The human resources department should be treated the same way as other business functions and like other departments must produce value. Gone are the days of impulsively decision making; increasing HR costs with no indication as to their financial payoff.
Measuring return on investment (ROI) has become one of the most challenging issues facing the human resources department and performance improvement field. Several factors are driving the increased interest in measuring ROI. Pressure from executives to show the return on their training investment is probably the most driving factor. The current high inflation and competitive economic pressures are forcing the executives to demand accountability on expenditures, including all training and development costs. ROI is a useful way of measuring whether a particular program or training course offered value for money. Thus, ROI calculation is the only way to justify the cost your HR investment including training.
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Many HR personnel have long assumed that measuring the ROI in human resources is impossible. However, the ROI is a measure of accountability that has been in place for centuries. Measuring return on investment was rated the hottest topic in a survey of 35 members of the International Federation of Training and Development Organizations (Phillips, 1999). Whether the company is fully grown or developing, training is still a critical issue. Whenever there is a significant expenditure, there is a need to know the financial impact of the expenditure. Most stakeholders involved in HR programs believe that the programs add value but using ROI you can confirm that using a credible and validated process.
Some of the factors to consider for an effective ROI process
- The ROI process must be simple. It must not include complex formulas, lengthy equations, and complicated methodologies.
- The ROI process must be implemented easily and must be economical. The process should become a routine part of your HR investment without requiring significant additional resources. Sampling for ROI calculations and early planning for ROI are often necessary.
- The assumptions, techniques, and methodology must be credible. The methodology needs to earn the respect of executives. This requires a very practical approach to the process.
- The ROI process must account for other factors that have influenced output variables. The ROI process should determine the contribution of the training program when compared to the other influences.
- The ROI process must be appropriate with a variety of human resources programs. Some models apply to only a small number of programs such as sales or productivity training. Ideally, the process must be applied to all types of training and other human resources programs such as career development, organization development, and major change initiatives.
- The ROI process must be applied to all types of data, including hard data, which are typically represented as output, quality, costs, and time; and soft data, which include job satisfaction, customer satisfaction, absenteeism, turnover, grievances, and complaints.
- The ROI process must include the costs of HR investment. The ultimate level of evaluation is to compare the benefits with costs.
- The actual calculation must use an acceptable ROI formula. This is often the benefits/cost ratio or the ROI calculation, expressed as a percent. These formulas compare the actual expenditure for the investment with the monetary benefits driven from the program.
Taurai Masunda is a Business Analytics Consultant at Industrial Psychology Consultants (Pvt) Ltd a management and human resources consulting firm. https://www.linkedin.com/in/taurai-masunda-b3726110b/ Phone +263 4 481946-48/481950/2900276/2900966 or cell number +263 779 320 189 or email: taurai@ipcconsultants.com or visit our website at www.ipcconsultants.com