Measuring the value of HR solutions
The best way to build broad endorsement — and gain financial approval — for new investments in HR solutions is to build a comprehensive business case that pinpoints all costs, potential benefits, and even project risks. This goes deeper than the simple calculation of ROI = net benefits/total costs, and ultimately, acts as a management tool to ensure that the project stays on course.
People are the most important asset of most companies. At the same time, human resources represents the single most costly asset, consuming up to 40% of total operating costs for most organizations. It is becoming increasingly difficult to hire, cultivate and retain a workforce.
HR managers are looking to human capital management (HCM) solutions to cut administrative labor costs — and change the historical view of HR from an administrative necessity to a strategic component leading the competitive advantage charge by managing and optimizing a company’s most important strategic asset.
As a first step, define the goal for investing in new HR solutions: Is it to reduce the administrative cost of HR functions, such as simplifying the manual labor required to manage a benefits program? Or perhaps the goal is to increase employee productivity, by reducing the time it takes a manager to open a job requisition, enable a new hire, or the time it takes for an employee to change their benefits elections or calculate their current incentive pay performance.
Next, be sure that all stakeholders are committed to the project. The realization of HCM benefits depends on IT departments implementing the appropriate infrastructure; human resources communicating the goals of the programs and re-engineering their processes to improved productivity; and in many instances, employees and managers changing the way they conduct their portion of HR administration. The IT department may deploy the perfect HR infrastructure, but if HR workers, or employees and managers fail to adopt, the benefits are for naught.
Lastly, create the cost-justification business case — a time-honored financial analysis to assure that an investment will meet certain payback criteria for the organization, and to compare various investment options to clearly delineate the optimal selection of the highest reward and lowest risk solutions. Traditional business cases compare the quantifiable costs and benefits of the proposed solution over a set time frame, typically three to five years.
A credible, realistic business case arms the IT and HR teams with the quantification needed to win over skeptics — most often a CFO or even a board of directors. It also helps the core team move beyond their emotional connection to the solution and make the case pragmatically, enabling others to perceive the wisdom in the investment, and make a rational decision.
Here are some guidelines to consider:
Measure the one-time and on-going investments required in the solution. Often called total cost of ownership (TCO), all of the related costs to the organization need to be estimated over the life of the investment. Initial IT costs include the investment in the HCM software, servers, possible client upgrades, implementation labor, development and customization, professional services and IT training. The software costs are typically less than 10% of the TCO.
Often overlooked or underestimated is the business unit investment required. This includes coordination and planning meeting participation, user training labor and course fees and business change management or re-engineering labor. These business unit costs for HCM solutions are often equal to or greater than the initial IT investment.
Another “hidden” cost is the ongoing IT management and maintenance of the solution. This includes the IT resources to manage the software and server systems upgrades, help desk support to answer “how-to” questions — particularly on new self-service applications, and on-going customization and development. Expect these costs to represent 15-25 percent of the original application investment.
These are the savings or business impacts that can be quantified into monetary terms, and are harder to determine than the costs. To measure tangible benefits, the organization needs to assess the current organization — the “as-is” environment — and simulate the impact of the solution on the people, processes and business, to determine the “to-be” environment. The difference between the two is the value of the solution.
Some sample benefit areas include:
Intangible benefits are most difficult to quantify, but hold an important place in the business case. Some CEOs and executives view intangible benefits as the most important decision criteria, and almost half look at both intangible and tangible benefits before giving the stamp of approval.
Some intangible benefits that are considered when evaluating and measuring the performance of an HCM project include:
Twenty percent of all IT projects are cancelled prior to deployment and 40% fail to meet budget, schedule and requirement goals. Because of this, and companies’ low-tolerance for failure in today’s tight IT budgets, risk-adjusted analysis is a critical element of the business case. Risk adjustment discounts the expected benefits of a solution based on the level of risk, factoring in the lack of clarity in meeting cost goals or obtaining benefits — and creates a more realistic business case.
Risk can be measured based on the probability of occurrence, and the likely impact on the costs and benefits, in some instances, discounting the value of the project significantly. The risk measurement for HCM projects typically include items such as:
A Sample Business Case
To help you accurately set expectations, typical business cases have shown promise: Paybacks of between 12 to 24 months, with a 3-year ROI of 150%.
Tom Pisello is the CEO of Orlando-based Alinean, the ROI consultancy helping CIOs, consultants and vendors assess and articulate the business value of IT investments. He can be reached at firstname.lastname@example.org