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News Flash: Recruiting Has the Highest Business Impact of any HR Function

Posted By Dr. John Sullivan On September 4, 2012 @ 5:28 am In Advice and How-Tos | 29 Comments

[1]Within most corporate HR functions, the atmosphere is simply too politically charged to even consider raising this powerful question:“Which HR function ranks No. 1 with the highest impact on two critical business success measures — revenue growth and profit margins?” Well, the data is in, and we now definitively know that the answer is … recruiting is the most impactful HR function!

In my many years of working with corporations, I have come across only a handful of HR leaders who have taken the time to quantify the business impacts of recruiting (Google and Apple are the best). But if you shift industries and look at the sports and entertainment industries, you will find that it is well established that recruiting is the most impactful people management function.

In pro basketball for example, you could take an average individual player and attempt to develop them over time into a “LeBron James.” However, if you wanted immediate results with a low risk of failure, you would simply recruit LeBron away from his current team. But fortunately, in the corporate world there has now been a breakthrough global study conducted by the Boston Consulting Group that reveals the relative value produced by each of the different HR functions.

From the Best to the Worst

If you’re curious as to whether a particular HR function produces a high or low business impact, this section will reveal their ranking. In it, you will find a summary of the recently released BCG findings as they relate to the relative business impact of the different HR functions. In the next chart, the top 10 performing HR functions are listed, along with their numerical impact on profit growth and on profit margins. Note that the “x” (times) next to a number in the chart stands for the number of times that the results of a “highly capable” function exceeded the results produced by a “low capability” function. Obviously, the higher the number, the more important it is to have a highly capable function.
[2]

Mid-level Rankings of HR Functions

HR functions that were rated in the middle of the pack include:

  1. Providing shared services and outsourcing HR
  2. Managing diversity [3] and inclusion
  3. Managing change and cultural transformation
  4. Actively using Web 2.0 for HR and managing associated risks
  5. Delivering critical learning programs
  6. Managing corporate social responsibility

Bottom-performing HR Functions With the Lowest Business Impacts

The lowest impact functions include:

  1. Transforming HR into a strategic partner
  2. Health and security management
  3. Managing flexibility and labor costs
  4. Restructuring the organization
  5. Managing work-life balance
  6. Managing an aging workforce (this one actually resulted in a reduction in revenue growth)

The Incredible Power of Recruiting

The recruiting function came out on top with 3.5 times the profit growth and 2.0 times the profit margin, totaling a 5.5 performance improvement. However, using those numbers alone would result in an underreporting of the impact of recruiting. That is because the fourth-most impactful item on the list is employer branding [4]. It should not be counted separately, because branding is an integral part of recruiting. If you were to combine the two functions, you could then add the 2.4x profit growth and the 1.8x profit margin numbers from employer branding to the numbers under recruiting and as a result, recruiting would get a total overall improvement score of almost 10 times the performance of a low capability recruiting function.

The Stock Price Impacts of Great HR

In addition to revenue growth and high margins, executives also love to see the firm’s stock price increase. Fortunately, the BCG study also researched the stock price gains produced by highly capable HR departments. In order to select the firms with the very best HR departments, BCG looked at Fortune magazine’s list of “100 Best Companies To Work For [5].”

The list was further narrowed down to the very best firms by only selecting “repeater firms” (i.e. only the few firms that have appeared on the list at least three times during the last 10 years). They then compared the stock price growth in those repeater “best companies” and compared the stock price growth of the companies comprising the S&P 500. The results were phenomenal. The “best companies” with great HR saw their stock price rise an average of 109 percent, while the S&P 500s rose only 10 percent over the last 10 years. That means that the stock price growth of firms with great HR departments was nearly 10 times higher!

Warning — Be Careful About Investing in These Lower-performing HR Functions

You probably already know through experience that many of the highly ranked functions (i.e. retention [6], onboarding [7], leadership development, and managing talent) have high business impacts. However, you might have been surprised to learn that many functions that HR frequently “champions” like work/life balance, becoming a strategic business partner, and restructuring the organization all have relatively minor impacts compared to the top ranked functions (note: statistically, correlational studies like this one show a direction but they cannot prove cause and effect). And sadly, the lowest-ranked function of them all, managing an aging workforce, actually had a negative impact on profit growth (meaning that if you invest in it, you will actually hurt your firm). 

More About the Research

Fortunately for those in the recruiting field, the world renowned Boston Consulting Group, in conjunction with the global people management association known as WFPMA, have released their latest correlational study demonstrating the power of individual HR functions. The study (which included 4,288 respondents from 102 countries across a broad range of industries), compared the difference in revenue growth and profit margins at firms with “very high capability” individual HR functions to the business impacts of low capability HR functions. The study, “Realizing the Value of People Management From Capability to Profitability” [8] follows a direction that I have been advocating for years. Which is to always calculate the dollar impact of each one of your talent management activities.

It is important to know that all aspects of business have become more quantitative, and as a result, you have no choice but to use “the language of business” — which is money. HR must finally realize that it must speak this language of money if it is to be respected, well-funded, and listened to. The need to quantify results in dollars is further reinforced wherever I travel around the world. I find that executives everywhere are instantly interested in any idea, function, or program that can demonstrate that it increases revenue, the stock price, profit, or profit margins.

Final Thoughts

I of course recommend that you use the data presented here to influence your executives into investing more resources into recruiting, as well as onboarding, retention, and talent management. However, many executives will not accept external data, even if it comes from someone as credible as BCG. So the next best option is to work closely in a partnership with your CFO’s office to come up with your own internal credible process for periodically calculating the dollar value of the business impacts produced by HR. Once you identify the most impactful functions, it only makes sense that you then prioritize those functions and programs, based on their impact and their ROI relative to other functions.

And one final thought. I don’t recommend that you share this article with any non-data-driven professionals who work in one of the lower-impact HR functions. HR people all too frequently hate to have their personal beliefs challenged. Many would simply rather not know.


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URLs in this post:

[1] Image: http://www.ere.net/wp-content/uploads/2012/09/bcg.jpg

[2] Image: http://www.ere.net/wp-content/uploads/2012/08/HR-and-recruiting.jpg

[3] diversity: http://www.ere.net/tags/diversity

[4] employer branding: http://www.ere.net/tags/branding

[5] 100 Best Companies To Work For: http://www.ere.net/2012/01/19/whos-the-best-company-to-work-for-heres-100-of-them/

[6] retention: http://www.ere.net/tags/retention

[7] onboarding: http://www.ere.net/tags/onboarding

[8] “Realizing the Value of People Management From Capability to Profitability”: https://www.bcgperspectives.com/content/articles/people_management_human_resources_leadership_from_capability_to_profitability/

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