The number one problem with ROI in HR (and other such metrics)

11/04/2013 at 13:32 5 comments

ROI in HR problems

I am convinced that ROI can offer significant value to HR. ROI can make HR better by making better investment decisions and improve evaluation of activities. Also ROI can show how HR adds shareholder value. In theory at least. Because ROI has a lot of problems.

The number one problem is that ROI calculations are not used as they should. Never. Ever.

In many HR departments a business case is made before any new initiatives are approved. The expected return on investment is also included. This is good. The expected benefits are identified and estimated together with the expected costs (usually easier to identify). If the ROI is positive – as it usually is in these cases – the program may be approved. Here ROI is used ahead of the program to get a budget.

The value of doing ROI estimation is however not in the business case, but in the evaluation of the program afterwards.  You evaluate the program versus your expectations – and then you get valuable insights into how to make the program more efficient and effective. Also you get a good feeling for how to make realistic ROI estimations in your future business cases (something very few are capable of) which will make them more trustworthy.

But, I have only met a handful of HR executives and companies where they have actually calculated the ROI post of the program. The fact is that most companies do not evaluate the value of their activities and initiatives. Once the budget has been approved the interest in the ROI estimation completely disappears.

The reasons are many, but usually they have something to do with lack of resources (“do you know how much it costs to evaluate a talent management program?”) or lack of incentive (“we’ve got the funds, who cares about evaluation”) or even ability (“we don’t know how to do it”).

This way of doing things typically favors those, how are good at making models with impressive benefits and those, who can convince others about their assumptions rather than those, who can make realistic assumptions and execute well. Implementing well is not rewarded.

While this may be true for all kinds of ROI-like measures – and there are many good alternatives – I believe that ROI is especially prone to this misuse.

So my advice is; either follow-up on your pre-program estimated ROI or don’t do it at all. Frankly, it is a waste of time.

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

There is no best Talent Management KPI Don’t go to a job interview at 11am

5 Comments Add your own

  • 1. The iNostix HR Intelligence Blog  |  11/04/2013 at 14:42

    Good blog post, Morten. I fully agree with you. The ROI is an efficiency measure and HR should evolve to effectiveness and impact measures, which are not financially driven but focus on process optimization and business impact analysis. These measures could have a financial component but it’s definately not the starting point. Your readers can have a look at a recent blog post which explains the differences between efficiency, effectiveness and impact: http://wp.me/p1Ywqa-7Q.

    Reply
    • 2. Morten Kamp Andersen  |  11/04/2013 at 15:36

      Tnx for you comment and great post you directed me to. The table in point five at the bottom of the blog provided an excellent overview of the differences between efficiency, effectiveness and impact.
      Like it a lot
      Best

      Reply
  • […] I am convinced that ROI can offer significant value to HR. ROI can make HR better by making better investment decisions and improve evaluation of activities. Also ROI can show how HR adds sharehold…  […]

    Reply
  • 4. Aleksey Savkin (BSC)  |  04/11/2013 at 20:16

    Excellent article! Can you share any specific method that you used to measure a ROI? We are using a fix of strategy approach and the Balanced Scorecard (http://www.bscdesigner.com/calculate-a-talents-roi-to-improve-all-hr-kpis.htm) that helps focus on what matters and give a dollar value of employee objectives.

    Still might be challenging task to calculate when business objectives are not clearly formulated.

    Reply
    • 5. Morten Kamp Andersen  |  04/11/2013 at 20:32

      Hi Alksey
      Thanks a lot for sharing your method and experience. Good blog post that you are referring to – haven’t read that one so appreciate.

      I guess that this post I tried to highlight, that they are rarely used as a evaluation tool but rather a ‘give-me-a-budget’ tool. The second issue I often see is that ROI is so very sensitive to a few assumptions and that those important assumptions – such as productivity improvement – are often guesswork.

      But lets continue the journey of making it possible.

      PS: I use the BSC myself as well – excellet tool

      Reply

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