While the disciplines of HR and finance have been fundamental components of organizational structure for many years, they have historically spoken very different languages while attempting to solve the same problems. The concept of GAAP accounting (Generally Accepted Accounting Principles) started in the 1930’s to standardize financial reporting in the wake of the 1929 stock market crash. This earned the CFO a proverbial seat at the executive table, while the CHRO continues to find themselves lacking the business language skills needed to pull up a chair. It is time to mind the gap between HR and finance.
For almost a hundred years, the finance function has built a transparent, consistent approach to measuring organizational performance. This has allowed them to dominate executive decision-making, while HR has struggled to demonstrate tangible value. Business guru Peter Drucker was famously quoted as saying, “what gets measured gets managed.” It is also commonly stated that the most valuable asset an organization possesses is their people, which makes it shocking that the first real attempt to create a standardized operating model for human capital was in late 2018.
This was when the International Organization for Standardization released ISO 30414. It was the first globally recognized international standard for human capital reporting through a framework that organizations could use to measure, evaluate and disclose the value and performance of their workforce. This created a people analytics explosion as cloud-based HR systems found themselves with abundant data available to go beyond standardization toward predictive modeling and scenario planning.
While differences remain between GAAP and ISO 30414, standardized human capital metrics are adapting to the financial mindset resulting in less need for translation. For example, instead of viewing payroll expenses as pure cost, the ISO metric Human Capital ROI (HCROI) communicates exactly how many dollars of profit are generated for each dollar invested in employee compensation.
Human Capital ROI (HCROI): (Revenue – (Operating Expenses – Total Workforce Costs)) / Total Workforce Costs
Fast forward to the age of AI, where advancements in technology have enabled organizations to create sophisticated human capital models including contemporary job architecture, skills intelligence frameworks, task taxonomies and strategic workforce planning tools. Ironically, we are able to use AI to plan for the impact of AI.
According to Boston Consulting Group (BCG), around 50% of jobs in the US will be reshaped by AI in the next few years. This automation and augmentation of tasks will result in the need for a different set of skills. In the past, HR had to rely on self-reported skills on ancient parchments called resumes. Today, they can validate skills through AI-driven simulations that verify each individual’s applied proficiency instead of taking their word for it. This is another step in the right direction.
Instead of finance doing headcount planning with limited involvement from HR, these two groups can come together to move beyond jobs and positions to consider the skills and tasks associated with these roles. The future needs of the business can be planned for based on the financial and human capital available. These conversations then move from annual exercises to ongoing interactions that allow the organization to adapt quickly to changing conditions.
For decades, finance set the language of business because it owned the structure and metrics of the organization. And while HR may not be fluent just yet, the two groups are experiencing new ways of working together to tackle shared challenges. For example, instead of the CHRO approaching the CFO and simply saying, we need to invest $3M in reskilling, upskilling and cross-skilling programs, they can come with data such as:
- More than 30% of transactional work will be automated in the next 2 years
- Without programmatic reskilling, the remaining workforce will lack the skills needed to navigate this upcoming digital transformation
- Due to demographic shifts, the availability of trained talent will decline by 25% during the same time period
- The result of doing nothing is estimated to be a 20% drop in HCROI, equal to $12M
There are still significant differences in the way HR and finance operate. Physical assets depreciate in the finance world, while HR views the workforce as an appreciable capital asset whose value increases with appropriate investment. One sees a cost needing to be managed and controlled, while the other wants to develop and grow their human capital.
But the gap is beginning to close – not because finance is removing its rigor or HR is abandoning their affiliation with humans. It is their ability to leverage new technologies and access this data-driven middle ground. This translation layer allows both groups to appreciate workforce strategies as quantifiable drivers of financial health. The goal is not to make these two distinct functions identical, rather it is to help them appropriately balance their depreciating liabilities and their appreciable human assets.
