HR Is Just Overhead?

HR is just overhead. Have you ever heard that before? If you haven’t, please tell me where you work. I’ll send my resume to you first thing in the morning. But the above sentiment seems to represent the thinking of a lot of companies. After all, HR/staffing costs money and it does not actually generate money. Of course, marketing does not generate money. It does, of course, establish the environment where the company’s products are presented and packaged in the best possible light to make the job of the sales force easier and more effective. But it does not actually generate money. Then there is the accounting function. They don’t generate money. It is already there, and they just count it and assign it to the appropriate “accounting bin.” With or without them, the money would still be there. (Of course, recent developments in corporate America suggest that accounting may in fact be a profit center. For some companies it was their “book cooking” that made the organizations look profitable, I guess that could be considered a form of revenue generation. Unless of course, you actually need the money that is not there.) No matter what, it seems, HR/staffing is stuck with the label of “overhead.” But that is as much our fault as anyone else’s. We have never successfully sold our role as a strategic business partner and an ally in the effort to generate or preserve profit. Nothing could be further from the truth, and shame on us for not selling that role better. Let’s consider an example. XYZ Inc., the world’s leading manufacturer of sprockets and widgets, signs a contract at the end of third quarter to make and deliver one million of its products in the upcoming year. The pricing calculation included the need to increase headcount to 500 persons, a 100-person increase, to support the existing workforce to meet the product goal. The contract is signed for $55 million based on an expected manufacturing and support cost of $45 per unit, leaving a $10 million profit margin. For the sake of argument and to keep this article from looking like a spreadsheet designed to make “bean counters” dizzy, I am going to keep from doing the total business diagram. But the per unit cost is based on an average annual salary of $60,000, with an overall additional cost of 150% of your salary base for benefits and infrastructure support per employee. This would include the cost of the additional equipment, floor space, desks and all the other cost factors of expansion. In other words, it is costing you $45 million to make widgets ó provided, of course, you have a 500-person headcount on the floor, trained and equipped to meet the contract commitment. By the beginning of the year you are still 75 people short of the needed headcount. Staffing had been reduced during the previous year, and before you could start hiring the 100 new people you needed you had to hire the staff to do the hiring. They had to get on board and get up to speed. Based on the reduced headcount on the manufacturing floor, the project leader has to recalculate their headcount requirements to meet the client deliverable. After all, the client does not want one million widgets just at the end of the year; they are expecting quarterly deliveries of 250,000 units. As in most contracts, the client has an “escape clause” that can be enacted if the terms of the contract are not met. At the very least, the client’s escape clause allow it to “renegotiate” the originals terms of the contact (read: M-O-N-E-Y). The project leader calculates that based on the rate of hire, she will need to increase headcount requirements by 15 people in order to overcome the lack of required staff through the beginning of Q1 to “catch up” with their production goals, or $2.5 million. Where does that money come from? From planned profit! Or, $1.35 million right off the top, because clients do not pay for your problems. By the midpoint, the new headcount requirement has been revised, yet again, due to the continued shortfall of headcount and the need to meet the production goals for the client. The new headcount requirement is also impacted by the need to offer better salaries to expedite staffing ó your average salary is now $65,000 and your new headcount projection is 550 people. The new cost of manufacturing your widgets is just under $54 million, and your new expected profit is less than @2 million ó significantly less. Agreed, in trying to make a point I could be considered guilty of weighing the data in my favor. So let us assume that the company in question only lost 25% of its expected profit due to staffing issues. That would still be $2.5 million lost due to the desire to save on staffing costs. Unless you pay your recruiters $1 million each, I have to doubt there is a real cost justification. HR/staffing is overhead? I do not think so. Timely staffing is money in the bank. During the “boomtown” days of the mid to late 1990s, people who did not own a calculator were ecstatic about the headcount growth of companies and their need to expand office space. But how much of that expansion was “real growth” and how much was “catch up hiring”? The only reason our employers and clients don’t know this is because we never tell them. In essence, we are failing as a strategic business partner to successfully champion our area of expertise in the accomplishment of critical corporate goals. Hey, maybe we are overhead after all? Have a great day recruiting!