Hr and-finance-partnership-opportunities-towers-watson


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"To learn more about how and where HR and Finance can partner more effectively, Towers Watson recently completed a new survey, Driving Performance Through HR and Finance Collaboration."

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Hr and-finance-partnership-opportunities-towers-watson

  1. 1. Driving Performance Through Enhanced HR/Finance Collaboration Effective working relationships across functions — particularly HR and Finance — have traditionally eluded many organizations. A siloed approach won’t work in the future. July 2013
  2. 2. Success Through Partnership If the U.S. recession focused companies chiefly on fiscal restraint, the recovery is putting growth back into the strategic equation. Amid strong (if still somewhat volatile) stock market performance and increasing consumer confidence, organizations across many industries are weighing various growth strategies and actions to boost performance and ensure they can meet critical revenue and profit projections. Along with the improving climate comes the need to recalibrate the balance between cost management, a perennial focus for fiscal health, and talent management. We’re already seeing senior leadership teams organize around the increasing convergence of business, financial and human capital objectives. Growth depends, after all, on a competitive cost structure on the one hand and an appropriately sized and skilled workforce on the other. Among the key questions leaders need to consider: •• How will our business goals and strategies change over the next three to five years? •• What cost pressures will we continue to face? What level of performance do we have to deliver, and what’s the best way to achieve that? •• What do we need from our workforce, and how much do we have to invest — and in what areas — to achieve these goals? •• What should our return on that investment look like — in terms of productivity, engagement, retention or other key behaviors — and how can we consistently measure and manage reward return on investment (ROI)? These are not questions any single part of an organization can or should consider in isolation, especially given the complexities of today’s global market for business, labor and capital. The right answers depend on joint decision making that reflects and prioritizes across a multiplicity of views — from those managing the business day to day to those responsible for its employees and HR programs, to those overseeing its fiscal structure and soundness. While effective working relationships across functions — particularly HR and Finance — have traditionally eluded many organizations, a siloed approach won’t work in the future. The interdependencies and complexities between financial, risk and human capital issues are just too great for virtually any business today. “We found surprising commonality in the views “ of Finance and HR in many areas, indicating a strong foundation on which the two functions can unite around a mutual cost, risk and talent agenda, and build an effective and sustainable partnership for the future.” The good news is that we’re seeing signs of greater collaboration between HR and Finance. But how fast and how broadly does this need to take place? What are the obstacles to overcome and what are the advantages of a genuine collaboration of equals in helping drive an organization’s growth and performance agenda? Driving Performance Through Enhanced HR/Finance Collaboration 1
  3. 3. A Solid Foundation, but More Change Necessary Snapshot: Collaboration HR and Finance agree they work together, but how much and on what varies considerably. Finance agrees 46% HR agrees Develop annual budgets 62% To understand the trend, Towers Watson recently surveyed 340 senior HR and Finance executives about the cost, risks and ROI of their reward programs, and the nature of their own relationship. (See About the Survey, inside back cover.) We found surprising commonality in their views in many areas, indicating a strong foundation on which the two functions can unite around a mutual cost, risk and talent agenda, and build an effective and sustainable partnership for the future. In fact, both respondent groups agree they already work together in several key areas, and both see more collaboration in their future. Our top findings at a glance: 39% 41% 35% Set workforce strategy 23% 43% Determine changes to reward programs 42% 49% 2 Set strategy for reward programs More collaboration in the next three years 70% •• ROI is a serious consideration for both functions and an area ripe for improvement. •• Both groups agree people play a critical role in driving performance, although some differences emerge in how to maximize this role through incremental investments in rewards. •• Both groups also have similar views about the top risks of their reward programs, citing inadequacies in leadership development, retention programs and their level of investment in talent. Both also expressed concern that their reward programs were not sufficient to drive the level of innovation needed in the future. •• Top priorities for both groups in the next three years are aligning and differentiating rewards relative to performance, supporting both productivity and cost management goals. •• Pay issues currently draw the most attention from both HR and Finance, but there is an opportunity for enhanced collaboration in benefits, given both the magnitude and volatility of the costs involved, and required plan changes, especially in health care.
  4. 4. Building successfully on this existing foundation will require change from both functions, particularly in understanding each other’s challenges, biases and capabilities. Recognizing and respecting the very real impact each function currently makes on the organization is a necessary first step in seeing how collaboration can increase that impact. A joint approach to achieving talent goals at an affordable cost ensures the organization has the capabilities it needs within a competitive overall cost structure. It gives Finance a clearer view into why certain investments are critical and what outcomes they drive. It helps HR understand where the fiscal pressure points are and how to optimize value for cost in shaping effective talent and reward programs. Aligning Rewards to Drive Enhanced Performance If there’s a critical rallying point for HR, Finance and business units, it is how — and how well — the organization drives the behaviors and outcomes it needs from its people. Do the functions and business units work collaboratively to ensure their people programs are designed to deliver a direct and measurable impact on financial performance? Is there is an appropriate return on the investment the organization is making in its people, in terms of their productivity, behavior and performance? In other words, how well are programs aligned to business strategies, objectives and the drivers of value for the business? Based on our survey results, both sets of respondents see fairly good alignment between reward programs and financial goals, although somewhat less alignment (at least in HR’s eyes) around talent goals. Given five-plus years of relative austerity in program investments, this isn’t surprising. But it does underscore the need to recalibrate alignment on the talent side of the equation. Snapshot: In or Out of Alignment? HR and Finance are surprisingly in synch in certain areas, but view cost and risk-related issues differently. Finance agrees 64% HR agrees Reward programs aligned with financial goals 74% 61% Reward programs aligned with talent goals 60% 56% Investment in rewards produces acceptable ROI 61% 57% 58% 60% Reward programs instrumental in driving behaviors/ actions needed for profitable growth Executive incentive programs structured to discourage excessive risk taking Rate of increase in rewards is manageable 58% 74% 71% Driving Performance Through Enhanced HR/Finance Collaboration 3
  5. 5. The Art and Science of Optimizing Rewards For many organizations, total rewards expenditures (the combination of pay, incentives, health care and retirement benefits, training, and related workplace programs) dwarf many other corporate investments. In the U.S., health care benefits alone have become such a sizable percentage of the total rewards package that, in some companies, they’ve crowded out even annual salary increases. Both HR and Finance have a shared, vested interest in ensuring that this growing expenditure is allocated efficiently and yields a desired return, whether measured in employee and organizational productivity, talent retention, employee engagement or other metrics. Executives often believe they’re not getting the return they need on their reward investments. Employees may not see or appreciate the value of what they’re receiving in the aggregate from the organization. Programs come to feel like entitlements that don’t drive the right behaviors. The link between rewards and behavior may be unclear or poorly communicated. Total rewards optimization (TRO) is a rigorous, analytic tool that addresses and corrects alignment between reward spend and desired corporate outcomes. It combines employee trade-off analysis (pinpointing what really matters to people) with portfolio optimization to present a set of efficient investment allocations. This analysis illustrates how various changes in programs (improvements or cutbacks) will affect specific employee behaviors being tested and identifies the precise impact on company costs (net increases or decreases) relative to the changes in behavior. Through this process, TRO answers three critical questions for HR and Finance: 1 2 3 •• What’s the right overall level of total investment in rewards? •• What’s the best way to allocate that investment across reward elements to maximize the employee behavior we want to influence? •• How do these results vary across targeted employee segments (whether by business unit, age, job level, tenure, skill group, location, performance or other categories)? “Total rewards optimization (TRO) is a rigorous, analytic tool “ that addresses and corrects alignment between reward spend and desired corporate outcomes.” 4
  6. 6. Of greater concern is the relatively lackluster level of agreement by both functions (61% for HR and 56% for Finance) that their programs produce an acceptable return on investment. We’d expect to see far higher agreement on a key point like this, especially considering the importance of demonstrating ROI on virtually any significant corporate investment. It’s indicative that both functions recognize and have concerns about some degree of current misalignment, particularly in defining specific expectations for employee behaviors and performance. “Maintaining alignment between workforce “ programs and business strategies is the only way to ensure a high value-to-cost ratio.” Maintaining alignment between workforce programs and business strategies requires repeated assessment and monitoring from HR, working closely with both Finance and business units. It’s the only way to lay the foundation for achieving desired ROI and ensuring a high value-to-cost ratio. In the end, HR and Finance both need to feel comfortable that the monetary investment in workforce programs is appropriate for the outcomes being achieved, and that can only occur when the two functions bring their respective views together. (See the Art and Science of Optimizing Rewards, page 4.) And without formal and regular checkpoints, it’s difficult to achieve desired levels of performance on a sustained basis, whether for individuals, business units or the enterprise overall. The fact is, alignment is not a one-time or one-off activity. Rapid shifts in business strategy often outpace related programmatic changes. The drivers of business value may change — without corresponding changes to performance goals or incentive programs. Well-intentioned programs — such as a new performance management system — may produce unintended (and sometimes adverse) consequences, necessitating quick fixes that don’t hold up over time. In Their Own Words: What respondents cited as critical shared priorities: data right financial results “Driving performance accountability” benefits Finance “Making sure incentive programs are rewarding the right people for the right financial results” provide competitive HR attract top talent “Forecasting workforce needs, accounting for the contingent workforce, managing workforce costs, workforce planning” manage dollars planning “HR must initially work to attract the top talent that brings new dollars in the door, and Finance must help manage those dollars to further leverage our advantage” costs accountability “Ensuring we provide competitive benefits to employees while effectively managing the explosive growth in costs” incentive programs Forecasting rewarding trends “Informing strategic planning with workforce data and trends” Driving Performance Through Enhanced HR/Finance Collaboration 5
  7. 7. Realignment starts with a key question: What does the business need to achieve, and how should it structure rewards to achieve those goals and drive the right actions and behaviors from employees? Among the related questions: Are key performance indicators clearly defined and connected to the performance management system? Does the organization have a performance scorecard that considers performance across workforce, operational, customer and financial metrics? Do employees understand the business model, the key performance indicators and how the organization makes money? Do they have a clear sense of where their role “sits” within the organization and which of their day-to-day activities matter the most to its success? Do employees in risk-heavy roles such as investment understand the scope of their responsibilities? Are they inadvertently being rewarded for risky behavior? Do managers have the training, tools and motivation to recognize and appropriately align rewards with individual performance, both good and poor? Do performance management programs and incentives create appropriate line of sight to key performance indicators? Two important tools in addressing these issues are value-driver analysis and value trees. (See illustrations, below and on next page.) The former identifies the financial metrics that drive value for the organization as a whole and compares its performance with that of selected peers to translate business strengths and weaknesses into specific workforce and rewards opportunities. Value trees cascade those enterprise-level drivers down through the organization, basically deconstructing high-level metrics into component job-specific actions and behaviors essential to achieving financial, customer and operational goals. Used together, these tools not only provide a clear strategic direction for the senior team, but offer an equally clear line of sight for employees from their work to the broad strategic agenda. Value-driver analysis 1: Defining the greatest opportunities for improvement ILLUSTRATIVE COGS as a % of Revenue Revenue Growth Labor Expense as % of Revenue Cash & ST as a % of Revenue SG&A as a % of Revenue Operating Margin RONA (Pre-Tax) Net PP&E as a % of Revenue Inventory as a % of Revenue Working Capital as % of Revenue Receivables as a % of Revenue Net Other Assets / Goodwill as % of Revenue Accounts Payable as a % of Revenue Long-term liabilities as a % of Revenue Capital Turnover LEGEND ABC 75th Percentile 50th Percentile 25th Percentile Bold% % % % Strengths Areas for Improvement Proprietary and Confidential. For Towers Watson and Towers Watson client use only. This analysis shows management the interrelationships among various operational and financial metrics, and helps identify the levers to pull to impact results. In a specific company situation, management would see exactly how the company’s performance in each area compared across quartiles to that for a defined peer group. Among the questions this can help answer: •• What are the cost/benefit trade-offs between different improvement opportunities? •• What are the key metric(s) to measure the effect of improved performance? •• What systems exist today to monitor/track these metric(s)? What influence can different employee groups have on each metric? 6
  8. 8. This analysis expands the view into peoplerelated costs, again showing how various costs combine to impact broader business metrics, and (in an actual case) including competitive quartile data to better understand the company’s position in its industry. This analysis can help determine: Value-driver analysis 2: Determining key people cost drivers ILLUSTRATIVE COGS (as a % of revenue) Short-term incentives (as % of cash compensation cost) Health care (as % of total benefits expense) Cash compensation expense (as % of revenue) •• Which areas of people cost impact SG&A and Cost of Goods Sold and to what extent? •• Are there better ways to allocate people costs to drive growth? •• What actions could better optimize the reward mix? Operating margin SG&A (as a % of revenue) Labor expense (as a % of revenue) Benefits expense (as % of revenue) Revenue growth Retirement (as % of total benefits expense) LEGEND ABC 75th Percentile 50th Percentile 25th Percentile Bold% % % % Strengths Areas for Improvement Value tree 1: Deconstructing a high-level value driver Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Subordinate Drivers Market Share Order Backlog Primary/Secondary Drivers Business Driver Tonnage Sold Average Market Price/Ton Total Net Revenue Other Revenues Scrap Costs Yield Cost of Scrap and Other Raw Materials Plant Overhead Division Payroll Depreciation Yield This analysis continues to deconstruct the broad drivers of business value into more specific operating processes and actions, helping identify very specific interventions in terms of cost reduction, revenue growth or process improvement. Conversion Costs Selling Costs Cost of Goods Sold SG&A Corporate Allocation of SG&A Warehouse Staff Payroll Costs Supplies Warehousing/Delivery Costs RONA Freight Costs Gross PPE Net PP&E Accumulated Depreciation Current Assets Current Liabilities Net Working Capital Capital Turnover Primary driver Goodwill & Other Assets Secondary driver Value tree 2: Primary and subordinate drivers Subordinate Drivers Primary Drivers Cash Tax Rate Business Driver Subordinate driver Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Employee Knowledge of Steel Making Process and Customer Specifications Employee Skill at Handling Steel-Making Equipment This final example completes the “deconstruction,” showing the wide range of factors (from employee skill, to packaging procedures, to extent of on-time delivery) that are the ultimate targets for greater efficiency and effectiveness in order to improve results at the enterprise level. Quality Process Control Mechanisms Types of Equipment and Technology Mill Capacity Customer Demand Product Mix Customer Satisfaction Geographical Location of Plants Conversion Costs Material Costs Cost of Product Material Yield On-Time Delivery Truck Residence Time Packaging Customer Service Product Identification Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Driving Performance Through Enhanced HR/Finance Collaboration 7
  9. 9. Improving ROI Demands the Right Metrics Snapshot: Types of Metrics Used Finance agrees 69% 56% 6% HR agrees 64% of all respondents use financial metrics 53% of all respondents use workforce metrics 12% of all respondents don’t measure rewards ROI at all 57% 48% 21% The majority of our respondent organizations are measuring reward ROI, most typically with financial metrics (like labor cost as a percentage of revenue) and at least one other type of metric. But very few — just 11% of the total sample — reported using all four of the measurement categories that form the basis for a balanced scorecard (shown below). Yet in one of the most interesting findings from the survey, those 11% also reported better outcomes than the rest of the sample, particularly in terms of reward alignment and adequate ROI. Specifically: •• 84% of this group reported strong alignment with financial goals, compared with 71% of those using only financial and workforce metrics and financial metrics alone. •• 76% of this group reported their reward programs produced an acceptable ROI, compared with 68% of those using just financial and workforce metrics and 56% of those using only financial metrics. •• 76% of this group also agreed their reward programs were instrumental in driving the behaviors and actions needed from employees, compared with 63% of those using financial and workforce measures, and 58% of those using only financial measures. While this is a good illustration of the truism that what gets measured gets managed, it also speaks to the importance of a holistic approach to measurement that explicitly recognizes the important linkages that exist from workforce and reward programs, to employee behavior in day-to-day operations, to customer behavior and ultimately to financial performance. The Linkage Framework In Practice Percentage of total respondents reporting use of metrics for reward ROI Workforce Customer Financial 53% 8 Operational 47% 27% 64%
  10. 10. Think of this linkage framework (illustrated below) as the mirror image of value-driver analysis. In the latter, enterprise goals are deconstructed into unit and individual activities, and cascaded down through the organization via a comprehensive goalsetting process to ensure that employees know what’s required of them. The linkage framework, by contrast, supports connections across the organization. It starts with an examination of workforce programs — rewards, communication, performance management, career development — and considers the extent to which those programs help produce the right behaviors and performance. Do they encourage high employee engagement? Do they incent desired contribution levels? Do they present a compelling value proposition to keep people at the organization? The next link focuses on how employee behaviors affect customers. Are satisfaction levels where they need to be? How loyal are customers? Do they purchase across the product or service line? Is word of mouth positive? The final link in the chain is financial results — a direct outcome of customer behavior. Are sales and revenues up? Is the business operating profitably? If operating costs are cutting into profits, where do the problems lie and what changes are required in which parts of the chain to achieve desired margins? By explicitly connecting metrics from the bottom up and the top down, companies can ensure there is appropriate alignment across the organization. Employees understand why and how their role contributes to stated business goals and how their own performance will be assessed and, ideally, see the link between their rewards and successful achievement of goals. Communication of metrics, establishment of specific individual goals and ongoing performance management also depend on managers who both understand their own roles and goals, and can articulate the organization’s goals in a meaningful way so employees see the linkage. The Linkage Framework Connecting the dots from people and programs to business results People programs and process Employee behavior Customer behavior Financial performance Leadership Engagement Customer satisfaction Revenue growth Reward programs Retention Customer attraction Labor/Operating cost Talent management Productivity Customer retention Operating margin Learning and development Customer service Portfolio penetration Net income Internal communication ROA/ROE/ROIC Assets/Liabilities Total shareholder return Driving Performance Through Enhanced HR/Finance Collaboration 9
  11. 11. Narrowing the Gap on Benefits When it comes to HR and Finance collaboration, the benefit arena is prime turf. HR relies on retirement and health care programs as key elements of the employee value proposition to help attract, retain and manage the flow of talent. Finance pays close attention to the costs and cost volatility of pension programs and the annual cost increases of health care programs. Both can have a large impact on an organization’s bottom line. Now, external factors, particularly health care reform, are raising the stakes for benefit design, delivery and funding. As public exchanges open for business in 2014, organizations are rethinking their health care strategies for active, part-time and retired workers. Plus, a looming excise tax hitting in 2018 is adding to pressure to manage costs effectively and avoid triggering the tax. While many companies may not rush to the exchanges for their active employees, the new options for retirees — particularly pre-65 retirees — can be immediately appealing and a potential game changer. On the retirement side comes a wave of boomer retirements, with 10,000 or more Americans becoming eligible for Social Security and pension benefits in one form or another every day. 23% of Finance respondents and 32% of HR respondents said they Yet, just currently work most closely on retirement 49% of Finance executives and 38% of benefit issues — even though only HR executives feel their current reward programs enable their company to manage retirement patterns and ensure an orderly flow of talent through the organization. These issues highlight important differences between the HR and Finance perspectives. HR more strongly believes the rate of increase in reward programs is manageable, while Finance believes that reward programs will enable predictable retirement patterns and the orderly exit of talent. Moreover, and somewhat surprisingly, a greater percentage of Finance than HR executives also believe that increasing investment in health care and retirement benefits would create more value for their organization. Currently, 40% of Finance executives say they work most closely with HR on benefits, compared to 57% of HR executives who say the same about working It’s an issue tailor-made for HR and Finance collaboration, given the magnitude of the costs and liabilities involved and the personal consequences for both current and future retirees. The move from defined benefit to defined contribution plans shows no signs of abating, leading to a sharp increase in the number of workers without the security of a pension plan, and much uncertainty for those employees as well as their organizations. 10 with Finance. The need for a greater common understanding exists now and will become only more urgent in the future. A good starting point is agreement on alignment, metrics, ROI and risks of benefit programs. And a dual perspective and partnership on these issues will offer many advantages, not only to ward off any potential adverse impact, but also to use benefits as a positive differentiator in the years to come.
  12. 12. Setting Priorities for the Future With both functions generally agreeing more collaboration is in their future, what do they see as their likely joint agenda? One focus may well be people risk — an issue that struck a common chord on both sides. Both respondent groups identified the same three top risks related to reward programs, and all related to inadequate development, retention or investment in talent. The other critical focus — also related to managing these risks— is improved differentiation of individual performance and linkage of rewards to both individual and corporate results. Both goals are closely connected and support the twin needs of optimizing reward spend and ensuring investments are allocated in the right ways, for the right people (e.g., top performers and high potentials) to deliver the right value-to-cost ratio. The time is right for an HR/Finance partnership. Both functions face related challenges in dealing with the realities of a global, highly interconnected economy. Technology, changing consumer behavior and demographics are reshaping traditional business models and affecting organizations’ cost structures and skill needs. Business risks have magnified as organizations move into emerging markets with minimal infrastructure and deal with increased political and social instability in various parts of the world. Aging populations are putting additional pressure on retirement programs and costs, and posing labor risks as well, as older employees stay in the workforce and gaps emerge in finding sufficient supplies of new skills. Sources of skilled labor are slowly shifting from the developed to the developing parts of the world, raising the ante on what it takes to attract and retain critical talent, and keep diverse and dispersed workforces engaged and productive. Those organizations that stay ahead of these massive shifts will be the ones that break through their traditional silos and bring together their experts in developing human capital, managing and investing financial capital, and keeping the business engine running efficiently. Snapshot: Risks and Priorities HR and Finance have very similar views about key risks and top priorities for the next few years. HR agrees Finance agrees Top risks of current reward programs 44% 40% 34% Inadequate development of future leaders Inadequate retention of people/skills required for growth Inadequate investment in talent for critical roles 60% 49% 50% Top priorities for the next three years 40% 37% 38% Increase linkage of rewards to company performance 48% More clearly differentiate rewards across talent segments 56% Increase linkage of rewards to individual performance 43% Driving Performance Through Enhanced HR/Finance Collaboration 11
  13. 13. Case Study: Reward Alignment Yields an Optimized Program A global auto manufacturer’s complex organizational structure, paternalistic culture, generous benefit plans and diverse talent pool had yielded a costly reward structure that was affecting its competitiveness in the market and its ability to maintain its loyal customer base. As a starting point, the company had to identify ways to reduce costs and improve the efficiency of its pension and health care benefits, while enhancing the attraction and retention of key talent. Rather than approach the problem piecemeal, the company undertook a strategic review of its total rewards strategy, drawing on insights gleaned from business results, executive interviews, employee focus groups and benchmarking analyses. It then developed a new philosophy and guiding principles better aligned to its business strategy, particularly its productivity, innovation and growth objectives. Results The company developed a multiyear implementation strategy that gradually phased in major changes in programs. It began by establishing a shared services function to provide more consistency in rewards across its many business units. Then, it developed a plan for phasing out the defined benefit pension plan, closing it to new entrants and giving employees 12 choices among other plans. Compensation programs were redesigned to better align with the marketplace for highpotential employees in pivotal talent pools. In addition, the company developed a new bonus program that places more emphasis on personal and business performance. Next, it will consolidate its health plans to leverage cost savings and administration efficiency. New talent management, and learning and development programs based on the organization’s core values are currently in the development phase. Impact Through this work, the company was able to rationalize its total rewards investment, and resize and reallocate monies to ensure it was spending on the right programs in the right ways. That is the essence of reward optimization. Specific outcomes included: •• Improved employee performance and engagement •• Reduced benefit costs and volatility •• Streamlined, and more efficient and effective administration •• Improved associate understanding of total rewards •• Improved ability to attract and retain critical talent •• Enhanced associate mobility
  14. 14. About the Survey We undertook this survey of senior HR and Finance executives to evaluate how the functions are collaborating today and the extent to which they recognize the strong connective tissue that ties their respective domains together. We conducted the survey with Forbes Insights in the first quarter of 2013, and drew responses from 340 executives representing global (51%), international (23%) and domestic (26%) organizations. The survey cut across industries but drew large samples from financial services, health care and manufacturing.
  15. 15. About Towers Watson Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 14,000 associates around the world, we offer solutions in the areas of benefits, talent management, rewards, and risk and capital management. Copyright © 2013 Towers Watson. All rights reserved. TW-NA-2012-28883 | |