Measuring the bottom-line results of human resource strategies is becoming increasingly important as corporate boards and executive managements seek information about the demonstrated financial impact of HR.

Lawson International's consulting services for human resource strategy ROI analysis helps organizations determine the financial payoff for human resource initiatives using capital budgeting and financial accounting techniques.

The Elements of HR Strategy ROI Analysis

A Strategic Imperative for Human Resource ROI Analysis

When it comes to planning and implementing human resource programs and strategies, concentrating on "organizational impact" no longer ensures competitiveness. Relying on near-term thinking, many organizations base their human resource budgets on annual projections for new initiatives that link, optimistically, with business requirements. Indeed, too many companies are squandering management attention and other resources on human resource projects that look like winners but fail to produce widespread, bottom-line results.

The need to evaluate HR strategies, therefore, in economic terms, is becoming more apparent. In the current environment of rising costs for human resources and employee benefits, corporate and senior line managements justifiably demand projections for expected costs and benefits of HR programs. For many companies, HR expenditures represent 18% to 25% of each revenue dollar. From that same dollar, about 4% to 10% is earmarked to capital budgeting projects. While capital budgeting expenditures are carefully examined and analyzed — and treated as investments — the much larger HR piece is viewed as an annual expense.

The Lawson International Approach

Measuring the bottom-line or financial impact of HR strategies requires an interdisciplinary approach — one which integrates capital budgeting and financial accounting techniques with the projected utility of HR programs.

We have developed and successfully implemented ROI and NPV analysis models for making prudent investment decisions regarding potential and on-going HR strategies for client organizations. These models incorporate and use three key elements:

•specification of the investment resources required of the human resource program,

•development and implementation costs associated with the program, and,

•quantification of valued outcomes for various stakeholders in the organization.

In addition, three economic factors are included in the development and use of the models — variable costs, taxes, and discounting. These economic considerations ensure that a more complete description of the projected ROI and NPV effect of the HR program is made for the client organization.

Company Case Examples

A variety of HR strategy and program initiatives can be assessed using return-on-investment analysis. This process brings prudent financial risk management to the routinely unquantifiable human resource function. The challenge is to derive financial parameters around HR strategies and determine what is and what is not productive.

Representative projects include:

•Evaluating the Bottom-line Effect of an Organization-wide, Goal-setting Process.

•Determining the Financial ROI of Training and Development Programs.

•Projecting the Profitability of Alternative Recruitment and Selection Processes.

•Linking Opportunity Costs with Company Values and Employee Retention and Productivity.

•Determining the Financial Payoff of a Reengineered Performance Management Process.

•Estimating the Economic Value Added (EVA) of Executive Development and Upward Feedback Strategies.

Moreover, informed decisions can be made about how to allocate and deploy investment dollars across competing or the most worthwhile HR strategies and programs. All new and on going HR program proposals can be evaluated and priorities reordered as necessary.

The Benefit

As a result of working with Lawson International, the HR client organization can:

•Educate/influence line and senior management on the financial, value-adding role of HR.

•Focus on quality HR programs, services, and strategies that demonstrate significant financial payoff.

•Demonstrate the financial impact of HR to the organization during executive presentations and in HR plans.

•Exhibit financial leadership for the function and related strategies - both on going and planned.

•Gain valuable insights into how HR investments can be used to maximize the net worth of the firm and contribute to measures of market and economic value added.