Measuring ROI in Human Resource

Impact of ROI on HR program is derived from finance.  None of the HR expense is booked as investment as these are all treated as expense/costs.   HR is always treated as cost center. Human resource team members now more than ever are under pressure to demonstrate the business of HR function from the CEO, CFOs & COOs & other Business Leaders. The ROI measures the financial return on an investment made, or it can be applied to a business measuring the performance of the firm by assessing the net profit compared with the overall net worth of the company.

In more recent years, the ROI concept has been adopted by other industries to evaluate HR projects and programs.

The ROI Data is in the form of:

• Strategic Goal Alignment
• Value Drivers for use of ROI in the HR function
• Elements, steps, and standards/benchmarks of ROI methodology & how it is used to influence the success & image of HR & Organization
• How ROI for Human Resources is typically implemented in an organization
• Development of Effective Human Resource Solutions

Value Chain: Inputs – Reaction & planned action, Learning & confidence, Application & implementation, Business Impact leads to ROI, Tangible & intangible benefits

Today major HR challenges are:

• Talent War
• Leadership Development
• Retention of Key & Critical People
• Follow the race to be the best employer

Approaches so far to measure HR program Value:

• Early approaches – HR auditing, HR Case Studies, Feedback Survey & MBO in personnel function
• Solid value added approaches – HR key indicators, HR cost Monitoring, HR satisfaction Survey & Competitive HR Benchmarking
• Leading Edge approaches – Human Capital Measurement, HR macro Studies, Balance Score Card, HR profit Center, ROI Methodology.

Major area of Applications -Recruitment, Orientation & Induction Learning & development, E learning, Career Development, Leadership Development, Welfare & fitness programs, Meeting & events, Employees Engagements, Organizational Development Initiatives

Selection-Development- Performance-Rewards- Communication

Paradigms shifts:

Activity Based	Results Based
No Business Need for Program	Program linked to specific programs
No Assessment of performance issues	Assessment on performance/ effectiveness
No Specific measurable objectives	Specific objectives of application of business impact
No efforts to prepare program participants to achieve results	Result expectation is communicated to participants
No efforts to prepare the work environment to support application	Environment is prepared to support application
No efforts to build partnership with key managers	Partnership is established between key managers & clients
No measurements of results or ROI analysis	Measurement of results & ROI analysis
Planning & reporting is inputs focused	Planning & reporting is outcome focused

Considerable Investment – HR Initiative linked to Organization Goals – Planned, Measured, Evaluated, Synergized & integrated

Sporadic – Knee jerk, fad based, nice sounding, intuition, luck based, need for speed, strategic importance, sponge like money, etc

THE ROI (Return on Investment)/ BCR (Benefit/Cost Ratio) Formula:

ROI = Net Project Benefits/ Project Costs or Benefit – Cost/Cost

BCR = Program Benefits/program Costs

ROI In Training Investment Value = Total Training Investment/Head Count

ROI in Human Capital = Revenue – (Operating Expense less cost of Human Capital)/Cost for Human Capital

The ROI Methodology – Evolution Planning, Data Collection, Data Analysis & Reporting Impact

ROI as Best Practice to:

• For process Improvement
• Generates micro & macro level Score Card
• Help to remove subjectivity & other biased influences

Why ROI Works:

• Provides a balanced set of measures
• Offers a step by step process
• Bridges business evaluation & initiative evaluation
• Balances research/statistical methods with practical application
• Flexible for all types of initiatives
• Credible with Top Management/Leaders/ Manager /Administrators

Intangible benefits Indicators:

Complaints, Conflicts, Team work, Customer Service, Engagement Stress level, Commitment, Job Satisfaction

HR Metrics:

Human Capital ROI – Ratio of income to employee cost

Revenue Factor – Revenue per employee

Income Factor – Income per employee

Expense Factor – operating employee per employee

Human Added Value – income net of employment cost per head

HR Expense % – HR expenses as a % of total operating expenses

HR Head count ratio – ratio of employees served by HR employee

HR Structure Break down – % of HR resources applied to each key HR area

Voluntary Separations (Turnover) – HR expense as a % total operating expenses

Training Investment Value – Rupee per person that is spent on training

Internal Mobility rate – % of employee who moved internally within a year

Time to fill vacancies – average number of days to fill a vacant position

HR Strategy Key Ingredients:

Analytical, Methodical, Linked, Measured, Synergized, & long Term for Target Achievement & Peak Performance

Measurements:

Recruitment: Cost Per hire per level & Revenue per employee

Selection: Profit before Taxes per employee/Productivity–Individual, team or at organization level & Productivity Overtime

Training: PBT per employee with training v/s no training, Productivity Per employee/Prevented cost of lost opportunity /Prevented cost of future mistakes

Coaching: Cost of turnover, Employee Productivity, Satisfaction & Commitment

Human Capital Success Metric:

• Changes in PMS ratings of Individual – year after year
• Climate Survey Reports
• Customer Complaints/praise
• Customer satisfaction/loyalty
• Employee Commitment Survey Score
• Employee Competency Growth
• Employee Development/Advancement opportunities
• Employee Engagement levels
• Employee Turnover by performance level & by controllability
• Extent of cross functional team work
• Extent of Organizational Learning
• Extent of understanding of the firm Competitive strategy & operational Goals

ROI Benefits:

• Better enablement for key strategic initiatives
• Better decision – making
• Better sense of our risk & better ability to react to change
• Information to innovate
• Better understanding of key drivers
• Better forecasting
• Focused & efficient workforce

The problems associates are:

• No real data available on soft solutions
• Even if data is available HR doesn’t know where to find it
• ROI models are theoretical
• Models are too complex and take too long to complete
• Model do not use real client data
• Model fails to address the critical business issues in the organization

Global Trends:

• HR Budget continue to increase in most of the organization
• Stronger link exists between HR & the Strategic Goals
• Developing HR as Profit Center is intensified
• More HR operational activities are outsourced – focus on core
• Increased interest in Monitoring & Managing Human Capital
• HR Managers/Leaders are trying to learn business/operations
• HR evaluation is more systematic, methodical & proactive
• ROI is growing in use as an HR evolution tool

The effective ROI

“An Organization Success is the product of its People Competence. That link between the people & performance should be made visible and available to all stakeholders”

–  John Sunderland Ex-Chairman Cadbury Schweppes