After many years, and an increasing amount of technology, HR Is still a grey area for finance to monitor. Finance accepts that HR is a necessary part of business, but sometimes HR’s decisions are gut based rather than data-driven. As a result, it’s difficult to quantify the strategic business value that HR brings to an organization. However, their are HR metrics finance owners can monitor such as retention rates and workforce productivity to see just how effective HR is in an organization. With this insight, finance can see what is working and not working within HR. Measuring the ROI of HR initiatives through a finance lens helps to see how HR is contributing to a business bottom line.
The ROI formula
Jack Phillips, CEO of ROI Institute, mentions in, “How to Measure the Return on Your HR Investment,” a basic formula that can be used to determine HR’s ROI. It is a simple cost/benefit ratio where the benefits of an HR program are weighed against the the cost of it.
According to his formula:
ROI (%) = (HR program monetary benefits – HR program costs)/HR program costs x 100
In the end, all finance needs to do is gather the data surrounding HR costs and the value it brings, then plug it into this formula to see HR’s ROI. The two basic areas that should be watched are employee engagement and retention. These can be monitored by metrics found in workforce productivity, usage of non-essential benefits and perks, and turnover rates.
Let’s start with the biggest expense that a company has: its workforce. As HR is responsible for recruiting, retention and employee engagement, it will be simple to get a high-level view of HR’s effectiveness by monitoring a workforce’s productivity. Simply use revenue and labor costs as your variables in the formula and see what your workforce’s ROI is. If HR is recruiting the right employees, training them effectively, and engaging employees, then it should be a positive return.
This will be a high-level analysis of data with countless other factors that influence workforce productivity. However, analysis can provide a general idea of how effective HR is in engaging employees in their day-to-day tasks.
Managed hiring decisions
SHRM’s 2016 Human Capital Benchmarking Report states that the average cost-per-hire is $4,129. Investing thousands of dollars into a new hire who has yet to contribute to the organization is a metric to watch. If HR truly took the time to hire the best fit, then overtime that employee will hopefully begin to contribute to growth. However, if that employee quits within a few months then the costs associated can negatively impact the ROI on HR’s hiring processes.
The same report from SHRM indicates that the average time it takes to fill a position is 42 days. With each passing day of a vacant position, there are costs that drain company resources. If HR can find a way to reduce the time to fill a position while still finding a promising new hire, then HR’s ROI will increase. Take the cost of the average number of days spent without a position being filled and run it against processes that help speed up hiring. If HR can still hire effective employees in half the time it normally took, then investments in HR will show a positive ROI.
A high turnover rate can be one of the largest inhibitors of company growth. Not only does it cost money to terminate or lose an employee, but it also costs more to hire a new one to replace them. HR can help develop strategies to increase retention rates. These include ideas like building company culture and additional training; regardless of the ideas it will cost time and resources. For each HR activity, calculate the costs of the strategies and your own retention goals. Were you able to lower your turnover rate and lose only two employees this quarter instead of four? If that’s the case, take the average cost of every lost employee and put that towards the monetary benefits of HR’s retention strategies.
Non-essential benefits and perks
Many businesses offer non-essential benefits and perks to their employees such as free gym memberships, free lunches or even services like on-site dry cleaning. However, not all benefits and perks are wanted or even used by employees. To know if certain perks are effective or not, weigh the cost of the perks with the boost of engagement and retention. Did that $3,000 ping-pong table in the break room help an employee become more productive? Monitor employee usage of benefits and perks. If no employees are using a perk or benefits but retention is still high, then it may not be contributing to the ROI your company needs for growth.
Of course, not every aspect of HR can be measured with an exact ROI percentage. For example, conducting employee satisfaction surveys and direct feedback may not be the most accurate or quantifiable. Overall, HR’s impact can influence a company’s bottom line, just make sure you do the math to see what the ROI really is.
About the Author
Gary is the Director of Finance for Zuman. He has over two decades of experience in finance from working in a variety of positions such as financial consultant and Sr. Director of Finance Operations. Gary holds a BS in accounting from San Jose State University.More Content by Gary Bryson