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ROI in HR

1) Calculating return on investment (ROI) for human resource activities and programs is an important but challenging task for HR professionals. It provides a measurable way to justify expenditures and determine the impact of HR on business goals. 2) There are various reasons to calculate ROI for HR initiatives, including accountability, competitive pressures to scrutinize costs, and decisions around continuing or discontinuing programs. 3) The ROI process involves setting objectives, developing an evaluation plan, collecting relevant data before and after implementation, calculating monetary values for benefits and costs, and determining the ROI ratio and impact. Several models can be used to comprehensively measure HR ROI in Indian enterprises.

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289 views7 pages

ROI in HR

1) Calculating return on investment (ROI) for human resource activities and programs is an important but challenging task for HR professionals. It provides a measurable way to justify expenditures and determine the impact of HR on business goals. 2) There are various reasons to calculate ROI for HR initiatives, including accountability, competitive pressures to scrutinize costs, and decisions around continuing or discontinuing programs. 3) The ROI process involves setting objectives, developing an evaluation plan, collecting relevant data before and after implementation, calculating monetary values for benefits and costs, and determining the ROI ratio and impact. Several models can be used to comprehensively measure HR ROI in Indian enterprises.

Uploaded by

Stephen King
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MEASURING RETURN ON INVESTMENT IN AREA OF HUMAN RESOURCE IN INDIAN ENTERPRISES

‘What gets measured gets managed’- is a very well known proverb in the area of management studies.

This is one of the most daunting tasks for an HR professional as it is one of those functions of management
whose quantifiability is of utmost difficulty. But as the proverb suggests and the golden rule of the day
states, ‘everything has to be backed by data’. Thus calculation of the return for whatever has been
invested in human resource capital has become one of the most significant tasks that is expected out of
HR professionals.

ROI of Human Resource Development is measured as the magnitude of evaluate investments by


comparing the magnitude and timing of expected gains to magnitude and timing of investment costs. In
an attempt to define it in its simplest of versions we specify it as the impact of HR on business bottom
line.

WHY CALCULATE ROI?

1. The pressure from Clients and Senior Managers: There is a constant responsibility for
accountability on every reporting manager in an organization. Thus to satiate the demands of
these parties an HR professional has to make sure that each and every development is clearly
communicated and is explicitly stated along with being measurable to maximum possible extent.
2. Competitive economic pressures causing scrutiny of all expenditures: The continuously
increasing competition and need to be economical to balance the costs and benefits, each and
every penny spent is measured against the advantages being derived.
3. General trend towards Accountability: There has been a tendency for accountability being
attributed to increased efficiency in an organization. ROI gives us a measurable figure so that we
can hold relevant people accountable for the outcome further calling for corrective action.
4. To justify the existence of training department: In order to give grounds for the presence for a
training department in the organization, we need to report what all benefits are being derived
and what all costs are being incurred for the same.
5. To take decisions related to Continuation/Discontinuation: Whether a certain program can be
continued or not is purely a decision based on certain numerical facts which come from these
facts and figures properly calculated and synthesized. We are able to gauge the success of the
efforts done and training imparted.
THE ROI PROCESS

1. OBJECTIVES: The first and foremost step is to develop the goals and targets to be achieved so that
the Vision and Mission is clear and transparent.
2. EVALUATION PLAN: We need to choose a proper and appropriate evaluation plan to properly
assess the benefits received and costs incurred.
3. COLLECT DATA: We need to keep a track of all the activities and keep collecting important data
during the respective program which is very material to process further.
4. COLLECT DATA AFTER IMPLEMENTATION: Once the program is over, we again need to collect
data related to important KRAs for further evaluation.
5. ISOLATE THE EFFECTS OF THE PROGRAM: We need to make sure that we differentiate the effects
brought abut by the program from any other initiatives so as to properly assess the benefits of
the same.
6. CONVERT DATA INTO MONETARY VALUES: We have to convert the data collected into numeric
or monetary form so as to facilitate comparison with the effects of any other changes, if any.
7. CALCULATE ROI: Finally, we calculate Return on Investment by taking into account the
appropriate and relevant costs and benefits of the program.
ROI = ADDITIONAL BENEFITS DERIVED/ PARTICULAR COSTS INCURRED
8. IMPACT STUDY: In the end, calculation of ROI is followed by an assessment of the Impact that it
has caused the changes it has brought.
A COMPREHENSIVE MODEL:

This is the Comprehensive model for calculating ROI which involves evaluation of the entire framework of
the organization including its structure. The standards and philosophy of the organization is studied in
detail so as to make the calculation model in line with the methodologies already being followed in the
organization.

After the complete study of whole of the organization and its practices, a model is prepared which is
conclusive of all the requisites and properly relates to the ideology that the organization follows. The
model is then finally implemented and hence used for the purpose of calculation of ROI in the
organization.

MEASURING HR ROI:

1. BCR (Benefit Cost Ratio): This is calculated as the ratio of benefits and costs being produced by
an HR oriented program e.g. an absenteeism reduction program produced savings of INR 500000
with an underlying cost of INR 250000. Thus the BCR is

BCR = 500000/250000 = 2

2. HR Profit Centers: Different departments related to HR are converted into separate cost and
profit centers and the related expenses and benefits are accounted for. This increases the
accountability of each department for the particular work being carried on or a particular training
being imparted.
3. HR Accounting:
There are various methods of doing accounting for Human Resources and thus finding out ROI.
They have been classified as above.

A. Human Resource Cost Accounting


a. Historical Cost Model: This was developed by Brummet , Flamholtz and Pyle. The whole
model revolves around 2 costs namely Training and Development cots which is capitalized
and written off over the expected life.
b. Replacement Cost Model: This was developed by Renis Likert and Eric G. Flamholtz. This
represents the cost that an organization has to bear to replace an individual’s service in
the organization. This approach is Present oriented than being Future oriented.
c. Opportunity Cost Model: This model was developed by Hekimian and Jones. This
approach suggests competitive bidding for scarce employees in the organization i.e.
opportunity cost of employees linked to scarcity.
B. Human Resource Value Accounting
a. Monetary approach: Under this method, accountants measure the value of Human
Resource using basic principles and guidelines of accounting.
b. Non Monetary Approach: Under this approach, more focus is on value derived rather
than on plain and basic numbers.
Amongst the above Lev & Schwartz, Flamholtz model and Jaggi and Lau’s model are the most
popular ones.

INDIAN ENTERPRISES:
1. BHEL: BHEL started providing information regarding HR in its Annual Report in the year 1974-
74 using Lev and Schwartz model. The company divided its employees Category wise, Group
wise and also the physically challenged employees. It calculated total no. of employees, value
added, Employee Remuneration and Benefit, Value added per Employee, Turnover per
Employee. It also calculated various ratios related to different employees. The value per
employee doubled from 2005-06 to 2009-10.

2. National Thermal Power Corporation (NTPC): ‘People before Plant Load Factor’ is the mantra
of NTPC for all the people’s policies. NTPC calculates generation per employee, value added
per employee and also the Man – MW Ratio.
3. Steel Authority of India Ltd. (SAIL): SAIL started valuation of Human Resource in the year
1983-84. The organization uses Lev and Schwartz model with some adjustments suggested by
Flamholtz and Jaggi and Lau model. The company uses a constant rate of discounting the
future expected return at 15%. It provides information on Turnover, Capital employed, EPS,
Net Worth per share, Employee Remuneration and Benefit. It also calculates Different ratios
like crude tone steel/man/year. The category ‘Other Current Assets’ also includes employees.

4. Oil and Natural Gas Corporation (ONGC): ONGC calculates value per employee using Lev and
Schwartz model with a discount rate of 8%. It also does Age wise distribution of employees
and also categorize them as Executive and Non Executive employees.
5. TATA Steel: It is one of the major Steel companies which has vividly reflected information and
practices regarding HR in its annual reports.

SOME MYTHS ABOUT ROI AND EVALUATION ON HR AND TRAINING PROGRAMS


1. ROI is a finance concept and not an HR concept: calculating ROI is done using a simple
mathematical formula. It only takes into account benefits and costs. There are various
ways to find out benefits for all programs, policies and processes.
2. Soft Skills and Behavior training cannot be measures: Majority of them are measurable
provided the following three things
a. Operational definition of the concept to be measured
b. Measures that are linked to the business needs
c. Data availability
3. ROI measurement can be done at the end of the training: ROI needs to be included even
before the training starts. This comprises of ‘Training need analysis’.
4. We need to evaluate only if the need arises: It is all about mindset. We just need a
mindset to justify every investment a company makes in HR.
5. To calculate ROI, we need a strong mathematical ability: We do not actually need any
high end mathematical knowledge for the calculation of returns. Basic mathematical
knowledge would work.

Thus we finally conclude that it is very much significant to justify all of our investment in
any of the HR training or development programs and evaluation of the same vividly
captures the benefits and costs of the same.

References:
1. http://www.jamet-my.org/archive/2016/2/175-185.pdf
2. https://xub.edu.in/jcr/cases/Case03-HRA-DEC2013.pdf
3. https://www.ijser.in/archives/v4i5/IJSER15788.pdf
4. http://hrunder1roof.blogspot.com/?m=1

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