CFO, CEO and ROI: Key Factors that Influence Human Capital Investments

Patti P. Phillips, Ph.D., Chief Executive Officer ROI Institute, Inc.
Jack J. Phillips, Ph.D., Chairman, ROI Institute, Inc. 

Recent issues and trends bring the connection between the CFO, CEO, ROI, and human capital ever closer together.

Enter the CFO­­. From all indications the Chief Financial Officer has become an integral part of the people side of the organization. For example, in a survey released by CFO Magazine, results showed that the top 10 concerns of CFOs. Five of the top 10 concerns involve what’s normally under the control of the human resources function. With regular coverage of human resources topics and even an annual issue devoted to human capital, this magazine suggests that human capital is too important to leave in the hands of the HR function.

Gartner research reported that more Chief Human Resources Officers are now reporting to the CFO. At a recent conference where Jack delivered a keynote speech (for the National Association of Electrical Distributors), he asked for a show of hands of human resource managers who are now reporting to the CFO. Surprisingly almost 20% raised their hands. Obviously the research was unscientific, but the same question asked three years ago would have elicited a substantially smaller number.

Now enter the CEO. Certainly a critical stakeholder of all things human capital and beyond, we now have more insights into what they consider to be important measures of success in terms of investment in human capital, particularly learning and development. The ROI Institute has conducted one of the most significant studies of the chief executive perception of the value of the investment in learning. CEOs clearly made their point in this ASTD-sponsored survey. Ninety-six out of 451 Fortune 500 CEOs responded to the survey. Of those, 96% said they would like to see some measure that connects learning to business impact; yet, only 8% of their L & D functions provide the data. On a similar note, 74% of the executives said they would like to see ROI developed at least for some major programs; yet, only 4% said they are provided this data now. Not surprisingly, 18% of the executives say they base the amount of funding for L & D on the amount of payoff they see from this function. Clearly, the CEOs are restless when it comes to the data that we have provided to them.  

Now enter ROI. CEOs and CFOs want to see the value for all human capital investments. They want to see value in terms that are important to them, which often means data that connects human capital investment to the business. In some cases this means measuring the actual return on investment (ROI) for major projects or programs.

For almost 200 years the concept of financial ROI has been calculated, originally for capital expenditures. Capital expenditures represent buildings, equipment, and tools. In the past, these investments represented the majority of a company’s expenditures. Today, in most companies, those items only represent 15% of expenses. The other 85% are expenses such as marketing, human resources, some technology, quality programs, support functions, and other processes. Now, ROI is an important metric describing the economic value of non-capital investments. Naturally, the CEO looks to the CFO to try to capture the return on the largest investment. That investment is the human capital.

To many, it comes as no surprise that the CFO is now more involved in the people side of the business than ever before, and often at the encouragement and requirement of the CEO. Together these two very important stakeholders are closely monitoring the investment in our people. Evaluation must be pushed to the impact level for at least major programs, and in some cases pushed to the ROI level for very expensive and strategic projects.  Some projects require ROI forecasts prior to making the investment.

The CFO, CEO, ROI and human capital are becoming more closely linked than ever in the past. For some leaders of the human capital strategy, this is deemed a challenge; for others it is an opportunity to embrace. Regardless of the position you take, these three factors have an important influence human capital investment decisions. Given this influence, it is time to start building a culture of accountability by embracing robust approaches to measuring and evaluating the human capital investment.