During times of economic uncertainty, HR leaders can find themselves in difficult positions. As finance teams manage burn rates and focus on “doing more with less,” HR departments can be caught in a double-bind, managing layoffs while also having to justify headcount, measure return on investment (ROI) on HR initiatives, and prove how they’re contributing to the company’s bottom line.
This situation can be exacerbated by a disconnect between the finance and people teams at an organization. However, when human resources departments and finance teams are aligned, HR professionals are seen as strategic business partners who are just as invested in business outcomes as chief financial officers (CFOs) are.
Below we’ll discuss how to be prepared for questions your CFO might ask and ways to back up your initiatives with valuable data and metrics. We’ll also discuss how to build better communication skills and relationships with finance departments to achieve shared goals.
HR and the Bottom Line
As HR operations have started to change, responsibility for HR leaders has also increased. People teams are not only accountable for creating a positive employee experience and improving retention but also having a deep understanding of how each HR initiative financially affects the business. A 2022 article by McKinsey found that HR departments need to be agile to react to the demands of the times, especially when it comes to reallocating resources.
HR is often referred to as a cost center rather than as a profit center for companies. With labor costs (like employee wages, benefits, and payroll taxes) accounting for as much as 70% of total business costs, there is always scrutiny by finance departments on human capital and human resource management when costs need to be cut.
Understanding Your CFO’s Perspective
“This has been an interesting and challenging time, because earlier last year you could see the credit markets were tightening, and the idea of ‘growth at all costs’ doesn’t exist anymore,” said Jennifer Compagni, chief people officer at CipherHealth.
Finance leaders now have a renewed focus on sustainable growth. A report by Gartner looked at the five actions finance leaders can use to drive business growth, and managing costs effectively was one of them. The report recognized the pressures on business profitability and the difficulty of protecting business growth during uncertain times.
My relationship with the CFO is the most important relationship I have at work. We meet weekly and probably talk every day.
“There’s a lot more pressure now to limit your burn and get your cash into a more neutral or positive EBITDA (earnings before interest, taxes, depreciation, and amortization) situation,” Compagni said. “And so with all of these pressures, the HR and CFO relationship is even more critical. My relationship with the CFO is the most important relationship I have at work. We meet weekly and probably talk every day.”
To have productive meetings, you need to understand HR from a finance perspective, Compagni explained. While you might evaluate an HR tool because it could help increase employee engagement, the finance team might be looking at the price tag. To approach it from their perspective, discuss the cost-savings this tool will create long-term and how it will reduce the total number of hours your team spends on administrative tasks.
Leading with empathy is also a good place to start, and Compagni recommends putting yourself in your CFO’s shoes, instead of focusing only on HR needs.
Keeping Communication Lines Open
“The best-case scenario for HR and finance teams is that we are fully aligned, and we are working together on the budget,” Compagni said. “There’s our planning phase and then the execution phase of the budget. We work together on things and adjust as we go based on company performance.”
When HR teams build their hiring forecasts alongside finance teams, both teams benefit. For example, if your company made or even surpassed your revenue goals, people teams can advocate for more investment in the teams building the most profitable products or the teams driving the most demand. At the same time, your hiring plans need to be informed by financial forecasts and reports, and they should change as your business needs evolve.
“I think it's very critical for the most senior HR individual and the CFO to have a very open dialogue,” said Matthew Kupfer, director and senior human resources business partner at Vistra. “That can take on a variety of forms, whether it’s a standing meeting or if something urgently does pop up, we can also get together. As an HR person, I’m viewed by finance as someone who can make or break their financial forecasts or cash flow forecasts.”
It’s important to keep an open line of communication with your CFO, but as changes happen or unexpected expenses are incurred, proactively communicating these developments also helps finance teams react accordingly.
It's really important that whenever I'm speaking to my CFO or any C-suite member, that I have data to back up what I'm saying.
Using Data to Think Like a CEO
When preparing for a meeting with your CFO you need to consider several factors. What is keeping your CFO up at night? Look at the places where your team is spending the most and find out what you can cut, and what is worth the investment.
Start by looking at staffing requirements and analyzing the cost of new hires. Then, review the costs of HR technology that you have or that you want to implement, and how these investments drive revenue, pay for themselves, or are necessary for your company’s development. The more proof points HR managers can share in a conversation with finance leaders, the better.
“It's really important that whenever I'm speaking to my CFO or any C-suite member, that I have data to back up what I'm saying,” Kupfer said. “That way, if they do have a question, I'm able to respond very directly and show the data I have. If we're talking about recruiting and needing to cut down those recruiting costs, we can look at the cost per hire.”
You may look at data like year-over-year retention or spending on new hires per department. Or, if you are trying to make projections, you may want to collaborate on those projections with your finance team to create the proper allocations. Kupfer explained, “If we are planning for economic uncertainty, that could be working out various models with the CFO, and then really maintaining and managing those plans in preparation for different scenarios.”
Questions Your CFO Might Ask You
With all of that in mind, here are some common questions that your CFO might ask you in a planning meeting, and how you can respond:
1. “How are you measuring ROI on your HR initiatives?”
As is the case for all metrics, how you measure ROI depends on what you’re tracking. When Compagni and her team wanted to measure the ROI on a three-module inclusive leadership program they had recently invested in, she said, “We looked at a couple of different things: time to value when people are onboarded, we looked at their engagement scores, we looked at turnover rate by manager and by department. Some of that is qualitative, and some of it is a little bit more quantitative.”
After reviewing this data, it was clear to Compagni and her finance team that the investment was worth it. They found that retention rates increased, and in employee engagement surveys, team members reported having a higher sense of agency and felt they had the leadership relationships and guidance they needed in order to succeed in their roles.
Here are possible ways to discuss the ROI of your HR initiatives:
- After reviewing our engagement scores, I saw that there is a W% increase in job satisfaction since last year, and our retention rates have improved by X% as well.
- Once we invested in our learning and development programs, we looked at our turnover rate, and year over year it has decreased by X%. Our total time to onboard people was X last year, and we've gotten it down to Y, so we’ve seen cost savings totaling Z across all departments and new hires.
2. “How are you measuring the effectiveness of our employee benefits package?”
To best answer this question, Kupfer recommended, “Look at benefit utilization rates. The outcome of looking at your benefit utilization rate is to determine if you are spending your money in the right areas.”
Based on the utilization of certain employee benefits or the lack of utilization of others, you can provide your CFO with this data, then make recommendations to your finance team about which benefits to cut or invest in further. If you save money from your yearly budget, you may be able to invest those dollars elsewhere into programs your team members and top talent care about, like training or learning and development.
Here are possible responses regarding the effectiveness of employee benefits:
- In an employee engagement survey, we asked our team members which were the most important benefits to them. The top three benefits they reported were X, Y, and Z.
- We reviewed the utilization of our most expensive benefits and saw that only X% of our total amount of benefits was being utilized. So, we kept the most highly used benefits, and after doing market research, found several more cost-effective benefits that will save our company Y amount yearly.
3. “How are you measuring cost per hire or revenue per hire?”
Proof points on cost per hire or revenue per hire vary by industry and role. However, if you’re trying to make the case for in-house versus outsourced recruiters, for example, Kupfer said, “You'll look at your total recruitment cost, divided by the number of hires in a period to determine your cost per hire.”
Reviewing metrics like the time to fill a vacancy can be another consideration, and analyzing the time it takes on average to fill a vacancy in-house versus through outsourcing can also help provide finance teams with meaningful metrics to determine the cost per hire. Another important metric is quality of hire, which measures interview accuracy, employee performance, manager satisfaction, and more so you can learn if your hiring process is in good standing or needs improvement.
Here are possible ways to explain how you measure cost per hire:
- I reviewed our quality of hire data and found that managers are reporting X% satisfaction with their team members’ performance, and that is Y% year-over-year improvement.
- I looked at our total amount of recruiting costs and how many employees we hired, and found that it cost us X amount, which was Y amount less than last year. I also found that it has saved our HR team Z hours, and we were able to focus more on V initiative as a result.
4. “How are you measuring our HR tools' effectiveness?”
When looking at an HR information system (HRIS), your CFO will likely want to know the cost per person and the cost of the software subscription. Kupfer noted that you’ll want to factor in “the time the HRIS saves for HR as well.”
If you implement an HRIS with a digital performance management system, for example, you can compare the cost of the HRIS to the employee time saved through automation. Kupfer said, “I would be looking at the cost of the hourly rate for the HR associate, and members of the technology team that would need to implement these annual performance reviews on a regular basis and determine what that cost savings would be on an annual basis.”
Providing metrics on the cost per employee and cost savings of human hours can help people teams rationalize the cost of HR tech investments to CFOs and inform their financial reports.
Here are possible responses you can have to discuss the effectiveness of your HR tools:
- Our team was spending X amount of time onboarding, and now with Y tool we save Z amount of time, which translates to $V in total cost savings.
- Our former HRIS cost X, and could not do Y or Z. Our new HRIS costs V, does everything we need, and is saving our team $W.
Showcasing HR's Value to the CFO
Understanding your CFO’s perspective is key to HR alignment and executive buy-in for your initiatives. By communicating regularly with your finance team, and reviewing your data and metrics to inform your meetings, you will be able to provide information to showcase the ROI behind the work of your people team and how it fits with your broader business objectives.
Learn more about how you can leverage HR technology to showcase ROI for the C-suite with Lattice’s ebook The ROI of HR Tech.
- Especially during periods of economic uncertainty, HR leaders should prepare to answer questions from the C-suite about expenditures.
- Think like a CFO: Know the cost of and the potential cost-savings for your HR initiatives.
- Use metrics to inform and validate HR decision-making.
- Work with finance teams to build forecasts for workforce planning to create buy-in from your CFO and C-suite.