Every return on investment calculation is derived from the same formula: ROI = (Gain on investment-Cost of Investment)/Cost of Investment
The formula does not change regardless of the type of investment being measured. It doesn’t matter if a company is measuring the ROI of an investment in inventory, machinery, technology, structures, training, or employee rewards programs. Then why do more companies not measure the ROI of human resource initiatives?
Granted, it is more difficult to eliminate other variables associated with the improvement or employee performance. Very rarely can an organization eliminate every possible reason for a change in results. After all, people are complex by their very nature and are influenced by a plethora of stimuli. But the same can be said about many other variables. Increases in sales may not be the sole result of a new product, but measuring the ROI of the program will certainly demonstrate how the program influenced the results. No finance professional would green light the purchase of a new machine simply because it “feels like the right thing to do”. So why should anyone expect an investment into the people of the organization to receive any less of a logical scrutiny?
Measuring the ROI for a HR initiative is paramount to understanding what works and what does not work. The costs associated with employee turnover, lost productivity, bad hiring decisions, terminations and deflated morale, can be some of the highest and most repeated costs associated with any business. With many human resource initiatives, including those around training and development, employee engagement, staffing process and performance management, the results of the program may take a little more work and more time to quantify or measure. Not only do these programs take longer to complete than simply purchasing a new durable good, but the results may not be realized immediately.
So how should a company go about measuring the ROI of a HR initiative? Follow these seven steps to effectively quantify any investment into your staff.
- Choose a specific metric: if you can’t measure it, how do you even know that you should be investing in this specific issue? There needs to be a goal behind every change initiative, every investment. If not, just save the money and take some to figure out what you are really looking to accomplish.
- Determine the desired outcome: know where you are trying to move the metric. If you don’t reach your goal, even a substantial ROI may not demonstrate a successful initiative. Consider defining short term, immediate and long term goals if the program is expected to have lasting effects on a measurable outcome.
- Set a baseline measurement: it is impossible to determine how far you grew if you don’t know where you started. For example, if you are looking to increase employee morale, consider conducting an Employee Opinion Survey to establish your baseline. Or if you are looking to measure the effectiveness of a new leadership develop program, consider using a 360 degree survey to define your baseline. Regardless of what you are looking to measure, there is a way to determine where you are currently.
- Determine the length of your study: new training initiatives and leadership initiatives will take longer to root within your culture than a performance based incentive program. Choose a time period that is long enough to see a result but short enough not to get watered down with other changes to the environment.
- Measure the cost of your investment: measure all costs associated with the program, from actual program costs, to the cost of employee participation, to the cost of the measurement device. Without a true cost figure, you will never be able to get a true ROI figure.
- Schedule both the baseline measurement and the follow-up measurement: securing these dates in advance will ensure you don’t accidentally extend or shorten the study thus impacting your results.
- Have a plan for what you plan to do with the savings: ensuring you have a plan on where you plan on investing any savings or financial gains will allow you to reinvest in other measures and create a strategic plan for long-term employee development and business growth.
Any executive gains credibility by measuring the results of a program. But based on the historical lack of empirical measurements provided by HR professionals, the amount of credibility that can be gained from conducting a valid ROI study can significantly enhance his or her credibility within the organization. Even if you fail to meet your expected results, being able to demonstrate an understanding of what happened and how to resolve the issue in the future will build upon the belief in HR as a strategic business partner within the organization.