If you have invested in a Human Capital Management (HCM) system, or you're considering it, measuring relevant returns on investment (ROIs) will be a critical success factor for you and your organisation.
A modern HCM system is a powerful tool that can help your entire organisation work more efficiently by optimising HR processes.
But how easy is it to calculate ROIs?
Well, it can be a bit tricky since it can refer to both financial and non-financial benefits – but you can argue that they are financial in the long run. These benefits could include cost savings, increased productivity, improved employee engagement, reduced turnover rates, or improved compliance, among others. Essentially, a good HCM solution should contribute to the overall business goals and objectives, and therefore its growth and success.
Are you wondering where to start?
To measure any ROI, you need to evaluate the costs versus the benefit, and this will depend on several factors, such as the company size, industry, location, and business environment, to mention a few.
However, below are four areas your organisation can explore to calculate ROIs from a recent HCM investment, or to use to build a business case for making one.
Let's dive in!
Cost Savings
A good HCM system can help businesses significantly reduce costs by automating and streamlining HR processes such as payroll, benefits administration, and compliance. The cost savings come from reduced manual labour, fewer human errors, and improved efficiency.
These can be quantified and used to calculate ROI in the following way:
- Identify the labour costs associated with the manual processes that the HCM system replaces or automates. This could include the time spent by HR staff, managers, and other employees on tasks like data entry, payroll processing, and benefits administration.
- Determine the cost of human errors that occurred before the implementation of the HCM system. For example, time the cost correcting errors, reprocessing data, and potential legal costs associated with compliance violations. A noteworthy example here is the significant amounts spent on software licenses that are no longer in use when an employee leaves the organisation. With automated offboarding processes, companies can make considerable savings from no longer paying for software licenses that are not in use.
- Estimate the time savings resulting from the implementation of the HCM system. This may include the time saved by HR staff, managers, and other employees on tasks that are now automated or streamlined.
- Calculate the labour cost savings by multiplying the time saved by the appropriate hourly wage rate.
- Determine the cost of the HCM system, including software, hardware, implementation costs, and ongoing maintenance and support.
- Calculate the ROI of the HCM system by dividing the labour cost savings by the total cost of the system and expressing the result as a percentage.
For example, let's say that the labour cost savings resulting from the HCM system implementation is Euro 100,000 per year, and the total cost of the system is Euro 500,000. The ROI of the HCM system would be:
ROI = (Labor cost savings / Total cost of the system) x 100%
ROI = (100,000 / 500,000) x 100% = 20%
This means that for every Euro invested in the HCM system, the company is seeing a 20% return in labour cost saving.
Increased Productivity
HCM systems can improve productivity by providing employees with the tools and resources they need to perform their jobs more effectively. Features such as performance management, training and development, and employee self-service can all lead to increased productivity and output.
Calculating the ROI on such features can be challenging as it involves quantifying the benefits of intangible assets such as employee engagement, morale, and productivity. However, here are some steps you can follow to estimate the ROI:
- Define the benefits: Begin by identifying the specific benefits that you expect to gain from implementing the HCM features. For example, performance management can lead to improved employee engagement and productivity, training and development can enhance employee skills and knowledge, and employee self-service can reduce administrative costs and improve the employee experience.
- Assign a value to the benefits: Once you have identified the benefits, you need to assign a fiscal value to them. For example, you could estimate the cost savings from reduced administrative time or the increase in revenue from improved employee productivity.
- Calculate the costs: Determine the costs associated with implementing the HCM features, including software, training, and support costs.
- To calculate the ROI, divide the total benefits by the total costs and express it as a percentage.
For example, if the total benefits are Euro 100,000 and the total costs are Euro 50,000, the ROI would be 100% (100,000 / 50,000 x 100%).
Keep in mind that ROI is just one way to measure the value of HCM features. You may also want to consider other metrics such as employee satisfaction, turnover rates, and customer satisfaction to get a more complete picture of the impact of HCM on your business.
Improved Employee Engagement
HCM systems can also help improve employee engagement by providing a better employee experience and increasing communication and collaboration within the business. Higher engagement levels can lead to increased motivation, retention, and productivity, which can be quantified and used to calculate ROI.
To calculate ROI on employee engagement initiatives through HCM systems, you can follow these steps:
- Identify the key metrics: The first step is to identify the key metrics that will help you measure the impact of HCM systems on employee engagement. This could include metrics such as employee satisfaction scores, turnover rates, absenteeism, productivity, and customer satisfaction ratings.
- Measure the baseline: Next, measure the baseline metrics for the identified key metrics before implementing HCM systems. This will help you understand the current state of employee engagement in your organisation.
- Implement HCM systems: Implement HCM systems that focus on improving employee engagement, such as performance management systems, employee recognition programs, and communication tools.
- Measure the impact: After implementing HCM systems, measure the impact on the key metrics identified in step 1. You can do this through employee surveys, performance reviews, and other methods.
- Calculate ROI: Finally, calculate the ROI by comparing the baseline metrics to the post-implementation metrics. Calculate the cost of implementing HCM systems and compare it to the benefits gained from increased employee engagement, such as increased productivity and reduced turnover.
Reduced Turnover Rates
High turnover rates can be costly for organisations due to the cost of recruiting, onboarding, and training new employees. HCM systems can help reduce turnover rates by improving the hiring process, providing better onboarding and training, and offering career development opportunities. The cost savings from reduced turnover rates can be measured and used to calculate ROI by following these steps:
- Identify the key metrics: Again, the first step is to identify the key metrics that will help you measure the impact of HCM systems on turnover rates. This could include metrics such as turnover rate, time to hire, cost per hire, and employee satisfaction scores.
- Measure the baseline: Next, measure the baseline metrics for the identified key metrics before implementing HCM systems. This will help you understand the current state of turnover rates in your organisation.
- Implement HCM systems: Implement HCM systems that focus on reducing turnover rates, such as applicant tracking systems, onboarding software, and training platforms.
- Measure the impact: After implementing HCM systems, measure the impact on the key metrics identified in step 1. You can do this through surveys, employee feedback, and HR analytics.
- Calculate ROI: Finally, calculate the ROI by comparing the baseline metrics to the post-implementation metrics. Calculate the cost of implementing HCM systems and compare it to the cost savings gained from reduced turnover rates, such as reduced recruitment and training costs.
Conclusion
Despite the challenges associated with calculating the ROI of HCM, it's a necessary step for organisations that want to optimise their human resources and drive business growth. By understanding the financial impact of HCM investments, businesses can make informed decisions about where to allocate resources and ensure investments are generating the desired outcomes.
Moreover, calculating the ROI of HCM can also help businesses identify areas where they can improve their HCM strategies. For instance, if the ROI of an employee training program is lower than expected, businesses can evaluate the effectiveness of the program and make necessary adjustments to ensure that it is delivering the desired outcomes.
By continuously evaluating the ROI of HCM investments, businesses can ensure that they are making informed decisions and maximising the value of their investments.
