Posts tagged ‘true cost’
Talent Management is difficult to get right. Let’s be sure about that. In fact, most talent programs have a negative ROI if properly measured. However, there is one mistake you should avoid at all costs as it will lead to high turnover of talents (and a negative return on investment). That mistake is not having a plan for what happens with the talents after the program ends. And that plan should be made and communicated up front.
The unique thing about Talent Management – and Human Capital in general – is that if an employee decides to leave the company, he (or she) will then take the entire investment with him. In other words the cost of a talent leaving is not only loss of productivity, cost of rehire etc. but also the money spent on developing that person.
A key objective of a talent program must therefore be to ensure that talents stay after the talent program as this is the only way to get a return on the program. When the talent programs is ongoing talent turnover decline. But what many fail to understand is, that talent turnover often goes up when the program finishes. And sometimes quite a lot.
Why is that?
Evidence suggests that frustration with advancement opportunities is among the most important factors . Generally, the single biggest reason for why talents leave organisations is lack of advancement and development according to a 2006 Global Workforce Study by Tower Watson.
During the program, talents will – rightly or wrongly – expect that something will happen afterwards; a promotion, a big assignment, an outpost or something new. If they are ‘leadership talents’ they will expect to move up the organisation. If they are ‘specialist talents’ they will expect being offered better and more prestigious projects to work on after the program.
Studies suggest that the talent turnover can be halved post the program if proper post-program plans are in place. Don’t make the biggest mistake of not addressing this up front.
When an HR executive is making a business proposal and includes a ROI calculation, it is important to highlight which cost savings are true (real) and which are – lets call them – false cost savings. A potential cost saving must be realised and the released resources put to better use before it can be considered a real cost saving. Otherwise it is a false saving. Put in another way, a false saving is an unrealized potential cost saving.
Let me give an example. Lets say that HR wants to outsource its payroll processing. An external provider has been identified and an internal audit shows that previously HR spent the equivalent of 1.5 FTE on payrolls. A true saving would occur if this 1.5 FTE was used to add value (i.e. earn a return above the cost of capital) in another part of the company or if HR laid off 1.5 people . A false saving would instead occur if the resources just ‘disappeared’ into the existing services with no extra value being added.
The first step for HR is to start making business plans, ROI calculations and credible assumptions. However the next step will be to assure that the assumption cover real tangible numbers and not soft and unrealizable numbers. The cost of the payroll provider is real. It requires real cash to pay for this service. If the assumed savings are false and therefore not as high and not tangible it cannot be compared with the cost and the ROI will end up being negative.
When confronted with the question “what is the total cost of your HR?” most CEO’s and HR directors come up short. They will either look at the HR budget and say it represents the total costs or they will tell you that they don’t really know.
Why does it matter? Well, by understanding the true cost of a service it will help the leadership making better economic decisions. Should some of our HR services be outsourced? What is the ROI on our HR services? Such questions are almost impossible to answer if the true cost of the service is not understood.
There are different ways of measuring the true cost of HR. Activity Based Costing (ABC) is in my view the best. ABC attempts to assign overhead based upon the activities that case the overhead rather on a pro-rate basis or any other arbitrary method. ABC examines each activity and establishes the cost drivers behind each activity.
ABC will include costs such as administrative costs, building costs, IT spend and management time in the equation and come up with a number which show the real cost of HR. ABC can be a tedious task and at some point a cut-off must be made and assumptions be made for the rest. But it is worth it.