HR ROI means metrics CEOs want (Guest Commentary)

Instead of managing costs, HR must prove itself yielding a return on investment

Successful human resources executives in the 21st century will prove their worth not by downsizing their own departments, but rather by telling a success story with each investment in human capital — and validating the story with numbers. The way to do that is to measure what can be termed “hROI,” the human return on investment.

I look at hROI as the difference between the cost of an investment in people and the dollars that the investment brings in. A training program that costs $5,000 per head and enables the company to bring in an extra $50,000 in revenue has an hROI of $45,000.

Although payroll is the greatest expense for most businesses, few companies systematically weigh their enormous investment in people against the return they bring. An Accenture study estimates that some 57 per cent of companies rarely or never measure how training initiatives affect turnover. Yet ROI is the ultimate measure for the success of all other corporate initiatives, whether it’s an IT project or a new piece of equipment. It’s time for executives to extend the concept and discipline of ROI to HR.

Existing HR metrics not enough

As an HR executive navigates the river of reports that crosses his desk, it may seem that human resources already measures everything, from the presence of illegal drugs in applicants to the attitudes of departing employees. But these metrics tend to apply to tactical goals, not strategic ones.

The traditional objective is usually to control costs incrementally, rather than to boost a return on dollars invested. Recruitment specialists, for example, may be assessed based on their time-to-hire numbers. But this metric says nothing about what the new employee will add to the company’s bottom line, in one year or in five. What’s missing is how well that recruiter is helping to achieve corporate objectives like product innovation or a quicker time to market.

Just as a CIO must set benchmarks to measure the ROI of a technology project, an HR executive must decide what he wants to measure in order to align any given investment in human capital with the goals and core business of the company. For a large retailer that usually makes elaborate plans to grow its call center staff for the crucial holiday season, that may mean not only measuring the additional revenue generated by the seasonal workers taking orders but also calculating the lifetime value of newly acquired customers thanks to that increased call center capacity.

Company-wide data gathering a must

Calculating hROI depends on gathering, integrating and analyzing data across the enterprise and down through the years. What should HR departments measure? For starters, consider the investment in, and the return from, specific sourcing and recruitment channels, the payoff from training and development programs, and the productivity and longevity of employees.

Human resources departments can and should also demonstrate a return on investment in innovative processes and uses of technology. Organizations that invest in self service HR tools for functions such as health insurance open enrolment typically reap a 50-per-cent savings, a return that pays back the original investment in about three years, according to a survey by Forrester Research.

The raw numbers of hROI are by no means the end of the story. The executive who drives a successful effort to link an application tracking system to post-hire performance and corporate financial objectives will add value not just to the recruiting process but to the very fabric of the firm. Enabling executives to get an integrated, holistic view of their organization will provide them with the data they need to operate with optimum efficiency.

Some worthwhile investments in employees may be very difficult to measure, even though they’re likely to yield high returns. Certain factors, like morale, may always remain incalculable, if only because it’s not possible to run every workplace as a sociology laboratory. Well-conceived, feel-good activities like holiday parties can offer value in retaining employees, even though that value can’t be quantified.

What does matter is that when HR, on balance, is successfully operated as a profit centre rather than a sinkhole of costs, arguments can be made to grow the HR function as a strategic resource integral to the financial health and growth of a company.

Vin Cipolla is a member of the Board of Advisors for Veritude, a provider of strategic human resources. Veritude is a wholly owned subsidiary of Fidelity Investments Company and services clients throughout the United States and Canada. For more information, contact www.veritude.com.

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