The Economic Impact of HR

The Economic Impact of HR

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How HR drives measurable business success

Human Resources is often thought of as a means to an end. Organizations know that there are innumerable rules and regulations to comply with, and HR is typically their captain of employment law compliance. However, HR management is capable of so much more than checking boxes and parsing legal jargon. For savvy organizations, HR plays a vital, strategic role in their economic success. How? By maximizing one of their most high-cost investments: their employees. 

American businesses are in the midst of an employee engagement crisis. According to Gallup1, only 32% of American workers consider themselves engaged at work. Odds are, even some of your high performers might fall into the 68% of disengaged employees. That’s a massive issue for your organization and its bottom line. With so many employees fighting through a general disinterest or malaise, it’s clearly more than a case-by-case problem. Nearly every business would be well-served by a commitment to building a stronger employee experience and company culture. 

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This commitment is about more than sharing a few laughs over a happy hour and seeing some more smiles in the break room. Positivity is a major plus, but the impact goes much deeper. Forbes noted2 that when organizations focus on employee engagement, they can see up to three times the revenue per employee. When people feel valued at work and have a clear sense of their place in your organization, they’re significantly more productive and, crucially, likely to stick around long-term.  

Human Resources encompasses a vast array of specialized areas of focus, and its scope is constantly expanding in this new era of work. Of course, HR compliance, talent acquisition and management, benefits, payroll, and employee relations reign supreme in most HR departments. However, out of each of those categories sprouts countless branches into different competencies. Think of things like people analytics, compensation analysis, performance management, and more. 

Essentially, successful businesses aren’t rolling out your grandparents’ HR department anymore. Now, HR is a center of excellence and a driving force for positive organizational outcomes. 

TLDR: Effective HR begets efficient employees, which beget growing businesses. Keep reading to learn how we achieve that.


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Four key HR outcomes that drive revenue

  1. Reduced Turnover: Effective human resources management can also help reduce employee turnover, which can be a costly problem for businesses. Some estimates suggest that replacing an employee can cost an organization up to double the departed worker’s salary.3 Worse yet, turnover is contagious. Employees are 7.7-9.1%4 more likely to leave an organization following the termination or voluntary departure of a coworker, and that likelihood skyrockets on smaller teams. In strained economic conditions like those we face in 2023, workers want stability.

    This gives your organization a leg up in retention, but that doesn’t mean you can hold onto that advantage with little-to-no effort. Especially as the relationship between employees and their jobs continues to evolve in a post-COVID world. Don’t rest on your laurels. If your organization wants to avoid high recruitment costs, low morale, and lost productivity, you need strategic HR to build an attractive culture. By creating a positive work environment, offering competitive salaries and benefits, and providing opportunities for career development, businesses can increase employee satisfaction and retention.

  2. Improved Productivity: By effectively managing and developing human resources, businesses can enhance the productivity of their workforce. This can be achieved by ensuring that employees are properly trained, motivated, and engaged in their work. This, in turn, can lead to increased efficiency and output. In fact, according to a study by Gallup5, high rates of engagement have been shown to improve productivity by 18% and profitability by 23% in the surveyed organizations. Additionally, HR can take steps to continually improve the skills of your workforce.

    Companies that invest $1500 per employee in learning and development have reported 24% higher profits than organizations that invested less or nothing at all. This is a must if you want to future-proof your business. Skills degrade every five years, and new must-have skills, such as AI tool proficiency, are constantly bursting onto the scene. HR helps you stay productive and ahead of the curve. Beyond your bottom line and day-to-day productivity, high-quality HR makes your employees safer. The aforementioned Gallup report noted a 64% decrease in accidents and other safety incidents. So at the end of the day, you’ll have happier, healthier, and more productive employees contributing to the success of your business.

  3. Increased Innovation: Investing in human resources can also lead to increased innovation. According to data by CultureAmp6, 80% of engaged employees agree that their company culture nurtures innovation. When workers feel secure in their role, understand what’s expected of them, and are encouraged to speak up, great ideas tend to flow freely. Furthermore, diverse workforces have been proven to out-innovate their less diverse peers. A large-scale McKinsey study discovered that organizations with greater gender and ethnic diversity outperformed less diverse organizations by 36%7.

    Building out a diverse team from top to bottom has major benefits for businesses, and an outward commitment to it might prove essential. 80% of (18-34) year-old respondents in a Glassdoor survey said corporate investment in DEI was important when considering a job8. Building DEI into your HR and recruitment strategy sets your business up for long-term success. When you have a wider array of backgrounds and experiences in your workforce, employees bring fresh ideas and perspectives to the table. This helps your company develop new products and services, stay ahead of your competitors, and grow your business.

  4. Cost Savings: HR and cost savings typically go hand-in-hand. For example, by implementing effective recruitment and selection processes, businesses can reduce the cost of hiring and training new employees. Similarly, by providing employees with the necessary skills and resources to do their jobs well, businesses can reduce the cost of employee turnover and retraining. We’ve outlined those costs above, and they’re certainly significant. Looking beyond the talent end of the equation, HR also saves your business money on otherwise looming threats such as lawsuits and non-compliance fines. Juggling the countless pieces of employment law, such as OSHA, FLSA, ACA, FMLA, etc., takes constant vigilance from experienced professionals. Tack on the ever-evolving state and local landscapes, and you have yourself a verifiable tidal wave of high-stakes, often tedious work.

    Furthermore, every business eventually comes across some troublesome terminations. If your team mishandles a termination, you could be staring down a wrongful termination lawsuit with an average settlement cost of $40,0009. Lawsuits and fines carry hefty costs, derail your momentum, and can negatively impact employee morale. Instead of barely keeping your head above water with compliance, bring in experienced HR professionals to safely guide your business.


Understanding the ROI on HR

Multiple studies have shown that approximately 90% of a company’s market value lies within its people through intangible assets. Most companies’ largest single operating expense is their labor force, yet many overlook their people as an asset in need of nurturing. Due to the expense of maintaining a workforce and the potential value it brings, companies should be investing in their people and developing their skills. 

Studies have shown that for every dollar spent on human capital, the return is 2.5 dollars*(HCMI). Your employees will never be a set-it-and-forget-it expense, no matter how experienced they are. If you aren’t actively prioritizing their development, your workforce will fall behind, and with it, your business. 

A study completed in 2020 by HCMI focused on 41 banks in the United States and uncovered significant, eye-catching results. The study concluded that when companies invest in human capital, they outperform their competitors. In fact, they did so by a wide margin. The five banks that invested the most in human capital grew their market cap by $20.8 billion each. At the end of the seven-year study, the five banks outgrew their peers in the bottom quartile of human capital investment by 33%. 

While your business might not enjoy a $20.8 billion boost, it can still reap the rewards of strategic HR. Moreover, as with any business function, you can measure those results to ensure your investment is heading in the right direction. Calculating the ROI of HR involves comparing the costs of human resources investments (such as recruitment, training, benefits, and compensation) with the financial benefits they generate.

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How HR prepares your business for future success

Your human capital plan should be tied into your business plan. It’s absolutely integral to the long-term success of any business. In order to effectively execute the growth plans of a company, you need the right people in strategic positions across the organization. Investing in attracting, retaining, and developing the right workforce is tantamount to achieving your business goals. You’ll struggle mightily to have one without the other, especially as you grow. 

Former General Electric CEO Jack Welch once said, “What could possibly be more important than who gets hired, developed, promoted, or moved out the door? Business is a game, and as with all games, the team that puts the best people on the field and gets them playing together wins.”

This highlights another vital area of HR, which is the strength of your bench. Too many businesses put off succession planning until it’s too late, leaving them rudderless in key positions. Most companies are not like England’s Royal Family, waiting for someone to die before elevating the next person into a new role.

 If the last couple of years in business have taught us anything, it’s that maintaining a happy, high-performing, and low-turnover workforce is not as easy as it once was. Your company’s key roles should have someone trained to step in and assume the role. Things change fast in the modern workplace. The average employee stays at a job for around 4 years10, and executives sit at around 5 years11. Job hopping is probably only a few years away from becoming an Olympic sport.     

If you don’t offer development opportunities, your workers will gravitate towards workplaces that do. Your competitors will actively target your team members and offer opportunities, leaving you to either desperately throw out pay raises or new titles if you want to hold onto them. 

Don’t let great talent wither away on your bench. Instead, paint a picture of their future at your company, and make it a pretty one. Every employee should understand where they fit in the grand scheme of things and what it takes to grow at your company. Without those critical HR strategies in place, you’ll spend ages (and a lot of money) chasing expensive talent that you might have had under your nose the whole time.

HR drives revenue when ADDA is in the driver’s seat

Investing in human resources has countless benefits for companies, including improved productivity, talent acquisition and retention, increased innovation, better decision-making, and legal compliance. By prioritizing your investment in human resources, you can position your organization for long-term success and growth. However, not every organization has the budget for a robust internal HR team. After all, HR professionals are highly skilled and compensated as such. Other businesses might have an HR team, but they lack the specialized knowledge to execute certain projects. 

If you’re ready to elevate your HR function into a revenue-driving machine, you need experienced, skilled professionals on your side. ADDA offers exactly that. Our consultants have mastered compliance, talent management and acquisition, benefits administration, payroll administration, and much more. Whether you need a full-service solution, or a specialist to guide you through complex projects, such as an HCM technology implementation or data transfer, ADDA’s team is here to help.

 Contact us today to learn more about how we can help! 


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