The film Jerry Maguire made the phrase ‘Show Me the Money’ famous. This phrase appealed to the business world in particular, and over 20 years later is still used by individuals who control the purse strings when they want to see how funding a particular project or program will contribute to the organization’s bottom line.
Increased competitive pressures have caused organizations to evaluate their business initiatives, and these days an organization’s support functions are accountable when it comes to demonstrating the economic value of the programs or projects for which they want to secure approval… and HR is no exception!
HR is increasingly held accountable for ensuring its initiatives add value, and for demonstrating that the business results of their initiatives will be greater than the resources needed to invest in the initiative. Using return on investment (ROI) to demonstrate the business impact of an HR initiative has evolved into the de facto criteria for an organization when deciding which projects should be approved and financed and for prioritizing various approved expenses.
In a recent XpertHR webinar, Patti Phillips, President and CEO of the ROI Institute, demonstrated how to calculate the return on investment (ROI) for training programs. Three key takeaways for me were:
1. Understanding How to Calculate ROI
ROI, expressed as a percentage, can be used to compare the viability of different investments or initiatives; prioritize investments; or compare profitability. ROI is calculated as the benefits (or gain) from an investment, less the cost of the investment, divided by the investment costs, and multiplied by 100:
ROI = (Benefits (or Gain) from Investment-Cost of Investment)/(Cost of Investment) x 100
Here’s a practical example to illustrate:
Acme, Inc., experienced an increase in sexual harassment complaints from its employees. HR, through interviews with a select number of employees and sexual harassment claimants, concluded that there was a significant lack of understanding by employees and supervisors of:
- The company’s sexual harassment prevention policy; and
- What constituted inappropriate or unlawful behavior.
The HR Director determined the organization should implement a sexual harassment prevention training program for all employees, and forecast the annual benefits and costs of the program as $336,418 and $61,700 respectively. Using this information, the ROI is:
ROI = ($336,418-$61,700)/$61,700 x 100 = 445%
This means Acme can expect to see a net return of $4.45 for every $1 it invests in the sexual harassment training program.
2. Knowing which programs are candidates for measuring ROI
HR departments don’t usually generate revenue for their organizations, and are often viewed as a cost center. HR measures are often on the softer side, for example enhanced organizational reputation, increased job satisfaction and improved teamwork. While these concepts are important, they are not always quantifiable, and members of the C-suite might be leery to invest in programs unless they provide tangible results.
Demonstrating how HR programs directly impact the bottom line not only helps to secure funding, it also demonstrates the credibility of HR as a profession. According to Phillips, some criteria to consider when selecting programs for evaluation to impact and ROI include:
- Cost of the program;
- Importance of the program to strategic objectives;
- Executive interest in the evaluation;
- Visibility of the program;
- Linkage of programs to operational goals;
- Life cycle of the program;
- Investment of time required; and
- Size of the target audience.
Examples of programs or initiatives ripe for measuring ROI include:
- Various training programs;
- Wellness programs;
- Implementing an absence reduction program;
- Purchasing an HRIS system; and
- Implementing a performance management program.
3. Balancing ROI with Other Measures of Performance
While probably the most commonplace, ROI is not the only measure of performance available to HR pros. A couple of other measures to consider are:
Benefit Cost Ratio
The benefit cost ratio (BCR) identifies the value of a project by looking at the relationship between the costs and benefits of a project. Expressed as a ratio, the BCR is calculated by dividing the program benefits by the program costs:
BCR = (Program Benefits)/(Program Costs)
Using information from the above example, the BCR is:
BCR = $336,418/$61,700= 5.45 (or 5.5:1)
This means Acme can expect to see a return of $5.50 for every $1 it invests in the sexual harassment training program.
Break-even analysis is used to determine at what point the benefits from a particular activity begin to exceed the investment in the activity. The break-even point is the point in time when benefits exactly equal costs, and is calculated by dividing program costs by the program benefits and multiplying by time (which is the time period most relevant to the analysis):
Break-Even Point = (Program Costs)/(Program Benefits) x Time
Using the information above, and assuming program costs and benefits are spread across the year, the break-even point is:
Break-Even Point = ($61,700-Cost of Investment)/$336,418 x 12 = 2.2 months
At the break-even point, total costs equal total benefits and only benefits accrue after that period.
There are also specific metrics HR uses such as cost per hire turnover, revenue per employee, cost of HR per employee and employee engagement rating, to name but a few. These metrics and others help HR to track and measure performance, and can also help to forecast the future.
For more key strategic insights on ROI, listen in to our XpertHR webinar.