How can finance and HR work better together?

For decades, we've all read about the classic friction between sales and marketing functions as they collaborate to maximize revenue for the organization. But on the other side of the income statement, there's an inherent - though perhaps more subtle - tension between finance and human resources. In many companies (particularly smaller ones), HR reports to the CFO, and at first glance, there's some logic to that. After all, in most industries, compensation and benefits represent the largest expense on the P&L.

Unfortunately, however, over the past 12 months, that large line item has seen the greatest disruption thanks to the pandemic. Ironically, despite reporting into finance, many CFOs find they spend far more of their time - and budgets - on finance topics and issues instead of HR challenges. Fortunately, however, there are places where HR and finance can collaborate to strengthen corporate performance and improve outcomes.

The evolving mandate for modern HR - digital transformation

In many businesses of all sizes, HR is too often confined to administrative and business partner roles that drive manual processes largely confined to functional silos. HR handles the hiring and promotions, adjusts the salaries, and implements benefit plans. While that remains good and important work, its strategic value to the organization is lower. Today, in an era of digital transformation, remote work, and rapidly changing business models, that traditional structure is increasingly outdated.

HR must be a strategic change agent focused on all aspects of the employee experience and lifecycle. It must help all areas of the organization develop high-functioning agility, resilience, and adaptability to move the business forward in ways that aren't always fully predictable. That includes collaborating with finance on the wider business needs and the financials associated with the strategy, planning, succession, skills-gap analyses, training/development needs, competing for elite talent, and more. This means a shift away from process-focused back office functions to working more with people across the organization, leading change from both a business and employee experience perspective.

Finance will ask hard questions of their colleagues in HR. That's because, although HR views employee hiring as an investment in future corporate performance, finance largely views employees as a cost - they will want to understand that large line item at the deepest levels purely from a dollars perspective. Finance wants to know the full and true cost of performance and what returns are generated from investments in incentives and training. They want to see headcount by business units, geographies, products, and time periods. Speed and accuracy will be essential in this regard, especially in the current unpredictable operating environment.

Compliance

Like finance, HR is on the front lines of several key risk-management issues that are taking on greater importance. Whether it's the California Consumer Privacy Act or the European Union's General Data Protection Regulation, employees now have new rights to access data about themselves that the company maintains. Employees in many jurisdictions also have the so-called "right to be forgotten," which requires companies to delete former employees from non-statutory records.

However, meeting these compliance requirements can be difficult, since most organizations store relevant data in a variety of files, systems, and databases, and some of that data isn't even digitized or centralized. Cross-functional collaboration between HR and finance will be essential to minimizing risks associated with these complex data-access/data-privacy policies.

At a more strategic level, decisions must be made regarding the company's risk tolerance and how HR can manage that on behalf of the business. For instance, AI/machine learning applications can now begin to predict the churn of top talent - an extraordinarily sensitive and valuable analysis. But do we want managers making decisions based on an algorithm that deems an employee to be a flight risk, which can lead to litigation and reputational damage?

The impact of COVID-19

In the COVID-19 era, agility and resilience are the traits that companies increasingly value while also introducing concepts such as scenario thinking - another area of intense collaboration between HR and finance. Previously, this often meant little more than standard disaster-recovery/business continuity plans. Now, this means so much more.

For instance, what happens if your post-pandemic plans to return employees to their offices are delayed by six months? What will this do to your reopening policies? How will you refurbish/retrofit offices to maintain social distancing? What new policies will you implement regarding new work modalities - and what are their financial impacts? How are you managing vaccine administration and know who has had what vaccine and when?  Will they need a new shot or booster each year? Too often, HR does have access to the right data - accurate and complete - so that they can make recommendations and take action.

From a personnel perspective, how do you recruit and retain individuals who are resilient? The work-from-home paradigm has a major impact on absences, PTO, productivity, and more. Reports indicate that WFH can lead to depression and mental-health issues, which can impact your wellness programs, behavioral health policies, and medical claims. Finance and HR must team up to address these new challenges holistically.

Of course two-way communication and 'process friction' become more difficult to manage and streamline in the COVID-19 era. As virtually any office worker can attest, our new way of working remotely - solely through screens - is exhausting. After moving from Zoom meeting to Zoom meeting, many find there's no time remaining to get actual work completed. The days get long and the weeks get longer - creating greater risks of cumulative stress and burnout.

Ultimately, however, many HR organizations are finding that - by design or circumstance, the pandemic has improved their effectiveness because it's forced them to take a leading role in crucial decisions - from new WFH policies to re-openings and so much more. They're confidently providing critical data for new financial models, forecasts, and scenarios that are directly improving business performance and preparedness.

Moving toward the intelligent organization

In the coming months, top-performing organizations will focus on infusing their organizations with information that was previously unavailable, enabling their managers to make better decisions. Instead of merely reporting on what happened and why, AI and machine learning technology will enable companies to look forward with predictive analytics that address strategic matters that blur the lines between HR and finance.

For instance, what is the revenue or cost impact of not meeting sales and marketing hiring targets in a quarter? What is the future financial risk if we lose top performers in a given time period?  How can we alert managers to potential risks by ethically spotting not just financial but also behavioral anomalies? The promise of forward-looking information - based on the right data - is powerful and exciting and will underpin the future of HR and finance collaboration.

Unfortunately, HR and finance struggle to share common data. People may be the company's most important asset, but HR often lags in investments in automation and IT systems. Finance wants to see rollups and monthly closings, but antiquated HR systems can create errors and stressful rework. HR-finance collaboration will require a common underlying set of shared data.

Ultimately, systems that automate and eliminate underlying manual work will free both HR and finance to engage in higher-level work that focuses on employee-centric, customer-focused, and business-enhancing initiatives - not just back-office administration. With the right alignment, HR and finance can jointly play a crucial role in navigating the organization through arguably the most disruptive business climate of our lifetime.