Determining Return on Investment for Human Resource Interventions

Linda Gravett, Ph.D, SPHR

A few years ago, I taught a graduate-level course on Measuring Human Resources Effectiveness. One of my students told me after the quarter was over that her major objective was to make it through the class each week without hyperventilating! She was pleasantly surprised to discover that it isn't necessary to be an accountant to be measurement oriented in the field of Human Resources. I'd like to address the importance of assessing the return on investment for HR activities and interventions in this article…..in a way that keeps the reader from hyperventilating!

Because of our experience and expertise in the field of managing people, there are some "givens" that we understand and take for granted, such as:

• Treat people with respect to get respect in return
• Provide education for newly promoted supervisors on management issues
• Job satisfaction is highly correlated with organizational commitment

Unfortunately, some of our "givens" aren't as readily apparent to other leaders within our organization, and an intervention that to us seems intuitive isn't readily accepted by others. I've found a straightforward approach that resonates with CEO's, CFO's, and line managers that I'd like to share. I call this approach simply the R.O.I. approach, for Return on Investment.

Step 1: Clearly state the business problem. For example, our organization has a turnover rate of 32% for computer programmers.

Step 2: Calculate the cost of the business problem. For example, calculate the turnover costs for separation, replacement, and training for each computer programmer that left the organization last year.*

Step 3: Identify a potential solution to the business problem based on historical data or benchmarking. For example, a study of exit interviews may reveal that key first-line supervisors aren't effective managers. A combination of training and one-on-one coaching may be a viable solution.

Step 4: Calculate the cost of the solution. For example, you could price having a consultant conduct a series of supervisory training workshops and the time for an HR staff person to develop and conduct a series of coaching sessions with individual supervisors.

Step 5: Implement the solution and monitor results. The planned for result, of course, would be lower turnover of computer programmers after three months, six months, and a year as a result of more effective supervision.

Step 6: Calculate the improvement benefit with this formula:

Cost of business problem before implementing solution (Step 2)


(Minus)


Cost of business problem after implementing solution, less cost of solution


Example


$585,000 Annual t/o cost in 2000 for programmers


$300,000 - 50,000 Annual t/o cost in 2001, less solution cost


$235,000 Net Improvement Benefit

Step 7: Calculate the cost-benefit ratio as follows:

Net Improvement Benefit (Step 6) ¸ Cost of the Solution (Step 4)


$235,000/$50,000 = 4.7 to 1


For every $1 spent for a solution, $4.70 was saved!


If $50,000 sounds like a lot of money for an intervention, you can point out that for each dollar spent $4.70 in expenses was saved over the prior year. In other words, you're getting a return on your investment.

This approach can be used for any HR activity, as long as you've documented (or can benchmark) the cost of a business problem.

*If you'd like a worksheet on calculating the cost of turnover, please e-mail me at LGravett@AOL.com and I'll send one to you.