Why Your Finance and HR Teams Can't Agree on a Headcount Reporting Metric

At some point, every successful People Analytics team will develop a meaningful partnership with the Finance organization. Unfortunately, this partnership is usually not easily achieved and it's quite normal for initial alignment efforts to last for a couple of years (or more!).

A new or maturing People Analytics team may fail to recognize the effort level required and not prioritize the work needed to establish this critical partnership with Finance. They do so at their own peril.

The day will inevitably arrive when a great analytics product from the PA team will be dismissed by senior leaders when they see the foundational headcount numbers do not match. The PA team will be lacking in a clear explanation that is supported by the CFO and Financial Planning & Analysis (FP&A) leaders.

But why is this the case? And how can HR and People Analytics teams do a better job of establishing the partnership? 

Analyzing the analytics conflicts between finance and HR

Lack of alignment on workforce data

At the heart of the issue is a lack of alignment on the most basic workforce metric: headcount. Both Finance and HR teams are often sharing headcount data with senior leaders. In many companies, the numbers are different. This creates distrust and frustration, and I will contend that, given Finance’s influence in most organizations, the HR team is on the losing end of these collisions. End result is that the organization spends time debating the figures (at a granular level) and misses the opportunity to make talent decisions that support the various company strategies (eg, growth, innovation, cultural reinvention, cost optimization).

While headcount is at the foundation, there are several other areas where such disconnects arise and create similar challenges: workforce costs, contingent workers, position management, re-organizations, workforce budgets/plans, movements, etc... Solving the basic headcount alignment is the first step in setting the partnership.

Source of the Disconnect: "Headcount Dialects" and "Dialectical Thinking"

The disconnect in headcount figures is nearly always one of definition. Strange as it may sound, Finance and HR do not naturally count the workforce in the same way. It's as if there is a 'headcount dialect" that each needs to learn in order to communicate with the other. Therefore, if they have not spent some intentional, focused time on aligning definitions and processes, they will continue to collide with each other (and HR will fail to gain the trust needed to build an analytics/evidence-based culture around workforce decisions).

The dialectical thinking challenge is for Finance and HR to recognize that the same data can be presented in (at least) two different ways and both can be simultaneously accurate. It is for the organization to determine which definition is considered "correct" for each anticipated use case (and then stick to that plan).

Primary disconnection points

Two primary areas of disconnect are the definition of the term “headcount” and whether a cost or organizational hierarchy is being used.

1. Definition of “Headcount”: There are several components of this, underscoring the need for alignment when it comes to finance headcount vs HR headcount. 
   • Using Full-Time Equivalent (FTE) or Employee Count: Employees that are working less than full-time are often in the system with FTE values of 1.0 (full-time), 0.5 (half-time), and every range of fraction in between. The Employee Count, on the other hand, will count each employee as 1 (sometimes lightly referred to as a “nose count” to distinguish it from the FTE values). In some companies, interns/co-op employees are in the system with FTE value of 0, even though they are being paid.
   • Determining Which Status Codes are to be Included: Employees are captured in the HR system as being active or inactive, on short-term or long-term leave of absence (LOA, “garden leave”), and any number of custom values that are used to align with the HR processes. In many companies, the FTE values are updated to align with the change in status. Agreeing on which status codes are counted in "headcount" is required for setting the foundation. 
     
     
2. Organization versus Cost Hierarchy: The headcount data can be rolled up (and broken down) in at least two ways: based on the organization/supervisor hierarchy structure or based on the cost center/financial hierarchy. Each has its unique value, and neither is wrong -- they are simply two representations of the same underlying data. It’s quite common that insufficient time has been spent in aligning, reconciling, and validating these hierarchies and determining which one should be used in which situations.
   • Organization Hierarchy: This is sometimes called the “supervisory hierarchy” and represents “who reports to whom” up the chain of command to the CEO. This hierarchy is representative of how work is being managed and how the workforce is structured. Each supervisor, regardless of who is paying for their team members, is responsible for the productivity, engagement, performance, development, and usually the compensation decisions, too. Viewing headcount through the organization hierarchy will provide headcount values (indicating the number of resources) for each business unit, each central function, etc... The organization hierarchy is appropriate for understanding how work is being done, performance is being managed, the effectiveness of leaders and teams, and all other human capital management concerns. It is also useful in some cost-related analyses such as evaluation and optimization of span-of-control and organization layers.
   • Cost Hierarchy: This is sometimes referred to as “who is paying for whom” and is rarely in perfect alignment with the organization hierarchy. There is a good reason for this, as there are situations when a position in one part of the organization (eg, research & development) is being funded by another (eg, a product or region business unit). In these cases, one leader is paying for the work and the work is being managed by a supervisor within another leader's organization. I have seen "cross-billing" situations going as high as 20% of a given organization. When headcount is shown in a cost hierarchy, it indicates what will hit the general ledger and the financial reporting of the business units. It has a valid and proper place, but it is mostly about accounting, budgeting, and financial planning.
     
     

Which business unit is right?

The truth is that as long as you have all the workforce data accurately captured in the system, everything is right. This sounds trite, but it puts emphasis on the task at hand which is to determine a shared understanding and establish rules for what will be counted and how, which situations will use which variations, and what agreed-upon labeling will be in place for charts/tables shared with others. Some organizations that have a culture of compliance and governance could set this up as part of an HR data governance effort (where headcount and other workforce metrics would be defined, managed, and communicated).

Going further, there is a need beyond the Finance and HR/People Analytics leader to socialize whatever is determined as these running rules across the Finance and HR organizations. These teams all need to be aligned.

How does One Model help finance and HR collaborate?

With a People Analytics solution like One Model in place, the conversations between HR and Finance can be had with much more clarity and speed. This becomes easier because, within One Model all of the workforce data is captured, data quality is managed, and all related dimensions (eg, hierarchies, employee attributes) are available for analysis.

Two examples of content that is specifically designed to facilitate the Finance-HR alignment discussions are:

• Headcount Storyboard. Setting up a storyboard which shows headcount represented in multiple ways: FTEs versus employee counts, variations of which statuses are included/excluded, etc. This information becomes readily comparable with the metric definitions only a click away. Even better, the storyboard can be shared with the Finance and HR partners in the discussion to explore on their own after the session. One Model is the best tool for counting headcount over time.
  
  
• Hierarchy Storyboard. Providing views of the headcount as seen using the supervisor and cost hierarchies side-by-side will help to emphasize that both are simultaneously correct (ie, the grand total is exactly the same). This can also provide an opportunity to investigate some of the situations where the cost and organizational hierarchy are not aligned. In many cases, these situations can be understood. Still, occasionally there are errors from previous reorganizations/transfers which resulted in costing information not being updated for a given employee (or group of employees).

With the data in front of the teams, the discussion can move from “Which one is right?” to “Which way should be used when we meet with leaders next time?”

When you have One Model, you can bring HR and Finance together faster and more easily ... and that helps you to accelerate your people analytics journey.

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