How to Measure the ROI of an HR Initiative
Author: Ray Halagera
Competitive economic and profit pressures have caused organizations to intensely scrutinize and evaluate their business initiatives. Measuring the return on an investment (ROI) to evaluate business expenses or new initiatives has evolved into the de facto criteria for an organization when deciding:
- Which expenditures are to be approved and financed; and
- An expenditure's priority among alternative approved expenses.
ROI is stated as a percentage and is calculated as the benefits (or gain) from the investment, less the cost of the investment, divided by the investment costs and multiplied by 100:
The trend in organizations is to hold all staff-support functions, including HR, as financially accountable as line functions when approving expenses, which could range from equipment purchases to upgrading a payroll system. HR can position itself as a business-oriented function, competitive to line and other staff functions in securing approval for proposed expenses, by measuring the ROI on an HR initiative, program or project, and then presenting the results to decision makers.
The benefits of taking the time and energy to calculate ROI include:
- Quantifying the value of the project. ROI communicates to business leaders an expense's worth in quantitative terms - a very important aspect. ROI turns a subjective proposal into an objective proposal, which can often turn uncertainty into support.
- Building stakeholder support. Tying a monetary benefit to an initiative may help with a "go/no-go" decision. Many times, stakeholders want to see what the dollar value is to them if they are to support a particular expense. Without measuring ROI, that is very difficult to do.
- Uncovering additional benefits. The process of calculating ROI forces the HR professional to investigate additional tangible or intangible benefits that might not have seemed obvious at project inception.
- Prioritizing the project. Once the decision has been made to approve an investment in a particular project, ROI helps determine the project's ranking among other priorities. Usually, initiatives with greater ROI are more highly ranked and gain resource support more quickly.
Measuring the ROI of an HR initiative, project or program requires the following steps: