Measuring the bottom-line results of human resource
strategies is becoming increasingly important as corporate boards
and executive managements seek information about the demonstrated
financial impact of HR.
Lawson International's consulting services for human
resource strategy ROI analysis helps organizations determine the
financial payoff for human resource initiatives using capital budgeting
and financial accounting techniques.
The Elements of HR Strategy ROI Analysis
A Strategic Imperative
for Human Resource ROI Analysis
When it comes to planning and implementing human
resource programs and strategies, concentrating on "organizational
impact" no longer ensures competitiveness. Relying on near-term
thinking, many organizations base their human resource budgets on
annual projections for new initiatives that link, optimistically,
with business requirements. Indeed, too many companies are squandering
management attention and other resources on human resource projects
that look like winners but fail to produce widespread, bottom-line
The need to evaluate HR strategies, therefore, in
economic terms, is becoming more apparent. In the current environment
of rising costs for human resources and employee benefits, corporate
and senior line managements justifiably demand projections for expected
costs and benefits of HR programs. For many companies, HR expenditures
represent 18% to 25% of each revenue dollar. From that same dollar,
about 4% to 10% is earmarked to capital budgeting projects. While
capital budgeting expenditures are carefully examined and analyzed
and treated as investments the much larger HR piece
is viewed as an annual expense.
The Lawson International Approach
Measuring the bottom-line or financial impact of
HR strategies requires an interdisciplinary approach one
which integrates capital budgeting and financial accounting techniques
with the projected utility of HR programs.
We have developed and successfully implemented ROI
and NPV analysis models for making prudent investment decisions
regarding potential and on-going HR strategies for client organizations.
These models incorporate and use three key elements:
of the investment resources required of the human resource program,
and implementation costs associated with the program, and,
of valued outcomes for various stakeholders in the organization.
In addition, three economic factors are included
in the development and use of the models variable costs,
taxes, and discounting. These economic considerations ensure that
a more complete description of the projected ROI and NPV effect
of the HR program is made for the client organization.
Company Case Examples
A variety of HR strategy and program initiatives
can be assessed using return-on-investment analysis. This process
brings prudent financial risk management to the routinely unquantifiable
human resource function. The challenge is to derive financial parameters
around HR strategies and determine what is and what is not productive.
Representative projects include:
the Bottom-line Effect of an Organization-wide, Goal-setting Process.
the Financial ROI of Training and Development Programs.
the Profitability of Alternative Recruitment and Selection Processes.
Opportunity Costs with Company Values and Employee Retention and
the Financial Payoff of a Reengineered Performance Management Process.
the Economic Value Added (EVA) of Executive Development and Upward
Moreover, informed decisions can be made about how
to allocate and deploy investment dollars across competing or the
most worthwhile HR strategies and programs. All new and on going
HR program proposals can be evaluated and priorities reordered as
As a result of working with Lawson International,
the HR client organization can:
line and senior management on the financial, value-adding role of
on quality HR programs, services, and strategies that demonstrate
significant financial payoff.
the financial impact of HR to the organization during executive
presentations and in HR plans.
financial leadership for the function and related strategies - both
on going and planned.
valuable insights into how HR investments can be used to maximize
the net worth of the firm and contribute to measures of market and
economic value added.