HR in few organizations has successfully introduced and implemented processes that are directly tied to the objectives of the company. And measuring and assessing HR performance in terms of ROI ensures that their actions are connected to the stated goals of the company and drives business growth.
Therefore companies today are seeking a well calculated ROI to validate their investments on HR.
Experts at the recently held HR exhibition, personal Swiss in Zurich, Switzerland confirmed that in order to sustain competitive advantage, it’s vital to evaluate HR activities and take a long term perspective into HR development. For a number of HR initiatives introduced in organizations, companies make substantial investments and it’s vital to measure the outcome against the investment. HR experts present at Personal Swiss said that HR activities should be measured through asset of easy to understand and top management accepted steps. ROI allows defining or calculating of a pay back period. For the investor, it is important to know within what time period she/he gets the investment back, when HR proves to the top management the cost of an overdue fluctuation in one department in comparison with the cost of replacement of a manager causing the fluctuation.
The strategy adopted to define HR ROI has to be unique. First use a differentiated accounting model for your HR cost. All costs appear in the annual financial accounting sheet only under ‘personnel cost’ you will not be able to show anything but the generic total cost. Secondly you need detailed statistics of all the HR activities that were carried out and it’s imperative that you should be able to break down each HR activity into sub categories and segregate them well, (for e.g. entire recruiting cost on a single recruitment should be categorized into internal and external costs, training cost, overhead costs and other recruitment related costs involved at various levels of hiring of a candidate). Thirdly, you have to measure the success of HR by evaluating the impact against the investment.
HR, the manager: The traditional way of measuring the ROI is pretty simple. But how can we calculate the value generated by HR and maximize the value for future benefits of the business as a whole? The various activities a company embarks on should show an ROI and HR should be no different. HR should always consider long term perspective; understand where an organization needs to be in a particular time period therefore define, what type of people will it need and how many work around it. ROI is important to ensure that organizations recognize the true value of HR. From a talent management perspective, HR ROI is dependent on aspects such as cost of external v/s internal appointments and its associated time to productivity, risk of failure (particularly with external senior positions), time to fill open positions (and therefore opportunity cost), retention and turnover etc. A human capability development firm says that there are many ways to measure the value of HR and in his opinion; balanced score card (BSC) is one such tool which tries take HR actions more quantifiable. But, cost of reuse of training budgets is the main parameter against which HR ROI can be measured.
Some companies are extremely measurement driven while others are more performance driven. Similarly, while some HR executives try hard make intangibles tangible (i.e. measurable), others don’t. Hence HR should insist on clear objectives attached to everything they do and only if their processes are objective-driven, results can clearly be measurable. If we assume HR initiatives to actually make a positive difference to the ROI, business leaders would then tend to disagree saying that their superior strategies led to the superior performance. Hence it would be better for HR to calculate specific business impacts – measures that can be strongly correlated to HR initiative without business leaders doubting the cause effect relationship. For e.g., if HR can engage a finishing school model to recruit fresher candidates at less than half salary of the usual hires from premier schools and achieve the same level of productivity, then such a contribution will be appreciated by the business leaders and top management.
Therefore, a proper assessment of HR’s hard work through ROI will bring to the forefront the value this function can bring to an organization.