What Is a Return on Investment in Human Resources?

by Tia Benjamin, Demand Media

Quantify the value of HR projects to build support.

Human resources is sometimes considered a "soft" industry, because it can't always provide quantifiable financial
data about its workload and doesn't typically create revenue either. Investment in HR can make executives nervous,
because projects and programs often provide no tangible results -- although the idea of "improved morale" or
"greater employee satisfaction" seems like a good thing, whether that translates to a significant increase in revenue
or improved productivity remains questionable. Calculating the return on investment provides a way for HR
professionals to demonstrate the worth of the profession.

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Definition of ROI
"Return on Investment," or ROI, is the term given to a mathematical calculation used in the finance industry and
business in general. The ROI measures the financial return on an investment made, or it can be applied to a business
measuring the performance of the firm by assessing the net profit compared with the overall net worth of the
company. In more recent years, the ROI concept has been adopted by other industries to evaluate projects and
programs on a smaller scale.

Importance of ROI to HR
Using quantifiable metrics improves the credibility of HR as a profession, and allows upper management to identify
specific, measurable ways that HR services benefit the organization. It's no longer enough to state that a certain
program is believed to be beneficial -- you need to be able to prove the worth of your actions. In difficult economic
times, the value of support services -- often seen as tangential to the organization's core mission or product -- comes
under increasing scrutiny. Consequently it becomes even more important for HR professionals to show how HR
services directly impact the bottom line, while identifying and eliminating programs that are not financially efficient.

Related Reading: How to Measure a Return on Investment

Examples of ROI in HR
HR can use ROI metrics to analyze the value of almost any of its services, as long as a dollar cost can be
determined. For example, if HR introduces a new health and safety program, its effectiveness can be measured by
the associated reduction in costs of work-related injuries. The value of a new employee orientation program can be
measured in terms of an ROI by assessing the costs saved by correlated reductions in turnover. Diversity programs,
HR information systems, training, development and mentoring initiatives are additional examples of HR programs
that can be measured by the ROI calculation.

Calculating ROI in HR
To calculate the ROI of human capital, divide the organization's net revenue -- gross revenue after deducting
operating expenses, salaries and benefits -- by the cost of salaries and benefits. To calculate the ROI of a particular
program, you must first calculate the value of the specific program itself, then divide it by the costs of implementing
the program. For example, if a training program to speed production of a factory line results in an increased amount
of product, calculate the value of the additional product and divide that by the costs of providing the training and
materials. In some cases -- a general increase in productivity, for example -- you will need to isolate the portion of
the increase that was because of an HR measure before calculating ROI. Conduct an analysis of groups that
underwent a training class, versus groups that did not, to estimate the effect. Alternatively, use an expert to estimate
the percentage increase that was because of the training.

Measuring the ROI of HR

It's impossible to know where to focus your resources unless you have solid HR data.
Shari Caudron

January 8, 2002

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It's impossible to know where to focus your resources unless you have solid HR data.
Alicia Main, an HR analyst with Best Practices, LLC, a research and consulting firm in
Chapel Hill, North Carolina, shares three ways that HR professionals can track their
successes.

1. Track human resources activity levels with a balanced scorecard to

emphasize the department's contribution to company goals. Best-in-
class companies align HR measurements with the strategic goals of the company.
By creating balanced scorecards, companies track a variety of financial, quality-
oriented, operational, and strategic measurements.

According to Mark Huselid, who along with Brian Becker and Dave Ulrich
wrote The HR Scorecard: Linking People, Strategy, and Performance (Harvard
Business School Press, 2001), an HR scorecard is a mechanism for describing
how people and people-management systems create value in organizations. It is
based on a "strategy map," which is a visual depiction of what causes what in an
organization, beginning with the people and ending with shareholder or other
stakeholder outcomes.

For example, in a pharmaceutical company, shareholder returns may come from

growing revenues. Revenues, in turn, are driven by developing innovative drugs
and marshaling them through the regulatory process. And developing innovative
drugs depends on a stable, high-talent R&D function, which is the job of HR. By
tracing its strategy back to HR needs in this way, a company can see the direct
cause and effect between HR and revenue.

By using a strategy map, HR knows what to deliver, and the metrics on the
balanced scorecard-which are linked directly to the deliverables and may include
such things as cost per hire, turnover rate, HR competencies, and alignment of
HR practices-tell HR if it is delivering.
 Implementing an HR scorecard focuses the company on the deliverables that lead
to competitive business advantage and enables HR executives to monitor costs
while tracking the value added to the company's bottom line.

2. Track HR performance metrics at the corporate level to ensure

consistent measurement and predict overall company
growth. Although the phrase "what gets measured gets managed" is so overused
that it's almost a cliché, the fact remains that the statement is true. Tracking
specific HR metrics at the corporate level gives executives an overall view of the
company's HR activities and successes.

Some corporate metrics to track are employee turnover rates; top talent defection
rates; absenteeism; safety incidents; overall head-count; compensation and
benefits competitiveness; total employees trained; total training hours; HR
expenses as a percentage of total operating expenses; internal customer
satisfaction; diversity; time to fill positions; and cost per hire.

3. Survey employee attitudes and identify informal thought leaders to

detect workplace concerns. Best-in-class companies consider employees to
be the internal customers of the HR function. Just as success for a business
depends on its customer-satisfaction levels, the success of HR in such
organizations hinges on the satisfaction of employees.

Best-in-class companies regularly survey employees to identify effective practices

and determine employee concerns. Typically, employees are surveyed about such
things as morale, job fit, teamwork, physical working conditions, promotion
opportunities, training practices, and treatment by the management team.

Workforce, December 2001, p. 28 -- Subscribe Now!

Dr Louise Suckley is a researcher with Sheffield Business School who focuses on the field of
organisational behaviour and undertakes impact evaluations of training programmes.
All too often when times get tough, staff training is the first thing to get cut. However, corporate
training and development is a hugely important element of business growth. The difficulty for most
businesses, as I see it, is justifying the cost as many see it as being too difficult to quantify your
return on investment.

Image courtesy of Feelart / FreeDigitalPhotos.net

We know that every business leader recognises the importance of employee engagement
and workforce development training programmes are a valuable tool in engaging and motivating
staff. Vocational training courses not only inject fresh skills into the business, but also help to
generate new ideas and revenue streams while inspiring staff to achieve more.

I realise that in the current climate there has to be a measurable return on investment for all staff
training programmes. But the big question is how can that be evaluated?

In a guest blog for Sheffield Business School, Sue Blight, Head of Learning and Development
atDairy Crest, the UK’s leading dairy company, argues the financial return from training can easily be
measured, but adds that the real value is the increase in confidence in the team.

Seeking an ROI from training goes beyond the corporate world and is a major issue in the public
sector, given that they are justifying the use of public funding. In the NHS, which has been under
intense scrutiny over recent months because of budget cuts and a number of high profile patient
care scandals, staff training and development is high on the agenda.
Deneise Dadd from the Open University Business School explains the various NHS approaches to
measuring ROI in her blog post for the Health Service Journal last year.

The ROI approach to measuring training and development

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

The Phillips ROI/abdi model is the one we have based our ROI/Evaluation approach on here at
Sheffield Business School. The model was applied to learning and development first within the
corporate context, before being used by international development and healthcare organisations.

This ROI approach to measuring training and development is highly regarded as one of the most
comprehensive methods, as it draws on a number of established theories and evaluation models,
includingKirkpatrick’s learning evaluation model and Phillips’ ROI methodology, theories of change
and the logical framework approach.

This model is about building a chain of impact to create a link between the specific learning/ training
activity and the impact or ROI, which could work equally well for coaching as it does for a more
traditional staff training programmes.

Measuring impact with the ROI model of training and development

As Paul Stokes explains in his blog post on measuring the success of coaching programmes, the
measurements are unique to each organisation, as their strategic objectives from the coaching will
differ.

The approach we use is about building a chain of measurements to try to demonstrate that impact.
This can arise from any type of training intervention from leadership and management programmes
that develop coaching skills and workshops that develop customer service skills or machine
operation, to those that develop advisory skills in health issues such as weight management or
diabetes.

In the example of building coaching skills in managers, a business could use this as a development
tool, which will result in the coach or coachee being more confident to take on more leadership
responsibility or making decisions themselves rather than escalating them to the next level of
management.

All of these different impacts have organisational-wide financial implications attached. For example,
in the case above, a consequence would be that recruitment to leadership roles can occur from
within the organisation, rather than externally (saving on external recruitment consultancy fees), and
the organisation also saves senior leadership team time from decisions not needing to be escalated.

The five levels of impact for the ROI model

Image courtesy of patrisyu / FreeDigitalPhotos.net

(1) Our model starts at the lowest level with Engagement – checking that the individuals feel the
training or coaching is worthwhile. We speak to them to ensure they are learning something new and
that they see it as relevant to their role. We also make sure they are committed to taking actions
from what they have learned.

(2) Following that is Learning – checking or testing that they have developed new knowledge, skills,
attitudes and that they have the confidence to apply it: this could be through a pre- and post-skills
audit or a scenario/simulation test of their coaching skills.

(3) Application and Implementation is next - Are they demonstrating changes in behaviour? This
could be done through pre- and post-360 feedback (interesting discussion on 360 feedback
on Training Zone) or evidence that they have completed the planned actions from their coaching
sessions.

(4) Business Impact is next. These measures are agreed with the business before the programme
starts and can involve HR, Finance, IT departments (as Paul Stokes suggests – this is about the
involvement across the organisation). Credibility comes from using the measures collected by the
business already rather than starting from scratch, and reaching an agreement about what can be
tied to the programme. If work based projects are used in the learning solution, the financial impact
of these can also be included at this level. The hard impacts are reported at this level where a
financial figure can be applied so it can be used to calculate the ROI. Soft measures are reported
separately. Isolation tools are also agreed upon with the business and applied to the impact
measures before the ROI is calculated (which also ties in with what Paul has written).

(5) Finally, ROI is then calculated. Fully loaded costs of the programme are gathered (cost of
programme, participants’ time and on-costs) and the Net Programme benefits are calculated:
(Benefits – Costs)/ Costs x 100

Developing talent and your business

By employing a robust evaluation model, you cannot only ensure you maximise the return on your
investment, but you can also ensure your business is improved way beyond the actual training
programme.

Image courtesy of cuteimage / FreeDigitalPhotos.net

An evaluation model like ours forces a business to take stock and identify its needs. In addition to
highlighting the skills it is lacking, this process can also help to identify new opportunities.

The added bonus of assessing participants’ skills as a baseline measure means the training can be
tailored to suit your needs and also makes sure the people who take part in the training are engaged
and determined to succeed.

I’d welcome your thoughts on how you identify your training needs and how you measure the return
on investment.