ROI is not the answer in HR

24/09/2012 at 20:25 6 comments

ROI in HR

ROI has become such a buzz-word for HR practitioners and not least for HR consultants.  You cannot read an article, a book or a blog about HR without it being there somewhere. It has become the holy grail; If the consultants can show that their service has a high ROI they can sell more. For practitioners it is more about selling their ideas up in the organization (read: to the CFO).

In other words: my claim is that ROI is really just something HR use to get approval and budget for projects and for consultants to sell their projects. The assumptions don’t have to be right, they just have to be good enough to get it though the people who approve budgets. And if that is how it is used then ROI is not the answer.

Don’t get me wrong I believe ROI is a great tool for HR to use (if used right). When I was working as a financial analyst I always tried to measure the shareholder value. For a financial analyst ROI doesn’t work – it is too simple (others such as Enterprise Value, Return On Invested Capital, Return on Operating Free Cash Flow and Cash Return On Net Capital Invested are all more appropriate). But for HR I actually do believe that ROI is the best tool for HR to use.

You should only use ROI when:

  1. you want to compare investment alternatives/projects
  2. you want to know which elements of a program is adding value and which are not
  3. you want to evaluate if a program has added financial value.

For these three things, ROI is great. But don’t use it just to get projects past your CFO. There are much better ways to do that.

The problem with ROI is that it is very sensitive to a few assumptions and if you tweak them a bit in the project planning stage you can easily end up justifying anything. And we don’t want to go there again. So please understand that ROI is a serious evaluation tool – and a good one at that – and not a forecasting tool (others are better).

Entry filed under: Human Capital ROI. Tags: , , , .

HR must take ownership of HR master data – part 2 The paradox of HR

6 Comments Add your own

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 1,610 other followers

Latest Tweets

Feeds


%d bloggers like this: