As HR grows in complexity it also becomes more involved in business forecasting, establishing business ROI and executing programs that are directly tied to future and current business success. The role of the HR professional has evolved into something more: HR business partners, or HRBPs. HRBPs are strategic business partners involved in the success of organizations, and not just hiring, firing and traditional advisory roles.
As HR grows in complexity it also becomes more involved in business forecasting, establishing business ROI and executing programs that are directly tied to future and current business success. @jmillermerrell #SmartTalkHR @RiseSmart https://bit.ly/2wYOJqK
As HRBPs, we are now challenged with “proving” the value of what often is not measurable. In the past, company leadership viewed HR as a cost center, but as this role has evolved, so has the importance of establishing ROI in human resources. In many organizations, HR is now recognized as the revenue center it has become. In other organizations, HR leaders have not yet been able to shift the perception of HR from an administrative role to that of a strategic business partnership.
Application of ROI to human resources initiatives
Establishing HR as a revenue center begins with proving the ROI on human management initiatives. ROI measures the financial return on an investment made. Given the fact that HR and recruiting departments are generally non-income generating, having solid metrics is key to demonstrating to senior leaders and executives how strategic HR initiatives can impact your company’s bottom line.
HR and recruiting departments are generally non-income generating—having solid metrics is key to demonstrating to senior leaders how strategic HR initiatives can impact your company’s bottom line. @jmillermerrell #SmartTalkHR @RiseSmart https://bit.ly/2wYOJqK
Some examples of strategic HR metrics are monthly turnover rate, revenue per employee, human capital cost, promotion rate, employee satisfaction indicators, retention rates, time to hire, and so on. However, the best metric is being able to tie employee productivity or a specific program to organizational growth and revenue. This is the best way to really speak the language of your peers, as productivity applies to every department within an organization. This starts by developing a relationship with key executives in your organization and aligning with them to help improve or drive a specific part of the business.
Recruiting is challenging to scale, but we have many tools and technologies to measure success today that we didn’t have ten years ago. Ongoing reporting on key metrics like the ones mentioned above can help you and your team uncover trends that show how an investment in recruiting can produce results that can make a large impact on the revenue of the company.
Demonstrating value of HR business partners to senior leadership
Let’s use employee productivity as an example. In a podcast on Workology, I spoke with Jason Hopkins, Director of Talent Acquisition and Internal Marketing at Emerus Holdings. Jason’s work that focuses on lost productivity provides a key metric to help position recruiting and HR as a revenue center instead of a cost center. Show ROI by comparing the cost of an inefficient process to the savings realized through efficient recruiting processes. For example, if your company hires 2,500 employees per year and the recruiting team is able to cut the time to fill a role by one day, you have reduced the lost productivity metric by $150 a day--equaling $375,000 in bottom line savings per year from the recruiting team.
By tying a dollar amount to lost productivity when a position is left unfilled—even for a day—you can demonstrate to leadership the broader impact of recruiting while also making a business case for how a new technology or process change can decrease lost productivity by shortening time to fill.
Your executive stakeholders who have an eye on the bottom line want to see results based on data. While many human resource operations focus on employer brand, candidate experience, and other areas of HR that are difficult to tie to revenue, assigning value to things like days of lost productivity due to a poor hire, or a decrease in time to fill impacting that same metric is the key to being able to show these results. Having analytics for everything from recruiting initiatives to outplacement solutions that drive your primary goals and using that data to demonstrate lower costs and increased productivity can be part of what drives cultural, strategic, and process decisions for your organization, moving HR from cost center to revenue center.
When you’re ready to present a case for a new program or process to your company stakeholders, and show ROI, focus on these three areas:
The payback period. This is the length of time it takes for an investment to make back the money initially budgeted for the project. Your business case should include the total investment and how it ties into your goals, with a focus on the timeline in which your team expects to see results.
Internal rate of return. This is the rate at which the net present value of all cash flows from a project or investment equals zero. This includes both positive and negative flow. You’ll want to include net gains and net losses (prospective and past) in relation to your proposed budget.
Profitability index. This is the ratio of payoff to the investment of your proposed project. Slightly different from your expected length of return, this should define expected success metrics and how a specific investment can improve areas that directly impact cash flow, such as reducing time-to-hire, improving lost productivity per open requisition, or reducing unemployment claims drawdowns.
Some examples of what you could outline in order to measure the potential of a program’s effectiveness:
- Increased revenue attributed to new hires.
- Decreased time to hire.
- Increased quality of hire (performance of new hires vs. current employees).
- Increased productivity
- Decreased employee turnover
New rules, new roles for HRBP’s
With the growing responsibility of human resources and a shift away from HR as an administrative function, we’ve seen the role of the chief human resources officer (CHRO) evolve to become a CEO’s most trusted advisor. The new CHRO is one hundred percent HRBP.
While the CHRO tends to focus on culture, civility and employee well-being, there is a significant emphasis placed on this role as HRBP and member of the executive leadership team. According to a report from the Harvard Business Review, senior executives want a CHRO who is a strategic business partner and an HR organization that anticipates the talent attributes required for a high-performance culture that achieves business strategy and growth objectives.
According to the HBR survey, senior executives understand the importance of the tools HR needs in order to sustain its strategic efforts. A majority of respondents recognize the importance of a new breed of information technologies to support strategic HR. The role of the CHRO focuses on using technology for strategic initiatives and data analysis for big picture planning, as well as choosing technology for the company that improves productivity and accommodates all employees. Tying the adoption of technology to the company’s business objectives also gives a CHRO the opportunity to have buy-in from executive leadership across all departments.