HR manages the selling, general and administrative (SGA) line on income statements, understands operating expenses and knows how to free dollars to positively impact EBITDA – all with the help of their
CEOs and CFOs of large companies recognize the strategic value of HR, but midsize employers typically place their contributions into the category of a cost center. In these organizations, HR is viewed as part of the SGA line on the profit and loss statement and assigned to the cost of doing business with no return.
This happens when CHROs can’t clearly communicate their impact to EBITDA, which is shorthand for earnings before interest, taxes, depreciation, and amortization. Benefit advisers are positioned to be part of Team CHRO and translate the accretive impact of supply chain management within a
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Let’s start with the language of HR: ACA, ADA, FLSA, FMLA and EEOC mean nothing to a CFO or a CEO whose acronyms and terms are COGS, SGA, EBITDA, revenue and gross profit. Now let’s take a simple example from HR and turn it into something the CFO or CEO will understand.
HR does an I-9 audit inside a 100-employee company and learns that 15 of the forms aren’t compliant and would cost the company $1,100 per form, totaling $16,500 in the penalty box. If presented this way, the CFO or CEO won’t appreciate the effort, which isn’t significant in their world. Let’s reframe this a bit: $16,500 by a profit margin of 10% means that the company would need to sell $165,000 in widgets to equate to what was just accomplished.
Let’s help HR talk the alphabet soup of the CFO and CEO. We are advisers, not brokers of products. Why is this important? Look at the six needs everyone has, according to Tony Robbins:
- Certainty
- Variety
- Growth
- Contribution
- Connection
- Significance
We all have these needs, but inside the workplace, different roles place some of these needs higher than others. The CHRO wants contribution and connection. The CEO wants certainty and growth. The CFO wants certainty and significance. If a CHRO reports to the CFO or CEO, they need to know how to speak to significance, certainty and growth. That is what their “client” wants to know about.
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Let’s target something much bigger than an I-9 audit for HR. The second largest expense inside the SGA line on the company’s income statement. Application of supply management to your health plan is a great way to liberate EBITDA. What makes up the supply chain on your health plan? Basically 4 things:
- Hospitals
- Pharmacy
- Ambulatory care
- Docs
What are your strategies to control the frequency and severity of use inside the healthcare system? Do you get underwriting credit for those strategies? Are you paying for outcomes or activity? This bears repeating: are you paying for outcomes or activity? For example: does something like a biometric screen deliver a financial outcome to your plan, or is it an activity?
When you apply this “pay for outcome” type of thinking or strategy to your benefits plan, you can achieve 20% to 40% savings. Let’s see what that means in CFO alphabet soup:
| 100-employee company, $10,000 cost per employee, $1 million healthcare spend |
| Supply management savings of 30% = $300,000 |
| Divide by profit margin 10% |
| Year 1 = $3 million of revenue equivalent |
| Year 5 = $15 million of revenue equivalent |
That last number — $15 million — is significant revenue equivalent over the next 5 years in a 100-employee company to your CFO or CEO. You now have their attention.
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Want to help your clients’ frontline employees? Then we must help their CFO or CEO understand how cost shifting impacts employees. Today we see deductibles that are set at about 20% of a person’s gross wages. Every $1,000 of cost shifting to the deductible equates to 3% to 5% of gross wages for those working on the front line if they need care.
For CFOs to feel the same amount of pain, it would be an equivalent of about a $40,000 deductible, given their wages are $200,000 annually. When shown this way, CFOs or CEOs will understand how much their people are hurting and why a health event is the No. 1 cause of bankruptcy. Keep in mind that even though CFOs may earn a higher salary, they also are likely to be living paycheck to paycheck as well.
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When shown this way, the CEO and CFO will not want to cost shift by increasing the deductibles. You and your client will find that they care about their people, and didn’t understand how a small increase in deductible can send their employees into financial distress when a healthcare event occurs inside their family.
Communicating in the appropriate robust flavor of alphabet soup, paired with strategies that achieve outcomes, aligns benefit advisers and CHROs to work on the same side of the table, improving the bottom-line financial strength of their company, and stopping the year-over-year cost shifting to employees.
