Transforming HR From Cost Center To Profit Center

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hanging Problem To Solution, Puzzle To Answer One of the things that first struck me when I moved from in-house HR and Recruitment to the consulting side was how great I felt about being a revenue generator, creator and producer. I was happy to not simply be a cost center or a ‘drain’ on resources, which in my opinion, is the unflattering and inaccurate description of the in-house HR function.

A competent HR and recruitment function is value adding, make no mistake about it; it’s maybe just that the PR case has simply not been made. In-house HR and recruitment has been held back by its false image as a cost center, which in my opinion, has damaged its reputation, dampening its voice in the boardroom, depressing salaries for HR members (compared to other cost centers) and making them often an unfair target for cut backs when cost savings are required.

I think it’s time for HR and in-house recruitment to fight back, and one way it can do this is to abandon its severely limiting cost center tag and assume its rightful status as a profit center and even revenue generator for the business, raising the profile and internal perception and perceived worth of HR in the process. And below, I have outlined three increasingly progressive ways to help you do this.

1. Demonstrate that in-house HR is the most profit-enhancing alternative

In this model, we are not strictly showing that HR is a profit center per se, but in this option we show that your in-house HR model is the most cost effective and therefore profit enhancing alternative available to the business. So, in using your HR operating model, as opposed to other alternatives, they are saving $X each year, thereby increasing profits.

To implement this model, why not cost up the services that your HR organization offers, e.g. hiring, performance management, pay benchmarking, benefits design, etc., and benchmark this against the likely cost if these same services were done using consultants and line managers. You should be able to easily demonstrate that your in-house HR model is the most cost effective way to do HR and is saving your business X dollars each year, raising profitability by X %.

Put simply, if in-house HR wasn’t there, the alternative would cost them more and would be lowering profits, hence in-house HR is the most profitable alternative. Present your figures each year to hammer home the point. If it isn’t the most profit enhancing way (and of course value adding way) to do HR, then maybe the strategy needs to change.

2. Charge for internal services

Many larger organizations adopt this approach. In this model, you educate the business as to the financial value that in-house HR brings by operating an internal charging model, where you charge out your services in order to cover the cost of running your department, e.g. salaries, equipment, talent management programs, etc. The charges can reflect the rates the business managers would have to pay if they acquired these services externally. You should be able to demonstrate quite clearly that the in-house HR model is at least cost neutral and arguably profitable.

3. Sell HR Services Externally

This is perhaps the most radical HR approach adopted by the likes of IBM who developed its own internal HR Service center and created an externally facing version that offered HR services to the other businesses. It’s called Global Process Services. 

To do this, you would need to develop high-quality, well-branded internal HR services to an excellent standard. For example, a great starting point is offering training courses. You could develop and perfect a range of training courses that you would supply to your managers and then you can adapt them and market them to external applicants and businesses, using your company’s consumer brand to back your HR function. You will effectively be running as an externally facing in-house HR function, generating real, incremental revenue to support your internal HR Function. If you can make this work you will be a true, revenue generating profit center.

Turning in-house HR into a profit center is by no means an easy option; it is in many ways quite a disruptive HR strategy, but the returns are potentially great in that it will increase the reputation, internal standing and autonomy of the HR function, which are all good effects.

By Kazim Ladimeji