And we both we kind of both said that we always, everyone kind of always said the question, that a lot of us are asking in this field that supports organizational growth and organizational development is, Who does HR report to? Because that is so telling. This is something that we’re all realizing, that all the companies supporting organizations in organizational growth and organizational development, they all want to know who HR reports to. Because we’re all realizing that’s a major indicator of how successful our efforts are going to be with them. How willing they are to actually see employees as assets and Investments, rather than expenses and liabilities. And how much work we have to do in our implementation if HR is not empowered, and reports to finance or operations. How we have to filter everything through the financial lens or the operations lens in order to get the buy-in that we need. Because HR is not going to be as much of a partner, or they’re going to more, in our implementation because they don’t really have the influence to do that. Which again slows everything down, because companies want a quick fix now, but they don’t have the infrastructure in place to support employee growth because they don’t value or invest in employee growth because HR reports to the CFO. So it’s very funny that we’re seeing this more and more, but this is coming up more and more when we talk to our peers in supporting organizational growth and development realm. So it’s something that I think we should all be talking about more in our companies themselves. Because it is such an important indicator to how the company’s profitability and growth is going to be in this new reality that we are in post 2019. In order to make this all this kind of stuff successful, to achieve the goals we have for our companies.


[JAMES]: Absolutely and I love the parallel development of similar concepts. Because we are seeing many people coming to the same realization without like… independently and starting to realize now, like you said, we need to start looking at things differently. The timing is really good for a company like this. The thing that gets me excited about the work that we do, because right now the majority of companies are still taking an outdated, and still have an outdated mindset, around what HR is, what workplace culture is, and how a workplace culture is actually built, and what the benefits are. They’re still looking at it as just merely a, “Well it’s about making people happy, it doesn’t really affect anything”. There’s a collective shift happening right now, and we’re kind of… I feel like we’re still in the early stages of a wave that is coming, that will help to shift this mindset. But while most of the companies are still taking this outdated view, those who are willing to invest in their people, those who take a different approach, who are willing to actually look at developing a productive, and inclusive, and profitable workplace culture are going to instantly set themselves apart. They are going to set themselves apart in the Labor Market, they are going to set themselves apart in the Consumer Market. They are going to have… if companies that are experiencing significant challenges with talent attraction, with being able to retain the talent that you are able to find, with… if you’re worried about high levels of burnout, or if quiet quitting is a… if you’re worried or scared about what the effects has, you can resolve these issues. And you can resolve them before your competition does. When everybody else is in a race to the bottom, it doesn’t take a lot of effort to move to the top of the pack.


[COBY]: And that’s a really good point. And that’s something we’ve mentioned in other podcasts too, that we call the Amazing Race To The Bottom, is this reality of the companies still using the, you know, still following the advice of the gurus who peaked in the 90s, and this idea of the employees as the expenses and liabilities. And that they’re not the business, the businesses the IP, and the buildings, and the vehicles, right? And that’s so antiquated now. And companies that get it are starting to really kind of see the growth potential and opportunity to rise to the top. And those that are not, are really kind of circling the drain, down to the bottom. But what’s interesting that this actually reminds me, so some of the information that I shared in an interview I had with Authority Magazine, you know, a month ago or so whatever. It was because one of the questions that they asked was, would a CHRO make a good CEO? And why are they always, why are they often overlooked? What would make them a good contender for that kind of position? And I said in the interview, I said when employees are seen as expenses and liabilities, HR is often viewed like the ‘maintenance department’. It’s just about fixing what’s not working, you know, putting out the fires, like you said, and replacing what’s broken, right? And the CHRO is seen as almost like being in charge of the reactive, expense mitigation, department. And that because of that, they’re viewed as being too focused on keeping people under control, making them too inward focused to lead the organization’s external goals. And it’s true, if they are relegated to that reactive, expense mitigation, situation where they’re about scheduling, hiring, policing inappropriate comments, and  who do you talk to when interpersonal, interoffice relationship. Then yeah, it’s really hard to imagine them being future focused, goal focused, organization growth and profitability focused. But if you allow the HR to reach its full potential, and be about that, again, the human capital side of the business, and have that influence. Because we know, we’ve said, some number of times, how important culture and employee performance is towards business outcomes, change management, competitiveness, innovation, collaboration, all those kinds of things that we need in order to become the companies that we envisioned them to be. That the HR, the people the side, the professionals who are responsible for the people, should be, can be so influential towards those big outcomes if we let them. So honestly, a really empowered CHRO could become, you know depending on their personal skills and everything, but they could be a good contender for a CEO position. Because if they’re given that “People are what drive the business, people are what sell our products, optimize our people performance optimizes our organizational performance.”, they could see the whole picture and be a potentially a very, very good contender for the CEO.


[JAMES]: Well having somebody in the, in a CEO position who not only understands the benefits, but understands the value and the work that goes into creating a productive, profitable workplace culture. I can see that as an absolute win. I like your answer, I’m glad that you said, you know it depends on personal skill sets and all the rest. Because this is the problem that I have with any question like that, is that it depends right. That’s the answer to every question, because people are complex. When you are dealing with people there is no one single correct answer. There’s anyways… I won’t go off on that tangent again, because I start every conversation that way and go off on a tangent, but I mean, I like the spirit of the question of, can a CHRO be a good heir apparent? And if they’re not seen that way, why not? And I think you gave a good answer for that, both here and in the Authority Magazine interview.


[COBY]: Well thank you.


[JAMES]: Yeah gotta be nice every once in a while.


[COBY]: I know, you gotta throw me a bone and pretend that you like me, you know,  so we look like we’re a high functioning team. But one thing that I always kind of like get a bit deflated on when we’re talking about the role of People and Culture, and again in HR specifically, to any companies that see HR as the police, as the bad guy, as the morality police, or the principal’s office, to shun you when you do something wrong, or they just do hiring, or they do scheduling. It’s so under utilizing what what should be a massive engine for growth and profitability. Because, like to me, it’s like, well obviously if that’s how you think of HR and that’s how HR is thought of in your organization, so if you think about HR in your company as the bad guy, the police, just who hires, just who I talk to when I get in trouble, or just who does my annual performance evaluation, then your company’s doing it wrong. Because to me, that’s like the entire marketing department just managing the company’s Facebook page, right? Total underutilization of what their intended purpose should be.


[JAMES]: Yeah, we’re gonna have some angry marketing professionals saying don’t give them ideas.


[COBY]: We apologize to to our, to those who listen who are in the marketing realm. We’re saying that’s a bad thing, as a reminder.


[JAMES]: I mean social media is an important aspect of company branding, but what a waste of skills if that is what you are using your team for, if that’s the only thing you’re using your team for.


[COBY]: But really, that’s a ridiculous use of a marketing department, right? And that’s my point. Just as that’s a ridiculous use for marketing to just be focused maintaining the Facebook page, it’s ridiculous for HR just be worrying about scheduling, hiring, and inappropriate comments.


[JAMES]: And those things have to be done. Like somebody has to take care of social media accounts, or else it just becomes a toxic landmine. Actually that is a good analogy, or else it just becomes a toxic landmine. But yeah, but somehow we’ve normalized HR just fulfilling those functions. And yes those are important functions that need to, that somebody needs to make sure are being properly managed. But it’s such a waste of potential.


[COBY]: Well and I think like we both said, I think you’re the first person to say though, about the reactive nature of HR. And I don’t want to confuse people, or confuse the point, and say that HR should never be reactive. Well no that’s not true at all. There is an important element to  the reactionary nature of a lot of responsibilities, like you know, hiring  tends to often be reactive, compliance tends to be reactive, right?


[JAMES]: Yeah, hopefully discipline is reactive, and not proactive.


[COBY]: Exactly. So there are parts of it that are essential, but and there’s nothing wrong with having positions, role, responsibilities that are reactive. It’s vital, but if that’s all it ever is, then again it is just like the maintenance department. It’s just about fixing what’s broken and replacing what’s not working. And it’s always going to be that way, and then the influence that mentality has on the company’s profitability is low. If you’re just replacing the light bulbs when they burn out, then you’re that’s not going to help grow, or collaboration, or innovation.


[JAMES]: And it’s funny because I think, unfortunately, many people have this mentality of “well we’ll just replace people when they burn out or we’ll just replace people when they leave”. What happens when you burn through your labor pool? As many people have already done. Right now there’s a short a massive shortage on light bulbs, so you’re going to be sitting in the dark. Right now there’s a massive shortage on skilled labor, how are you going to remain competitive if you can’t even staff your business?


 [COBY]: Yeah and again in a lot of like, and a lot of what really we need to be doing is, I think, this needs to be a collective critical thinking activity. Because there is so much to think about, like you know if I’m an employee, if I’m you know in at the stereotypical mail room employee at a large corporation, and I think of HR as the police, then I’ve been set up in a position to almost to follow down a path that leads to limited growth or profitability. Because I think that we need to, again, rethink a lot of the stuff because so much of this is antiquated “best practice” from the 90s. And we talked about this…


[JAMES]: Attitudes towards work have changed substantially since the 90s, right?


[COBY]: Exactly and so like for a company that understands this and they’re wondering “well what is it that we need to do to break away from that 90s mentality to stop participating The Amazing Race To The Bottom and actually started rising to the top?” A good question is, who does HR report to? And what empowers them to have influence on the company’s profitability? Because if you don’t know, that’s a concern. If it’s they report to the CFO and they’re just reactive, that’s a major red flag. But if you, but if you have them reporting to the CEO, and they have the influence, maybe more intention could be done to maximize the existing influence, lean into what you’re already good at. So I think that there’s a lot that we could really do to be more, you know, to think broader and to rethink all this relationship around what HR is and not what it should be, what it could really be, in how we move towards the future of work. So all right, I think I might just do a summary. Unless you have any other thoughts or ideas James?


[JAMES]: No, I’m happy with where the conversation went, I think there’s some good points, some good takeaways for people and I think I justified my garbage answer enough. So tune in next time where I give you another garbage answer…


[COBY]: ..and then we spend 45 minutes digging ourselves out of the hole that James creates for us.


[JAMES]: Status quo.


[COBY]: So the question is how does HR influence a company’s profitability? Well part of the answer is it depends on who HR reports to in the organization. Because when companies have HR reporting to the CFO or the COO it ends up filtering all of the people, the complex People and Culture aspects that really are pivotal to our organizational growth through the lens of mitigation and maintenance. And this tends to kind of turn into to, kind of often defining where we fall in The Fragile Grip Principle are we squeezing people too tight because we’re trying to maximize output, for operational purposes. Or we dropping them at a moment’s notice because as soon as costs go up, we have to cut the financial, we have to cut costs to keep the levels happy. Or are we actually going to support people in the way of investing in them to maintain that fragile relationship that we have with people? Because it is a mutually beneficial one for long-term success. We have to realize that HR is often mistakenly viewed as the maintenance department, the reactive, risk mitigation department, and this tends to be why it limits HR’s influence on companies profitability. Like I said, when we only focus on HR being about inappropriate comments, or interpersonal relationships, or scheduling, or hiring we’re doing it wrong. And it’s like making our marketing department just about handling our Facebook page. We have seen more and more companies that support business growth and organizational development are talking about the fact that who HR reports to in the organization is a very telling component. Because whether the companies have influential HR professionals versus HR professionals that have to filter everything through finance or operations is really a great sign of how successful they’re going to be implementing the needed fixes that they have to address the causes of the problems, not just the symptoms. And to every business owner, director, manager, HR professional, and employee; start thinking critically about how employees, and employee focused professionals, are viewed in their organization. Because if employees are seen as risks and financial liabilities, and HR is filtered through a financial or an operational lens, then this would be what limits our success and profitability, long term. Because the people are so much more than just the expenses and the liabilities that many companies unknowingly or maybe unintentionally think about as default thinking from the 90s. All right, cool. So that about does it for us. So for a full archive of our podcasts and access to the video version hosted on our YouTube channel visit our website at Thanks for joining us.


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