Successful HR departments must be able to measure the value to the business of what they do. Andrew Mayo explains the basics of HR return on investment
Despite all the rhetoric about HR aiming to become a business partner, the reality is that most HR functions have been rather casual about measuring their contribution to the bottom line. As long as HR can secure a budget – preferably a bit bigger than last year’s – most practitioners are happy to leave it at that, secure in the knowledge that there will be little demand for rigorous justification later on. But all that is changing.
The successful HR functions of today and the future must be able to measure and monitor their own effectiveness in supporting operational management and delivering services, and must also be able to justify and evaluate projects.
This is a far cry from the present situation in many organisations where sets of objectives are written as a series of activities, rather than aimed at any particular defined benefits. For example:
To introduce a revised competency framework
To introduce a high potential development programme by Quarter 3
To run five development centres for call centre managers
All of which beg the question: Why? What dimensions of organisational improvement are they aimed at? Or are they just good ideas, areas of interest for the professionals concerned?
There is considerable pressure to change this soft approach. Both business and the public sector are becoming more numeric, more demanding, more target and ratio-driven. There are too many stories of large projects that seem to have achieved very little.
Before you can begin to turn this situation around, however, you need an understanding of the fundamentals of how to look for a return on investment in HR.
The professional HR practitioner needs some essential tools to be able to:
understand and articulate the meaning of ‘value’ and ‘value added’ from the perspective of a support function
quantify both costs and returns in relation to people and organisation management
be confident and competent in justifying investments that relate to people .
This is a demanding requirement, not so much because of the technical nature of the tools needed, but because our people capital is not subject to the same rules as financial capital. Judgements and assumptions have to be made, and many of the returns from initiatives, though real enough, cannot be expressed in financial terms.
Business partnership, however, demands that HR rises to these challenges. But where do we look for returns in HR?
It is not particularly helpful to try and answer the question: ‘What is the return on investment for the HR function?’ An organisation has to administer its people at the very least. It may choose to do so in-house or by outsourcing, but one way or another, it has to pay for doing so. There is a baseline of cost that has to be paid for; beyond this are many areas of discretionary spend.
HR functions vary enormously in their scope, activity, and the range of resources they use. If we think of HR as the ‘people support activity’, rather than a discrete headcount group or department, then what we want to know is how much we are spending on all aspects of people support. This may include:
People in an HR department
People in a training department
Dedicated IT people supporting HR systems
Trainers in other departments
Outsourced administrative services
Relevant temporary staff
Subcontracted training and other professional services
Consultants doing projects.
In addition, there are also the ‘on-costs’, such as space costs, re-allocated corporate services, telecommunications, and so on. And with today’s technology, we also have ‘self-service’ opportunities for staff – for example, to find the answers to policy questions, and make changes to their records.
The headcount or costs of the HR department itself may be a fraction of the total HR costs. This is why great care must be taken in benchmarks such as the ratio of HR people to the total headcount. It is easy to show a good ratio with creative flexible resourcing. If we want to understand whether we are getting value for money, we need to break down HR’s work into activities.
Where do we use resource in HR?
We support the organisation on a day-to-day basis – operationally. The objective here is about the efficiency of service delivery at the minimum cost consistent with the standards desired. We spend ‘strategically’ – to maximise our current and future human capital, enhance organisational effectiveness, or bring about change.
But these two categories can be expanded even further:
HR provides services – in administration, advice, policies and procedures, counselling, compliance, data provision and monitoring, problem solving
HR manages continuing processes – for example, recruitment assignments, communications, appraisals, pay and bonus schemes
HR may provide operational training, meeting compliance needs or ensuring a necessary standard of knowledge or skill.
The effectiveness of HR in this category will be measured as:
Cost of service delivery
Efficiency of process management
Effectiveness of time utilisation
‘Current value added’ for stakeholders.
HR initiates and manages HR projects, bringing in new methodologies, systems or processes
HR diagnoses what is happening with human capital, at individual, group and organisational levels
HR initiates, manages or supports organisational change (for example, culture change, mergers, structuring and restructuring, new systems, new markets)
HR provides learning and development programmes supporting individual and organisational change.
This leads us to two connected types of assessment of ‘return’, which can be used to judge whether an HR function is spending money and time to best advantage:
The ‘future value added’ for stakeholders
The ‘return on investment’ from specific projects and programmes
Once you can put a numerical figure on these two types of assessment, you can answer the question of why you are doing what you are doing, and demonstrate exactly what you are really worth to your organisation.
The complete guide to Understanding HR Return on Investment
Is available at an introductory offer price of £60. Written by Andrew Mayo, one of the UK’s leading authorities on the subject, the guide is a step-by-step explanation of how to measure the value of HR activity in language the boardroom will understand. Enquiries: Caron Berry on 01371 810433.
How good are you at measuring HR return on investment?
Back ground to the task
Some 150 high-potential middle managers from 40 different operating companies of a multinational telecommunications company were sent on a three-day management conference in groups of 25.
The conference consisted of group discussions to work out how the company values could be practically implemented, how change was taking place within the organisation to achieve the strategic business objectives, and also included exercises to identify and share best practice.
The direct cost per three-day programme (including travel and accommodation) was £60,000.
After attending the conference, it was noticed that the turnover for this highly mobile group dropped from 189 per cent to 8 per cent, and also, motivation levels of two-thirds of the group perceptively increased. This was supported by anecdotal and written evidence from appraisals (managers often reported gaining ‘significant motivation’ from the programme) and was also measured as an increase in productivity of the team being led (generally this was found to be 10 per cent revenue of a decrease in 5 per cent costs per employee).
The average number of staff in a team is 10
average materials and operating costs per employee are £70,000
average sales per employee are £80,000
Fifty per cent of managers attending the conference have positions directly linked to revenues, and 50 per cent are linked to costs.
The average managerial salary (including benefits and bonuses) is £100,000.
Evaluate the monetary value of financial (tangible) benefits, the monetary value of intangible benefits, and the return on investment.
Here’s a model answer:
Monetary value of tangibles:
Turnover reduction = 15 managers X £100,000 = £1,500,000 (estimated cost of replacement, opportunity loss and retraining new hires = one year’s salary)
Plus monetary value of intangibles:
Productivity and motivation of 50% managers measured by sales = 50 managers X 10 in team X 10% of £80,000 = 500 X £8000 = £400,000Sales margin = 12%, so bottom line benefit = 48,000Productivity and motivation of 50% managers measured by costs = 50 managers X 10 in team X 5% of £70,000 = 500 X £3,500 = £1,750,000Total = £48,000 + £1,750,000 = £1,798,000
= Total programme benefits
£1,500,000 + £1,798,000 = £3,298,000
Cost of programme: £360,000
ROI(%) = Programme benefits programme costs x 100
= (3,298,000 – £360,000) /360,000 x 100