The Financial Innovation HR Needs

I recently came across a post on IDEO's blog that highlights things some of their talent would love to redesign. The Olympics, bedpans, and channel surfing all make the cut. It got me thinking, What parts of HR would I love to redesign? I could make a joke here, that the same two parts that come to mind for me I think come to mind for most people:

  1. Everything HR does.
  2. Everything HR says.

Behind that joke would be a lot of truth—the conversations we have today have aren't substantially changed from 20 years ago. Despite some refreshingly positive outliers, as a general rule the software HR uses is still behind the times; HR has neither the budget nor the strategic charter to be proactive; the hiring process is broken, on-boarding sucks, professional development is a crapshoot, and alumni relations are almost non-existent. HR is a function eternally on the brink of an evolution that never quite arrives.

And as I catalogued areas ripe for redesign, I realized why. There's one change that sits above all others, and until this change is made, nothing will change:

We need to redesign how "people" show up on financial statements.

The way businesses account for their employees, like the way they account for everything, is set by FASB. FASB is the Financial Accounting Standards Board, the governing body that sets GAAP accounting rules... which are the "generally accepted accounting principles" that dictate how a company classifies, values, and treats its assets, liabilities, revenues, expenses, etc. GAAP standards are what makes our stock market and our broader economy as robust as they are.

Currently, GAAP treats "people" as an expense rather than as an investment. And that's HR's problem.

Who from HR is lobbying FASB to fix this bizarre situation?

When you make an investment, you get an asset that offsets the cost incurred to acquire it. While the asset's value may go up or down over time, in the moment you buy it, you're square. That trade-off is the hallmark of an investment.

But expenses don't work like that. There's no trade-off. Expenses don't provide any financial benefit to offset what you spend.

So when a business "invests" in its people, it's not actually making an investment. There's no asset that shows up in the financial statements to offset what the company has spent. No trade-off, no investment. It's an expense.

So while everyone *knows* that people drive the value of an organization, it is impossible, financially speaking, to show a direct ROI on employees' contributions. You have to deduce that by reverse engineering the balance sheet. And even then, it only works in certain circumstances. You can (and should) read about this sophisticated process in Tom McGuire's and Linda Brenner's fantastic book, TalentValuation.

And you know who from HR is lobbying FASB to fix this bizarre situation?

No one, from what I can tell.

I'd change this.

Treating people-related costs as the investments they are will finally unlock HR's promised evolution.