The ROI Debate | HR Examiner

On August 22, 2013, in Editorial Advisory Board, HRExaminer, Neil McCormick, by Neil McCormick

A lot has been written about ROI calculations for Human Resource activity over the last few years and more recently in Mark Effron’s article Ridiculously-Overwrought-Insecurity[i] so I thought I’d share some of the insights we have gained from an assignment to develop an ROI assessment methodology for Human Capital Interventions.

My team recently completed an assignment for one of the larger employers in Australia. Their human capital spend is very significant and the organisation is quite complex. Fortunately for us the attitude and thinking of the project sponsors was progressive and positive.

Our client was determined that we should develop a methodology and framework that was repeatable, defensible, consistent, evidence based, and one which would be accepted by all relevant functions as the method of measurement for human resource interventions.  Further the methodology and framework needed to allow assessment of single programs, comparative analysis of multiple programs and/or a “do nothing” assessment.

I’m pleased to say that we successfully delivered the required framework and methodology and it has been accepted by all relevant functions within the organisation (including finance). Our client has also continued to invest in the further development of improved cost models.

It’s very difficult to talk about Return on Investment, in its purest form, when most human resource departments are considered cost centres.  I’ve personally seen many a senior leader’s eyes “glaze over” when someone mentions HR ROI.

For mine, a better terminology would be “Value Assessment” rather than ROI assessment. However, at this point in time it seems ROI resonates with most stakeholders, so I continue with ROI as the descriptor.

It is impossible to cover all of the detail of an assignment of this nature in one short article. I do want to share our observations and some of the key points to give you a better sense of the framework.

The first observation from our research is that a significant number of attempts at determining ROI in the HR space are limited to a comparison against Processes or Outputs. An example of this may be the calculation based on the reduction of process cost for the implementation of an automated system as against an existing manual system. While cost reduction is admirable, most leaders do not relate to ROI in these terms.

The creation of a purely accounting ROI analysis is possible, based on the inclusion of a multitude of assumptions and estimates. The majority f these assumptions would possibly be classed as “heroic” and certainly be open to challenge. However, this model would be extremely complex and, in our opinion, defeat the purpose of creating a holistic review process.  Further, to use only financial data would be unlikely to present a complete analysis of benefits and costs.

We believe the necessary rigour, consistency, repeatability and defensibility can be attained through a combination of quantifiable monetised benefits and costs in association with the non-quantifiable positive and negative impacts.  We recommend clients not rely on a pure accounting ROI but include intangible benefits, risks, and the impact on organisation capability as part of the ROI review to give the reviewers a complete picture of the ‘value for money’ of any given project.

Our developed ROI model is designed to offer a consistent, repeatable and simple way to evaluate human resource interventions and takes into consideration the following components:

  • The quantifiable/monetised benefits and quantifiable costs for the intervention
  • Risks including those associated with non- delivery / inaction
  • Intangible benefits derived from the intervention
  • Capability Impact of the project on the ability of the organisation to achieve core objectives

ROI Human Resources 1

Outputs from the ROI template can be compared.

ROI Human resources 2

NB It is possible to have a forecast lower return and a significant impact on Organisational Capability as indicated in Proposal A, above. In this instance the question may be asked, why hasn’t this issue already been addressed!

As there are a number of options in regard to the value that can be associated with variables, we recommend the formation of a working group to determine the most appropriate for each client.  For example, it is critical to determine the scale, anchors and definitions for the ‘Score based measure’ to apply to Capability Impact.

Leaving best intentions aside, forecasting future impact of interventions is very assumptive and these forecasts can be incorrect for a variety of reasons.  To ensure organisations continue to achieve value for money from proposed human resource interventions we recommend the capture and ongoing comparative analysis of key data including budget to actual comparisons of costs and benefits throughout the project intervention timeline. This ongoing analysis focuses attention on the achievement of intervention objectives and allows for and supports changes to strategy if necessary.

A key question in the methodology is, how does the proposed HR intervention link (directly) to the delivery of Organisational Objectives? This is a tough question to answer if the groundwork isn’t done appropriately!

The pre-work required is quite rigorous and assumptions and forecasts are monitored on an ongoing basis.

A detailed description of the Intervention, the targeted organisational objective and how the intervention links to this objective, key results and performance indicators, detailed financial costs and estimated benefits along with timelines are included in the initial business case. Another inclusion is a required review of alternative strategies.

On the basis that the project is successfully launched, the above information is monitored through the project lifecycle. If the project is not delivering acceptable results the intervention is reviewed and either the intervention project is adjusted or concluded.

I recognise that the above article is only a high level description of the ROI methodology we have developed and implemented. I’m sure there’s many questions and opinions you all have.

Please feel free to contact me and I’ll do my best to answer all of them.

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