The human resource function is often considered a ”soft” function because it doesn’t provide any quantifiable financial data concerning its workload, and neither does it generate any revenue directly. Because of the nature of this function, investing in HR Technology can make company executives nervous since such projects don’t result in any tangible reward, although the promise of greater employee satisfaction and improved morale sound like a good thing.

However, whether the above things translate to increased revenue or improved productivity is something that remains unclear. And because of this, relying on the calculation of ROI is the only way HR professionals can prove the worthiness of the HR Technology implemented.

ROI or Return on Investment is a mathematical calculation used in the finance industry and the business world in general. This measurement is interested in the gauging financial returns of investment put on something. It can also be used in business to measure its performance by assessing net profit about the overall net-worth of a company/SBU. And in recent times, the concept of ROI has been applied in many more industries to measure the performance of projects on a smaller scale.

The importance of Return on Investment (ROI) in Human Resource raises the question that- Is there any real benefit of adapting the concept of ROI on Human resource? Or is it just a number?

Well, one thing is clear with ROI: It uses quantifiable metrics to show the credibility of an HR program, plus it allows company executives to gauge specific, measurable ways this program benefit their businesses.

In a fast-paced, competitive business world of today, it’s no longer satisfactory to believe that something is beneficial. Instead, there should be a need to be able to prove the worthiness of actions. During tough economic times, for instance, support services in a company are often viewed as tangential to a business’ products or core mission. Because of this, support services are supervised to derive more value out of them.

Likewise, it is expedient that the HR professional should show how their investment in HR technology and their services impact the bottom line of matters. But while they do this, there is also the need for identifying and eliminating programs/ Technology that doesn’t generate any revenue or value addition to the business.

ROI Metrics in HR

The HR department can use ROI metrics to analyze and measure the performance aspect of any of their services so long as a cost can be determined. For instance, if the Human Resource introduces a new workers’ health and safety program through investment in gamification, the effectiveness of that program can be measured by its associated reduction of cost related to workplace injury.

And when the HR department comes up with new technology for employee orientation program, the value of that program can be measured by assessing cost eliminated by correlated reduction in employee turnover.

Cloud-based HR information systems, diversity programs, LMS-based training and mentoring programs and so forth were some of the things that ROI metrics can be used when assessing their respective performance. Because of this, it turns out that ROI metrics in HR aren’t just numbers or empty talk.

How ROI for HR is calculated

When ROI for human capital is being determined, the company needs to divide its net revenue (gross revenue when operating expenses have been deducted, for the cost incurred in salaries and benefits.

When ROI is being calculated for a particular program, the value of that program must be determined in the first place before dividing that value by the cost incurred during the implementation of that program.

Again, let’s say a training program to speed up production is implemented, and it resulted in an increased number of products, the value of the additional numbers will be divided by the cost of training and that of buying materials to facilitate that production.

However, in some cases, say when there’s a general increase in company productivity, you will need to isolate a portion of that increase which was as a result of a Human Resource measure before determining the ROI.

You should conduct a careful analysis of groups that were trained and those that didn’t receive any training before estimating the effect. What you get is a measure of ROI. However, if this calculation seems complex, you will have to enlist the help of a professional to calculate the percentage increase that was as a result of this training.

It is very hard to know where a company should direct its resources unless they have solid HR data. Good companies around the world frequently assess their employees to figure out best practices that would yield results and also address their concerns. In most cases, they are often interviewed about their job qualifications, morale, promotion opportunities, and treatment by the company, training and many more.

This should clearly hint that ROI is not only a metric for the technology industry alone but a calculation that applies to every industry. Furthermore, it’s effective in assessing the performance of the HR department. It tracks HR contribution towards achieving company’s goals. Again, through ROI, companies can track operational efficiency, quality aspect, and other strategic HR measurements and these are critical to the success of any company.

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