A study by Watson Wyatt found that “Firms that carefully link HR activities to business strategy, measured by metrics have a 33% higher return on total capital than organizations that do not.”
For some HR pros, talking about return on investment (ROI) inspires a sense of fear. In others it creates an almost giddy response at the idea of being able to measure and prove the value the profession can bring. Calculating ROI is not as easy as looking at a spreadsheet, but if done properly, it can take your role as a strategic HR leader to new heights.
Why Measure ROI?
HR professionals have a broad array of metrics and measurements at their fingertips, but it can be argued that the most powerful is the ability to prove a return on the money invested in the programs and projects under HR’s purview. In all the conversations about strategic HR, we have pointed out the immediate need of connecting HR activities to business strategy and talking not in “soft” terms of satisfaction but in hard terms of dollars.
One of my friends, the former VP of HR for a children’s healthcare network, always says that HR needs to speak the language of the CFO. In other words, we need to be able to speak to the funds we spend and the benefits we receive, because that is how you validate the level of value you’re providing to the organization.
As mentioned previously, some HR professionals are fearful of the results that an ROI analysis can bring. They think of ROI as a personal performance indicator, not a business process improvement tool. This causes resistance, but it’s possible to overcome with the right approach. It’s important to see the adoption of this measurement methodology as you would any other change management project. It will only be fully accepted by leveraging communications, casting a vision and demonstrating the value in the new approach for your stakeholders.
How to Calculate ROI
To explain how to calculate ROI, it’s easiest done by example. Since the topic is top-of-mind for most of you, let’s look at open enrollment. Let’s say your 300-person company is evaluating a new system designed to allow employee self-service during the benefits enrollment process. In order to sell the idea, you need to show preliminary calculations on ROI. So, what benefits might this new approach offer?
Reduced HR time spent on administrative activities. At a conservative estimate of 20 minutes per employee per year, that is 100 hours spent handling employee benefit change requests. At an average wage of $35 per hour for HR employees, we can determine a dollar amount of $3,500 from the time savings alone. .
Reduced resource costs. Instead of printing and shipping information to employees, the data now lives in the self-service portal. If the company spends an average of $20 per employee to collate, print, assemble, and ship information, that comes to $6,000 in savings.
Improved employee engagement. Being more involved with their benefit decisions helps employees to be better consumers. Because it is difficult to measure a specific monetary impact of this benefit, we can list this as an intangible benefit in our ROI findings. Other intangibles can include an increased quality of HR data or even the ability for employees to access information 24/7 without calling an HR representative.
In our example, the total savings would equate to approximately $9,500. If the cost of an enrollment system is $15 per employee per year, we’re looking at $4,500 per year in total costs. So far, the ROI looks promising, but let’s get an actual measure of the value.
First, we calculate the cost/benefit ratio to provide a quick look at potential value. This is done by dividing our savings by the cost.
- Savings: $9,500
- Cost: $4,500
- Cost/Benefit Ratio: 2.11 (for every $1 spent, there are $2.11 in monetary benefits)
The net ROI is then calculated by reducing savings by the cost, then dividing by the cost.
- Net ROI: 1.11 (for every $1 spent, there is $1.11 in returns after costs are covered)
In this example, the ROI is positive, which bolsters the business case to invest in the new system. There also is additional value from the intangible benefits that are difficult to measure; however, without calculating the potential ROI, HR doesn’t have a strong business case for requesting the new self-service tools to support open enrollment.
This approach can be used to validate any HR practice, from recognition programs and employer branding to training and benefits. By adopting a data-driven approach, the business will actively seek out the contributions of the HR function in order to understand and solve problems across the organization.
Written by: Ben Eubanks, Principal Analyst, Lighthouse Research & Advisory