HRMS Value Measuring Return on Investments in HR Technology Solutions

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HRMS Value Measuring Return on Investments inHR
Technology Solutions
Presented by . . .
Brendan OFarrellChief Executive, HCM
International and Chairman, IHRIM Europe
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Overview

• Organisational Characteristics
• Management by Fact
• Measuring/Forecasting Costs
• Identifying Opportunities
• Measuring/Forecasting Costs Benefits
• Required Investments
• Determining ROI

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Organisational Characteristics
Understanding how organisations function and how
they approach issues is key to evaluating
potential ROI for HR technology investments.
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Key Considerations

• Complexity
• Geographies
• Local Legislative
• Cultural Considerations (National
  Organisational)
• Multiple Industry Sector Participation
• Distinctly Different Business Lines
• Disparate Legacy Systems
• Fragmentation
• Responsibilities
• Accountabilities
• Processes

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Management Characteristics

• Reactive
• Focus on issues and problems
• Piecemeal
• Narrow focus - one issue at a time
• Proactive
• Focus on objectives results
• Holistic
• Top-down emphasis on the whole

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Resolving Identified Issues

• Our problem(s) is(are) a, b and c.
• All-too-common approach
• Issues with perception vs. reality
• Focus is on pain - reactive
• HR workload
• Manager/employee dissatisfaction
• Executive pressure
• Cost pressure

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Objectives Results

• Clearly Defined Objectives
• Key business goals
• Financial and non-financial
• People-driven - clearly identified
• Quality Metrics
• Analytical rigour
• Predictable outcomes
• Measured results

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Management by Fact
What you dont measure, you cant manage.
Peter Drucker
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Management by Fact

• Current costs
• Clearly defined
• HR Delivered value
• Organisational capability/productivity
• Benchmark indices
• Ongoing metrics

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Current Costs Defined

• People Costs
• The sum of all expenditure for the acquisition,
  development, deployment and rewarding of people,
  within any organisation.
• HR Costs
• The sum of all expenditure dedicated to managing
  the acquisition, deployment, development,
  rewarding and monitoring of human capital, within
  any organisation.

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Delivered Value - Key Questions

• Does the HR Function
• reduce administrative time burdens for managers
  and employees alike
• assure timely acquisition of required staff
  resources to pre-defined standards
• provide managers with data and tools to help them
  manage their people
• provide quality training programmes
• facilitate retention of key people resources?

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Delivered Value - Key Metrics

• Non-HR manager and employee time devoted to HR
  administrative processes
• Employee satisfaction and commitment
• Employee capability
• Employee performance
• Vacancy duration
• Internal rates of promotion
• Human Capital ROI

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Capability/Productivity

• Baseline Capability Metrics
• Capability assessment scores
• Performance ratings
• Retention rates
• Baseline Productivity Metrics
• Revenue per FTE
• Revenue / People Cost
• PBT per FTE
• PBT / People Cost

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Benchmark Indices

• HR cost per FTE
• Training cost per FTE
• Cost per Hire
• Annualised rates of employee turnover (attrition)
  by staff category

N. B. - Benchmark indices are only valuable to
the extent that they are based on
data from sufficient sets of directly
comparable organisations.
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Benchmarks - Approach with Caution

• Benchmark data are often based on averages or
  medians
• Averages include the worst as well as the best
  organisations
• There are far fewer best organisations than
  mediocre or poor ones
• Beware of benchmarks that include data from
  markedly dissimilar organisations

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Ongoing Metrics

• The most relevant measures are those focusing on
  internal performance improvement and in relation
  to targets.
• External benchmarks are both less reliable and
  less indicative of true organisational
  capability/performance.
• Target metrics should be a key component in
  planning and evaluating all HR technology
  investments.

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Measuring/Forecasting Costs
Time and money are both fungible.
Thomas Watson
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HR Function Costs

• HR Staff Costs
• Total HR staff compensation
• Equipment Systems
• Amortised capital cost, plus maintenance and
  external support
• External Services
• Consultancy and operational services
• Material Resources
• Internally retained and/or distributed

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Cost Forecast Illustration
HR Cost - Millions
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Other Relevant Costs

• Recruitment
• Agency fees and advertising
• Selection costs (e.g., interview expenses)
• Non-HR manager/employee time devoted to
• HR processes (e.g., pay reviews, performance
  management)
• information management and/or
• people data acquisition/manipulation.

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Aggregating Staff Cost Data

• Ideally, start with complete organisation and
  population data
• Group Categories of Employees into Payroll Cost
  Bands (e.g., Executive, Managerial, Professional,
  Administrative)
• Compute Average Payroll Costs by Band
• Average Base Salaries
• Average Burden (Social Charges, Benefits, etc.)
• Average Total Payroll Costs

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Forecasting Assumptions

• Salary/wage inflation
• For staff costs and external services
• Price Inflation
• For other costs (equipment, materials, etc.)
• Organisational growth
• Additional staffing to support growth
• Additional equipment, materials, etc.
• Timeframes
• Suggest five years

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Capturing Non-HR Time

• Identify Key Process Involvement
• Volume, frequency and complexity
• Measure or estimate time expenditure
• By manager/staff category
• Convert to payroll cost
• Hourly payroll cost per hours expended
• Forecast with salary inflation over appropriate
  chosen timeframe

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Analysis Principles

• Analysing Current Processes
• Current processes and process components/steps
  exist for a reason
• The reason may no longer be valid
• 1st Question Does the objective of this process
  merit its existence?
• 2nd Question Does the output of this process
  deliver value to the business?
• 3rd Question How much time/effort on whose part
  is required to do it well?

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Data Availability

• Some data is usually readily available
• e.g., HR staff costs
• Other data may be more elusive
• e.g., manager/employee time devoted to HR
  processes
• Educated estimates may suffice, in the latter
  case
• Analysing processes can confirm estimate
  validity

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Key Points in Assessing Costs

• HR costs are HR costs regardless of budget
  assignment or accounting
• Actual HR costs are often hidden in other staff
  function or line budgets and expenses
• An accurate assessment of actual total HR costs
  will yield more precise identification of
  opportunities

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Identifying Opportunities
Reducing costs and enhancing delivered value
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Opportunities

• Identifiable areas of HR management practice
  that, if changed or modified, could deliver
  incremental value to the particular business
  enterprise.
• Potential changes in ways of working, processes
  and/or methods that, if implemented, can be shown
  to provide measurable improvements in cost, time
  savings and/or other workplace value.

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Benefits

• Hard benefits
• HR workload savings
• Other direct
• Other indirect
• Soft benefits
• Improvements in manager and/or employee
  satisfaction/commitment
• Greater manager satisfaction with HR
• Improved employee understanding of developmental
  opportunities and resources
• Other Benefits

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Hard Benefits

• HR Workload Savings
• Quantifiable reductions in required time and
  effort on the part of specific HR staff
• Other Direct Benefits
• Reductions in current HR expenditures for
  materials, equipment, systems and services
• Other Indirect Benefits
• Quantifiable savings in time expended by non-HR
  managers and employees in completing processes
  required for/by HR

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Soft Benefits

• There are no direct soft benefits
• Returns on investment should not be based on
  anticipation of soft benefits
• Soft benefits are icing
• Hard benefits are the cake
• Soft benefits, however, may have value and should
  not be entirely disregarded
• Business investment decisions require predictable
  and quantifiable returns

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Other Benefits

• There are other benefits of real value
• They result from more effective people management
  practices
• If HR operates more effectively and
• If HR practices enhance managers ability to
  manage their people more effectively,
• There are measurable bottom line results to be
  gained
• Investment in process improvement and technology
  can also help deliver these other benefits

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Improved People Management

• Lower overall employee attrition
• Retention of key talent
• Greater individual and organisational
  productivity
• Better customer service
• Improved customer satisfaction
• Greater customer loyalty

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SORP

• Scepticism
• A healthy perspective
• Optimism
• Beware of undue enthusiasm
• Realism
• If I cant count it it doesnt exist
• Pessimism
• No more helpful than optimism

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Measuring Forecasting Potential Benefits
Hard data, realistic assumptions, sensible
timeframes, and appropriate conservatism
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HR Payroll Costs

• Total FTEs assigned to HR Cost activities, as
  previously defined
• Sum of all
• salaries
• variable cash
• employers payroll taxes and
• benefit costs

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HR Workload Savings

• Analyse HR Staff Time Expenditure
• Allocate by HR management functions and processes
• Convert to annualised number/type of HR FTEs
  devoted to each function/process
• Assess Current Processes
• Determine Expected Time Savings for Redesigned
  and Automated Processes
• Convert to FTE Workload Reductions

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Other Direct Benefits

• Reduction or Elimination of Current
• HR systems costs (e.g., licensing and
  support/maintenance)
• external HR services costs (e.g., recruiting
  agency fees and processing services)
• materials costs (e.g., printed materials and hard
  copy reference documents)
• equipment costs (e.g., IT hardware, hard copy
  training documentation, etc.)

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Other Indirect Benefits

• Value of workload time to be saved by non-HR
  managers and staff, currently devoted to HR
  processes (e.g., pay review, performance reviews,
  etc.)
• Assess current time expenditure
• Estimate potential time savings for redesigned,
  automated processes
• Convert to payroll cost savings

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Ground Rules - Indirect Benefits

• If a current process is determined to be
  unnecessary, it doesnt count
• Eliminate it! (no savings attributable to HR
  technology investment)
• Necessary (valuable) processes
• Objective/output has value to business
• Time required assumes that process is carried out
  effectively
• Potential time savings based on redesigned,
  automated processes and new technology
  implementation

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Benefit Realisation 1

• Direct Benefits - Controllable by HR
• HR workload savings
• Other direct benefits
• Indirect Benefits not within HRs control
• Other non-HR managers control indirect benefits
  realisation
• Time savings headcount reduction or additional
  revenue generation - a choice
• ROI measurement only on payroll cost associated
  with estimated time savings

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Benefit Realisation 2

• A Conservative Approach
• Suggested Assumptions
• HR workload savings 100
• Other direct benefits 80
• Other Indirect Benefits 50
• No Value Assumed for Soft Benefits
• Value of other benefits (e.g., improved
  retention) on a case-by-case basis, only if
  directly attributable

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Required Investments
Total costs of acquisition and operation,
measured over a 5-year timeframe
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Total Cost of Operation (TCO)

• Software Licensing Costs
• Implementation Costs
• Internal project staffing - incremental
• External project staffing - consultancy
• Training - new technologies
• Change management
• IT infrastructure - hardware and networks
• Ongoing Operational Costs
• Software maintenance and support
• Staff devoted to support and maintenance

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Forecasting Assumptions

• Salary/wage inflation - Staff
• Price Inflation - Equipment/Infrastructure
• Organisational growth
• Time Value of Money
• Internal rates of return
• On invested capital
• On capital employed in the business
• Cost of capital
• Forecast Timeframe - 5 Years

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Determining ROI and Other Financial Decision
Criteria

• Net Present Value of Benefits and Costs
• Annualised ROI
• Payback Timeframe

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Forecasting Benefits and Costs

• 5-year Projections
• Separate Direct and Indirect Benefits
• Assign Benefits and Costs to specific, sequential
  fiscal periods (e.g., months)
• Costs to the time periods in which they are
  expected to arise
• Benefits as well but with appropriate time lags
  to account for staged roll-out
• Based on Relevant Assumptions

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Determining Net Present Values

• Calculate
• NPV at start for each benefit and cost element
  from assigned fiscal period
• Based on selected financial assumptions (e.g.,
  time value of money)
• Sum Results to Determine NPVs for
• Required investments
• Direct benefits
• Indirect benefits

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Determining ROI

• Allow for Cost Overrun at 20
• Direct ROI

(S HR Workload Savings (Other Direct Benefits
x .8)) / S (Required Investments x 1.2)1/t - 1

• Total ROI

S HR Workload Savings (Other Direct Benefits x
.8) (Indirect Benefits x .5)) / S (Required
Investments x 1.2)1/t - 1
t Forecast timeframe (e.g., five years)
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Payback Timeframes

• Calculate Separately for
• Direct Benefits
• Total Benefits
• Number of months until S of Benefits to date
  exceeds S of Investments to date

Time Series (S Cumulative Benefits - S
Cumulative Investments) gt 1
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Decision Criteria

• ROI gt than n
• Threshold based on alternative investments
• Ratio of NPV Benefits to NPV Costs gt n
• Pre-determined multiple (e.g., 3 x)
• Payback Timeframe
• Investment fully recovered in n months
• Certainty of Benefits Realisation
• Ability of organisation to capture indirect
  benefit value - manager accountability

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Business Common Sense

• If Direct Benefits alone are expected to produce
  appropriate ROI, within an acceptable timeframe,
  get on with it!
• If Business Case depends on indirect benefits
  realisation, be sure management is capable of
  deriving available value, before proceeding.
• Be realistic expectations, effort, timeframes
  and costs.

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Critical Success Factors

• Clearly defined objectives and expectations
• Up-front analysis and planning
• Real senior executive commitment/support
• Co-operation and support
• Other functions (IT and Finance) and line
  managers
• Dedicated internal staff resources
• Adequate time and financial resources
• Project management and controls
• Comprehensive change management

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A Final Word
Provided that the business case is well- founded,
successful investment in HR technology is a
management choice. Failed projects are always
attributable to inadequate management. Primary
risk factors are human not technical
nor technological.
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Thank You!