Returns are hard to measure in human resources. In other departments, sales conversions, new products, or ad campaigns can easily be measured. But in HR, the “assets” are people. People bring so much value to your business, but it’s difficult to measure HR’s ROI.
In the data-driven age, every line of business is under increasing pressure to connect investment strategies with measurable, bottom-line results—and HR is not immune. That means not just feeling successful, but showing executives financial data and performance metrics that prove success.
HR software solutions are often one of the biggest investments HR managers or COOs make during their tenure—not necessarily because they’re expensive, but because they literally change the way a company operates. Whether you’re shopping for your first HR system or looking to replace your current system, you need to have a plan for measuring and reporting return on investment (ROI).
What is ROI?
You probably already have a general idea of how ROI works. It’s the percentage of your investment that you earn back through direct profits, indirect profits, and cost savings. If you’re looking for a specific formula, it usually looks something like this:
Ideally, if you choose the right software and implement it correctly, you’ll see a positive ROI—meaning you’ll make back what you spend and then some. To calculate this amount, you need to know two things:
(1) The estimated monetary value of any resulting gains, and
(2) The total cost of ownership (TCO) for your software
Total Cost of Ownership
TCO has more dimensions than you might expect. Many make the mistake of expressing cost simply as the subscription or licensing cost—essentially, what’s on the “sticker.” The problem with this approach is that it doesn’t provide a complete picture of the investment in terms of upfront cost and ongoing expenses.
Cloud-based software, which is usually licensed on-demand (“software-as-a-service”), is a perfect example. But even on-premise solutions have costs beyond the sticker price. Here are some examples:
· Installation fees
· Data migration
· Updates or custom development
· Ongoing consulting
· Cost of additional software users
· IT maintenance costs
The complexity of your costs will depend on the scale and complexity of the solution you choose. If it’s a simple, cloud-based app for administrative HR tasks, you may only have to worry about the monthly subscription price and a few maintenance hours. If it’s an entire HCM or enterprise resource planning suite, you may be looking at significant capital and operational expenses.
Measuring Your Gains
The next step is to calculate your gains, including direct profits, indirect profits, and cost savings. Again, this is where things get tricky because it’s a lot harder to measure financial impact in a line of business that’s mostly concerned with personnel.
But it can be done. To get started, here are four key areas to look for gain after implementing a new HR solution:
1) Reduced employee turnover: The right HR software can help you keep tabs on employee performance and job satisfaction, which means you can spot warning signs early on and (hopefully) maximize the amount of time talented workers spend at your company. That’s a big deal, considering it can cost 30-50 percent of their annual salary to replace even an entry-level employee. If your company has a high turnover rate, see if the new HR solution changes that, and try to determine what replacement costs you avoided.
2) Streamlined hiring process: Solutions that help manage the hiring and onboarding process can cut time and reduce the administrative work normally required to bring a new hire from application to first day. The more efficiently you can manage the hiring process, the more time and money you save. What was your average time to hire and cost per hire before? What are they now? How much is your saved labor worth?
3) Lower recruiting costs: Before you hire talent, and even before you interview, you have to find talent. An HR solution with strong recruiting features can help you market job openings, connect with potential candidates, recruit on social networks, and manage referral programs. These tools save you from some of the manual efforts and longer waiting periods associated with one-off job postings, classified ads, and word-of-mouth. More targeted recruiting campaigns can also lead to higher interview-to-offer and offer-to-acceptance ratios.
4) Administrative productivity: Modern HR systems are a great way to replace outdated workflows and paper-based record-keeping, especially when products offer online document storage and employee self-service. According to a report from 2011 (the numbers are probably higher now), large companies spent an average of $1,400 per employee per year on in-house administration of payroll, time and attendance, and health and welfare. By “outsourcing” some of these tasks to a human resource management system, businesses can drastically reduce costs. The HR solution keeps the gears turning while employees focus on more mission-critical goals.
Even considering all of these factors, the best advice is to avoid over complicating things. Most of the time, your measurable benefits will take the form of lower employee turnover, streamlined administrative processes, and reduced costs. To get an accurate read on ROI, pick a handful of specific metrics, benchmark them before implementation, then measure and report after.
Check out this list of human resource management system features that will help you discover the return on investment you’re looking for.
Aleksandr Peterson is a technology analyst at TechnologyAdvice. He covers marketing automation, CRMs, project management, human resources, and other emerging business technology. Connect with him on LinkedIn.