The Incalculable ROI of HR
It sounds simple enough in theory, and sometimes it is in practice, too.
If you own a factory that makes a wildly popular widget, you might decide to add another machine to increase production. If you compare the additional money you make (after expenses) to the cost of the machine, you find your return on investment (ROI).
ROI Not Always Clear in HR
However, the lines aren’t as clear if you’re trying to establish the ROI of increased employee benefits, for example, or the introduction of flexible work hours. Neither action is likely to have occurred in isolation; the pertinent variables are more difficult to define and measure.
In fact, not everyone even agrees on the definition of ROI as it applies to human resources.
“Essentially, you want to know, ‘What is the best value for your money that you can get,’” says Shayda Kassam, CPHR principal at PeopleLink Consulting Inc. “When you think about people, it becomes complicated. People don’t react like a widget would. If you hire a person and that person brings in a big sale, how do you measure the return on your investment? What do you include, how long do you count the costs for—it’s complex.”
“I immediately challenge people. Are you talking about the cost of the HR function or of your people resources?” says Roger Wheeler, CPHR a professor in the HR programs at the Okanagan School of Business at Okanagan College.
“Typically, the cost of the HR function is maybe three to five per cent of operational costs. The cost of people is often up to 70 or 80 per cent,” explains Wheeler. “Even if you have a 50 per cent cost saving in HR function, you’re only cutting 1.5 per cent in total. Talk about the cost of the people; that’s human capital. What’s your return on that capital? What’s your investment in it?”
For Wheeler, who developed and now teaches a course on HR metrics and analytics in the college’s HR Management Specialty program, the definition is key. “When I’m defining it for students, I tell them to focus on making a connection with the return on investment through performance in individuals, teams and business units related to a goal.”
“Ask, ‘Is this a cost or an investment?’ The simple point is that if you don’t get a return, you can’t really call it an investment,” Wheeler says. “HR has traditionally been seen as a cost. Many people concentrate on costs and efficiencies. But spending HR dollars on the workforce can only be seen as an investment if you are anticipating a return. If you can’t measure a difference in performance, then you’re not getting a return.”
“If you’re doomed to discuss only the efficiency of HR, you’re missing the biggest piece – the effectiveness of HR,” he adds.
Intangible Results Difficult to Measure
There are two significant barriers to evaluating ROI on HR activities: the fact that not all HR benefits are tangible, and the challenge of separating the effects of HR’s activities from other concurrent influences in the workplace.
“Sometimes ROI is tangible, for example, a reduction in turnover,” explains Marni Johnson, CPHR, senior VP of HR and corporate affairs at BlueShore Financial. “But it can also be intangible, such as impact on the reputation of an organization.”
“It can be tough to separate out how much is a direct result of HR investment,” Johnson admits, but well worth it. “You can ask the employees themselves, through a survey, or in a less formal, more timely way such as focus groups, or just sitting with employees and asking them. You get a sense from an engagement survey. It’s a good indicator of future performance. Engaged employees are innovative, provide better customer service and sell more.”
An Investment in Resilience
Michelle Sing, CPHR, interim CEO at YWCA Metro Vancouver, and CPHR BC & Yukon’s 2018 HR Professional of the Year, is familiar with intangible benefits. “If you invest in your employees, your return is so much greater, not just in dollars and cents coming through the door, but in intangible pieces as well.”
Before she moved to Canada, Sing lived in South Africa. She recalls a large wholesale/retail operation that lost one of its warehouse operations to a fire. Recognizing the significant literacy issues among employees, the company sent them to school while they were rebuilding instead of laying them off. After that, their workforce was committed to them. They didn’t even have to recruit.
”At the YWCA, we work to ensure a work/life balance for our employees, to ensure that they’re healthy and resilient. We have practices to support that, including flexible work hours, free use of our wellness and fitness facility, resources for other parts of life and manager who are supportive of them as well,” Sing explains.
To Measure Beyond Dollars Alone
ROI on HR is different in a not-for-profit organization, Sings says. Seeing ROI as “a measure of success of your HR programs and a predictor of changes that might need to occur in your programs,” she approaches measurement in more than one way.
The YWCA is known for the social services programs it offers, but it also operates social ventures – its health and fitness facility, its hotel—to generate revenues that supports the social services programming.
While the business ventures’ ROI can be measured in a more typical manner, “they work toward the same goals as the larger organization—women’s equality and making sure we’re meeting the needs of all of our different staff in the organization,” Sing explains. “We try to measure the social and community impacts we’re making, the direct service delivery to women and children, or the efficacy of programs in promoting social or policy change.”
The Value of Open Communications
For Sing, the bottom line is her people and less tangible benefits of HR practices. “When looking of the return in social services, the majority of the work is done through our people. They need to be engaged. They’re only successful if managers support them and they all have leaders who they trust to have a vision that employees embrace, and know how they contribute towards it,” Sing says.
“We also build trust so that employees are able to go to leadership when they need to. We know about community needs because of the open lines of communication we have with employees,” Sing adds. “For us, one of the measures of success is around communications. Employees need to trust the messages they get. We communicate as much as we possibly can. If you don’t, employees make things up and in different ways, and there are so many different pieces. Direct communication is better. We recognize that the needs of employees are important.”
Full Measure of Business Partnership
Naturally, that communications needs to flow throughout an organization, so HR is not alone in building such value streams—or deserving of sole credit.
“HR professionals can’t work in a vacuum,” Kassam says. “Responsibility also rests with the line managers. “HR pros need partnerships with line managers who need to see measurements as meaningful. How do we use those numbers to change people’s behaviour, and how do we be smarter about it next time? If you’re labelling any benefits as a direct result of only the HR department’s activities, it detracts from that partnership.”
“Isolating the effects of HR only matters if you’re measuring and it can detract from the success of HR activities. You would need internal discussion to set parameters of what to include and exclude,” Kassam explains. “HR can measure, but not for HR’s sake—that lessens your power. It must be a business measurement, seeing it as an operational measurement, part of a partnership. It becomes more meaningful if you can demonstrate how you impact results, rather than collecting data for the sake of data.”
“I would say it’s very hard to say the success of an organization is only due to HR,” Sing agrees. “You need all the parts working together—communications, financial stability (to attract donors and funders). We’re only as successful as our employees are.”
In the case of the YWCA, that’s unusually successful.
“Our average retention rate is consistently around 90 per cent,” Sing admits. “On average, employees stay seven years with the organization. As we grow, we hire new employees, but we have some who’ve been with us for 30 years and many others in their high teens or 20s.”
A Growing Recognition of Impact
HR practitioners agree that looking at HR results through a business lens is vital. Kassam started her career as a Chartered Accountant, then moved into compensation consulting before starting her HR consultancy.
“I’ve been told by a few clients that I appreciate HR differently from other practitioners—I see it very much as a business. I was respected as a Chartered Accountant when people still thought of HR as fluff. Respect for HR has changed; people recognize that it’s a serious discipline and it does impact the bottom line, even if demonstrating the actual value is a monkey,” says Kassam.
“It’s always a partnership with other leaders. If the managers around you don’t believe in HR or take advice from HR, how effective even a great HR practice be? Not very,” says Kassam. “HR practitioners need more business skill to understand and partner with other leaders in the organization. HR is an advisory function, it doesn’t have the line power to say, ‘You must do this.’”
Integrating Principles, Goals and Value
“There has to be a really strong link between what HR does and what the organization is trying to do,” says Wheeler. “The organization’s strategic goals must translate to business goals, department goals, team and individual goals to connect HR activities to the values chain of the organization. If not, you can’t claim you contributed to the achievement of that goal.”
“You must be working with other units in the organization, show how your work is attached to the values chain, and then you can clearly claim responsibility for some of the benefit. The benefits are tangible, but they’re integrated,” Wheeler explains. “You should always be able to show how HR investment contributes to positive outcomes. You must be able to make the connection between HR activities or intervention and a business outcome, or it’s pretty hard to justify spending that money.”
“The senior decision-makers’ role within the HR function has undergone the biggest evolution among HR professionals, in how it gets involved with the rest of the organization. If you can’t speak the same language as they do, you can’t have influence,” Wheeler says. “I encourage students to build a strategy map for an organization and then identify how HR strategy is attached to it, and how it will help certain functions achieve certain goals.”
The Strategic Evolution of HR
“We have to operate HR with a financial outlook,” Sing says. “For example, know what effect benefits have on recruitment and retention. Everything requires budgeting and financial analysis. There’s not much you can do without a financial analysis outlook.”
“You’re facilitating maximizing the value of the skills and talents of people to achieve the organization’s goals,” says Johnson. “Ultimately, ROI is the improvement in business performance relative to the investment it took to achieve it. With the changing demands on organizations, the role of work and the fight for talent, HR has had to become more strategic. That helps the organization stay relevant and gives it a competitive edge.”
Other factors that have changed include: new expectations of employee experience with the gig economy and people changing jobs more often; social media providing a completely transparent view into an organization; the emphasis on inclusion and diversity; understanding and leveraging automation and the impact it’s going to have on the workforce; and the leadership pipeline of succession planning.
“They all have impacted how HR works. If HR isn’t strategic, the organization may not stay relevant and survive. HR plays a critical role in strategy. You need to look outside the organization, too—at the industry, at your competition. Be business professionals with an HR lens,” says Johnson.
Measurement A Challenging Proposition
Other difficulties aside, it can be costly to measure ROI.
“Measuring ROI takes resources, it’s time-consuming and it costs money,” says Kassam. “I suspect that larger organizations are trying to measure it because they have the resources. Generally, it’s more likely to be measured for specific projects than for the entire HR practice. If you’re looking at measuring, look at what you’re trying to achieve, how you’ll measure it and what it will look like down the road. There are a lot of resources involved in even preparing to measure, which is why it’s more likely to be larger companies doing it,”
“It’s not necessary to determine the ROI for every program you do,” explains Johnson. “It can take a lot time and effort. Just pick the big ones. Even doing something like a trendline analysis on sales—you can compare figures from before and after the introduction of a new compensation program or training. Then you can say if the change affected sales, even though it often isn’t just the HR professional who’s brought about the change; it’s in collaboration with other groups.”
“HR is a business discipline. You need to understand numbers, you need to be strategic, and you need skills in communication and cultivating influence. Being able to speak the language of numbers has really benefitted me in my career,” Johnson adds.
Even if your organization has the resources to track ROI on HR, “There are no generally accepted principles or method for measuring ROI on HR activities throughout the industry,” Kassam says, while admitting the allure of such a thing. “It becomes more meaningful if there are; numbers have meaning and power. There have to be some stats that are universally adopted. It will begin in the larger, more sophisticated organizations, then move into the mid-size ones, and so on. Right now, there isn’t really a universal understanding of what it is.”
A Universal Formula? Pass the Phillips
Early in the 2000s, Jack J. Phillips introduced a methodology for measuring return on HR investment, but it hasn’t been widely adopted, at least not among B.C. HR professionals.
To quote Phillips from “How to measure the return on your HR investment,” his 2002 Strategic HR Review article, “HR staff members must have an easy-to-understand approach to measurement. If the process appears confusing and complex, then professionals will give up in a fit of frustration, assuming that the ROI cannot be developed or that it is too expensive.”
Both internal clients and researchers need to have confidence in the measurement process, Phillips adds. And the process must be easily replicated from one situation to another.
Phillips identified the key elements of the ROI process as: an evaluation framework; a process model that provides a clear procedure to developing the actual ROI calculations; a set of operating standards and philosophy; necessary resources for implementation, and successful case applications to demonstrate how ROI actually works in an organization.
A Measure of Consideration
“Whether you measure ROI or not, there is a cost to not looking long-term or not doing planning,” says Kassam. “You can be smart about planning without measuring ROI, in what programs you choose and how you design them, for example. As individuals, always be mindful of what the goal is and the best way to reach it and of how you implement programs. HR is leveraging culture and implementing programs in a way that understands what the culture is.”
“I do believe the students are really benefiting from being pushed to think of HR in the context of the organization,” says Wheeler. “My hope of my graduates is that they add value to whoever hires then because they’re immediately able to identify and discuss connections between HR and the organization.”
Regardless, whether it’s measured or not, as Sing says, “Everything we do has an impact.”