Posts tagged ‘HR process’

ROI is a dangerous tool – here is how to use it

ROI (Return On Investment) has become the tool which HR increasingly use to show that they are adding value to the company’s bottom line. And rightly so. HR has the potential to create a lot of value to a company – also Shareholder Value. And this value  should be shown and highlighted.

ROI is a very simple tool. Too simple in many ways. The calculations is:  (return-investment)/investment. The return is the monetary gain from a HR activity and the investment is the full all-inclusive cost of the activity.

Despite the obvious problems in actually measuring the financial benefits of say a leadership development program, the ROI calculation is something  in itself to be careful about.

When I worked as a financial analyst, we didn’t use ROI that much. We used more ‘sophisticated’ metrics such as Enterprise Value metrics, ROIC (Return On Invested Capital), RoOFCF (Return on Operating Free Cash Flow), CRONCI (Cash Return On Net Capital Invested). What is common about all these ratios is that they recognise that ‘return’ and ‘investment’ is something quite complex.

When I still believe that ROI has a lot offer for HR executives it is because that when used right, it has a lot to offer.

The advantages with ROI are:

  • Easy to understand
  • Focuses on input and output of an HR activity
  • Show the bottom-line effect
  • Gives HR a language to talk to top management (and CFO in particular)
  • Makes it possible to make better HR investment decisions
  • Connects well with HR Balance Score Card
  • Potentially show the important assumptions behind the activity

The weaknesses of ROI are:

  • It is very sensitive to a few assumptions (in particular about productivity gains)
  • Reduces complex things such as people and leadership skills to simple causal relationship and a single number
  • Difficult to see the most important assumptions behind the calculation

So when you use ROI to show the financial value of your HR activities please remember that it is a very simple tool which should be used very careful. When I help HR executives to use ROI in their business I always emphasize the importance of process, structure, explicit assumptions and base line data.

Good luck

19/08/2011 at 09:35 6 comments

HR due diligence just got a lot harder

 M&A due diligence is important. Very important. Dependent on which study you read, 60%-85% of all mergers and take-overs do not deliver the financial and/or strategic benefit it was expected. The due diligence process is supposed to assess if the deal makes strategic and financial sense AND if the two companies together can execute the process so the benefits can be reaped. And if it doesn’t – then to cancel the deal. Well, as the numbers show – it does seem to work.

The financial due diligence is often rigours and plays a major part of the overall due diligence process. In many cases it is the only due diligence which is really performed.  But judging by the failure rate of M&A’s – it does not appear to be enough.

How can the success of M&A be improved? Answer: HR due diligence must play a bigger role than they do today.

Four things will improve the M&A success rate:

  1. HR must be involved earlier. HR is usually only involved in the second half of the pre-deal stage. Usually after the financial and legal due diligence.  That’s too late. HR should be involved at the first stage of a deal.
  2. HR due diligence must go deeper into the organization. Many HR assessments only deal with the top management level. Many talents and key people are however based further down the organisation. Also, many practical  integration problems occur at the middle-manager level. This level should also be included.
  3. HR due diligence must be more comprehensive. Many assessments are limited to a few superficial HR metrics (number of employees, union membership, staff turnover, pension liabilities, compensation plans etc.). This is partly because HR is involved too late. Becoming more comprehensive also means adding more types of data, which could include behavioural data, cultural information and engagement levels.
  4. HR must use more professional methods and processes. A proper, professional and value-added HR  due diligence must be based upon a strict and rigorous process where relevant parts of the company is x-rayed, objectively measured and assess in specific relation to being able to execute on the successful integration of the two companies. Nothing more. Nothing less.

04/08/2011 at 19:06 Leave a comment

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