COST â€“BENEFIT ANALYSES FOR HR
Perhaps one of the most important functions of the HR measurement system is that it provides a means to identify, in quantitative terms, the discrepancies between your firmâ€™s current and ideal HR architecture. Such gaps may have arisen within the elements of the HR system itself, between the HR system and firm strategy, or between desired or between desired and actual employee behaviors.
For example, in one firm we visited, the companyâ€™s HR Scorecard and planning processes indicated that they would face a shortage of midlevel managerial talent as their business expanded and as a number of midlevel managers reached retirement eligibility. Business slowdowns and a multiyear hiring freeze had shrunk the number of retiree replacements in the pipeline.
Senior HR managers in this firm quickly asked, how can they best develop the employee competencies necessary to meet the firmâ€™s current and future needs? Should they learn how to train employees in these competencies in-house, or should they use an external vendor? Should they explore some other strategy entirely? In any case, what return on investment (ROI) can be expected from the various scenarios?
In particular we can explore data-collection and analytical methods that can help to assess whether certain HR programs will pay off in the short and long run .Taken, together these methods make up what we call cost-benefit analysis. In many ways, cost-benefit analysis is a microcosm of the HR Scorecard framework. Determining which elements of your work should be â€œcostedâ€? is essentially a strategic task; and should be tied up to the firmâ€™s competitive strategy and operational goals. For the sake of efficiency, you should also focus this decision process on only the vital few HR activities that really make a difference. In other words, the HR Scorecard will help to identify the most appropriate â€œdoablesâ€? and â€œdeliverablesâ€? that will become the focus of a cost-benefit analysis process.
Human resources professionals understand the importance of assessing the costs and benefits associated with investment in specific HR policies and practices. Indeed, for many years, HR practitioners have pursued this kind of information as if it were the Holy Grail. Many HR managers have even told that the senior management team in their organization would be happy to fund more extensive HR initiatives and innovationsâ€”if only human resources leaders could provide economic justification for such policies.
Determining the ROI of specific HR intervention, whether as an end in itself or as a means of deciding on policies and practices, is not difficult as it might first appear. Nevertheless, it does require some knowledge of finance, accounting, and the process of capital budgeting. It also requires a consistent, step-by-step process.