We all know that business operates according to the laws of limited resources. This means that every activity has a value, and only those corporate initiatives that provide the most value will be considered for investment. In this regard, Human Resource initiatives are in direct competition for scarce resource dollars with other organizational activities, for example:
- Traditional investment decisions such as acquisitions and stock purchases
- Marketing programs such as product advertising and promotions
- Purchase decisions for new technology systems and software solutions
Although Return on Investment (ROI) typically represents only one of many factors executives use in evaluating competing proposals, it has traditionally been the most widely applied performance measure to compare the economic impact of multiple investment activities. CEOs and CFOs, who typically hold the purse-strings, regard it as one of the most significant indicators of viability and as a result, a critical component of any corporate decision. As HR professionals are increasingly afforded the opportunity (and, in many instances, required) to present a business case and corresponding financial justification, they must learn to “play the game” and apply this traditional measure to planned programs, initiatives and/or events.
In simple terms, ROI demonstrates how much an investment’s net benefits exceed its costs. It is calculated as follows, with the result being expressed as a percentage or ratio:
ROI = (Gain from Investment – Cost of Investment)
Cost of Investment
For example, if a $50,000 initiative aimed at reducing attrition resulted in fewer terminations at a total savings of $125,000, the ROI of that initiative would be 150%.
While investment costs can be approximated in most cases, there are instances when it is nearly impossible to measure intangible, non-monetary benefits in exact dollar terms. For example, how would you quantify to your CEO an increase in job satisfaction and employee engagement? When direct top-line or bottom-line benefits are not obvious, HR executives should start assessing the value of initiatives by evaluating how they impact the business in terms of one or more of these areas:
- Increased productivity
- Improved customer satisfaction and loyalty
Although it is difficult to deny that the ability to present a traditional ROI calculation represents a powerful tool when making a business case to your CEO or CFO, demonstrated impact on business value –whether it be improved job satisfaction survey results or a decline in documented safety violations– can also be effective.
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