The current economic downturn and subsequent intense organizational financial scrutiny has brought the role of the human resources (HR) director front and center. To protect the bottom line, chief executive officers (CEO), chief financial officers (CFO), and program staff realize that mission fulfillment and metric realization is contingent upon making sure the right administrative, program, and development human resources are in place and will remain in place for both the short and long term.
While CFOs own the financial bottom line and reporting, development directors own the fund-raising function, and chief program officers own the efficient and effective delivery of programs, HR directors own the organizational and salary structure. The recent economic upheaval has opened up the opportunity for HR directors to solidify their role as a strategic partner in the organizational financial decision-making process, as they are tasked with increased responsibility and account- ability for the bottom line. CEOs and CFOs must look to the HR director as a strategic lead in closing short- and long-term revenue and contribution budget gaps.
Evaluating the Tipping Point
In today’s financial environment, the HR function must identify—sometimes creatively—structural options for the organization, including salaries and benefits, and must understand the crucial “tipping point” of the options’ impact on the mis- sion and staff when reducing expenses. While most nonprofits are relatively lean in terms of their other-than-personnel costs (OTP), between 50% and 70% of expenses are personnel, staff, and benefits. The HR director is charged with identifying any number of across-the-board expense-reduction options, such as cutting pensions, increasing employee contributions to medical insurance, limiting merit increases, and suspending cost-of-living allowance (COLA) increases.
If a significant revenue gap needs to be closed, it may result in devastating cuts to staff and benefits. Productive staff will leave, less productive staff will remain, and new productive staff will be hard to find. This will happen in administration, program, development, and leadership positions. The result could be that program targets won’t be reached for performance-based grants, resulting in loss of revenue, and cost reimbursement grants may have unfilled positions, impacting indirect cost recoveries. If the HR director can’t articulate and honestly assess the impact of salary and benefit adjustments, then the quality of staff and programs may diminish the organization’s reputation and significantly alter the business strategy, as revenues become harder to find.
The trade-off between organization-wide pain (horizontal cuts) or dramatic program pain limited to a few programs and a few staff (vertical cuts) is the difficult decision many nonprofits are currently facing. It is here that HR directors can provide critical advice and map out the short- and long-term ramifications of all choices with consideration of what the organization does, why it does it, and what is most important to the mission. To comprehend these ramifications, HR directors should understand program economics, that is, the net income of specific programs or grants, to make the decisions needed and connect them to the mission. For example, if a program is losing money or is not core to the organization’s mission, staffing and benefit cuts should be made vertically. The choice becomes more difficult if a core program is losing money.
Since HR directors are ultimately responsible for the organizational structure, they should also be the experts on running each department efficiently and effectively with fewer staff. Given their global organizational perspective and compliance expertise, they should understand how departments or projects can collaborate or share staff and how an efficient administrative staff can save time and liberate program staff to focus on their critical programmatic functions. From a revenue standpoint, an HR director should help determine which staff— besides the development team and CEO— should be trained to grow current programs and seek new revenue sources. An HR director needs to understand and evaluate how adding to or investing in organizational development capacity can increase contributions over time.
Cultivating Bottom-Line Orientation
The metamorphosis of the HR director to bottom-line visionary will not happen overnight. Most CEOs have not always called on HR directors to think strategically, nor have they been aware of how their recommendations and a proactive role can significantly affect organizational change and bottom lines. Additionally, the transformation requires a shift in thinking from the CEO, COO, and CFO. The HR director is too often viewed as a “people person” who might favor individual staff sensitivities over insensitive bottom-line calculations. For this reason, many HR directors may not be given a seat at the table when organizations make strategic bottom-line decisions. But times have changed, and now more than ever the HR director is needed as a key player in maintaining a strategic balance between the bottom line and organizational morale and capacity. Senior executives can cultivate and solidify the HR director’s ascendancy to the inner circle by requiring the following characteristics of their HR leadership:
Understand the organization’ s financial big picture and integrate it into the HR decision-making process. HR directors must be able to determine whether and how to cut back or to invest and grow, based on the organization’s financial position and goals. HR directors should understand temporarily restricted net assets and how the staffing structure is allocated to grants and contracts. For example, an organization that is sitting on millions of dollars in reserves but has high staff turnover rates due to lack of salary increases needs the perspective of an effective HR director to consider different budgetary allocations and their impact on the bottom line.
Communicate assertively and with purpose. An HR director’s voice needs to be heard. He must speak up if he thinks the organization has gone too far or hasn’t gone far enough in its decision making. He should make every effort to acquire a seat at senior staff meetings and communicate that he is an agent of change and an important contributor to financial and programmatic goals. Explaining to the right constituencies what the HR department is doing provides a level of transparency that can pay off tremendously with the entire staff, if done correctly.
Think strategically and creatively. An HR director has the perspective to model what different organizational and departmental salary and benefit structures might mean in terms of productivity, staff retention, and cost efficiencies. HR directors should have a clear understanding of each department’s goals and should think through how they may internally—and perhaps externally—collaborate, merge, or share.
Take responsibility for drawing a fine line between the passionate assessment of how staff is feeling and the dispassionate assessment of how that translates into action. The bottom-line-oriented HR director will be straightforward with the senior staff about the reality of the organizational mood and the impact of the choices management makes. HR directors have to find ways to understand company morale and the impact of collective emotions on collective and individual actions. They should also have a vision of what they want the corporate culture of the organization to be and whether it is compatible with the organization’s financial resources and mission.
The Impact of Repositioning
Motivated HR directors with an agenda and a seat at the senior management table present several ramifications for their organizations and the nonprofit HR profession. The responsibilities are then greater, as is the pressure from new internal and external constituencies. The result should mean more exposure to the board—including the impetus to set up a personnel or human resources board committee—increased interaction with the CFO and finance committee, and increased interaction with financial and programmatic decision makers. HR directors with MBA or MPA backgrounds are now more desirable. Ultimately, the role of the COO—or Chief Financial and Administrative Officer (CFAO), as is the latest trend—who oversees finance, HR, IT, and other support and administrative functions, might be the next step for the HR director. HR director salaries will increase, as supply and demand dictate, though it should be pretty clear that the financial impact of a good HR director will quickly and easily offset such increases.
For-profit HR directors may also begin to make the transition to the nonprofit sector and increase the pool of talent avail- able. This transition will only make sense if a nonprofit organization’s needs are such that it can take full advantage of the for- profit HR director’s experience, willingness, and ability to adapt to the changing—but still distinctive—nonprofit culture and structure.
The current economic climate has forced organizations to put all their cards on the table and consider all options. The HR director has emerged as a powerful force in a nonprofit’s organizational response—not only to ensure organizational survival, but also to define an optimal organizational structure for mission fulfillment and growth as the economic climate improves. Some may be concerned that to emphasize the bottom line in the world of HR directors may result in a less personal, mission-minimal approach to the business. But because HR professionals with an eye on the bottom line also have an eye on the most efficient and effective way to deliver the programs to achieve the mission, they understand that staff satisfaction and limited turnover are critical to maximizing administrative, managerial, and program human resources capacity. The increasing focus on human resources issues as non- profits adjust to new financial realities and societal needs will ultimately reward the strongest, most effective organizations and will guarantee that HR directors continue to ascend the nonprofit managerial hierarchy for years to come.
This article originally appeared in the July 2009 edition of the CPA Journal.