ROI for HR technology is not the "Holy Grail" for human resources
There have been suggestions recently that return on investment for HR technology is the “Holy Grail” for human resources. Or, in some cases, developing the business case and working to demonstrate positive ROI may be a waste of time. These suggestions are misguided for a number of reasons.
ROI calculations remain a fundamental underpinning for decision-making in most corporations. Determining the precise ROI can be difficult, but HR departments can and should quantify as much as possible the value of their HR technology. Even where precision is difficult there is much to be said simply for going through the exercise. Here is why.
First, preparing a business case and estimating ROI invite fundamental planning and thinking about the business of HR. It’s basic business discipline and, properly done, can greatly help HR keep strategy and technology aligned with overall business objectives.
Second, creating estimates of investments and potential savings is the first important step in expectation and change management — both fundamental to successful implementations.
In the absence of any attempt to quantify the financial benefits of HR technology, how would an organization decide what to do first? And if there are no budgets to govern anticipated investments, how can the people responsible for the implementation know that they are on track financially?
Third, the very act of looking into how HR is delivered in the organization — what’s called the business model for HR — creates the opportunity for a better understanding of the cost structure of HR for the organization and, potentially, for business process improvement.
And finally, there are a number of solid studies which definitively show a positive correlation between investments in the right kinds of HR technologies and positive returns on shareholder value.
All in all then, creating a business case and attempting to estimate ROI is good practice.
But as the practice gains popularity, it may be time put it into context as but one of a number of decision-making tools available to management for making decisions about investments in technology.
While there are many ways to look at the effects of investment and subsequent returns such as net present value (NPV), internal rate of return (IRR), or payback period, most organizations prefer to use a simple definition of ROI. Straight cash flow usually works best in the initial stages of assessing where investments are best made.
And most executives, when considering technology investments in the early stages, have a fairly intuitive and obvious measure: does the amount of the expected benefit exceed, in a meaningful way, the anticipated investment?
For HR organizations that struggle in situations where positive ROI is difficult, or perhaps impossible, to demonstrate — implementing technology to automate the payroll function, for instance — it may be useful to think of another acronym which has been in use in IT for a number of years — KTLO (Keep the Lights On).
Think of KTLO investments as those investments that are required to keep the business up and running — things that, while they may not demonstrate positive ROI on their own, are so fundamental to business operations that the business would be in peril if they failed.
Why spend a lot of time calculating ROI for payroll systems? Everyone in your organization needs to get paid. This is not to say that there are no decisions to be made around payroll systems (quite the contrary). But investing a lot of time and energy in calculating ROI may be counterproductive. Have you ever given any thought to attempting to calculate ROI for the accounting system — or the phone system?
Successful HR technology business cases frequently call for a combination of opportunities that demonstrate positive ROI with a number of opportunities that are more correctly categorized as KTLO. You may want to ensure that a pre-occupation with demonstrating positive ROI is not preventing you from investing in KTLO-type technology initiatives.
While some organizations’ attempts to figure out HR technology ROI may have been frustrated by a misunderstanding about what exactly ROI means, others may have been looking for returns in the wrong places. Here is how HR technology can give the organization the most bang for its buck.
Technology all by itself doesn’t change anything. Generating positive ROI always requires some type of behaviour change. People have to do something different with the technology to reduce activity cost. A new way of doing things changes the economics of the activity, generating cost savings in the process.
For most organizations, the technologies and processes that create the biggest potential for positive ROI have to do with administrative activities and communications.
And, like it or not, many HR activities are administrative and many of these administrative activities touch on stakeholders outside of HR. The potential for reduced administration costs is highest with the introduction of employee and manager self service, which means behaviours must be changed outside of HR.
Where technology scores ROI through reduced administration
We’ll briefly touch on some of these areas, but keep in mind that for many organizations, outsourcing or co-sourcing some of these activities is also a potential way to change the economics of service delivery.
•Pension administration: For defined benefit pension plans in particular, administration is an exacting business. Organizations are increasingly called upon to balance demands for self service from both active and retired members with constraints around existing technology, which is often a legacy system ill-equipped to offer self service. Yet many organizations can dramatically alter the cost profile of pension administration activities by using the right technology, whether completely in-sourced, or co-sourced.
•Health and welfare benefits administration: Even though most Canadian organizations rely on providers to process and administer claims, employers remain on the hook for communicating plan provisions and benefits and sometimes for enrolment activities. As organizations seek to retain and enhance employee relationships, while reducing the costs of administrative and educational activities, the cost reduction opportunities afforded by health and welfare portals are becoming more evident.
•Compensation administration: As compensation plans become more highly customized, administration of the compensation function itself is growing in complexity. Many organizations now want to do on-the-spot market pricing, comparisons and increasingly complex forecasting, both within HR and the operational business units. This increasingly complicated administrative activity is a prime candidate for technological intervention.
•Performance management: Organizations are more and more interested in performance management. Typically, this is achieved with a series of cascading objectives, starting at the top of the organization and breaking down to individual performance measures that are distributed and aligned throughout the organization. In the past this systematic parcelling out of objectives may have been viewed as too administratively intense to be practical. Newer technologies specifically related to performance management promise to enable more organizations to benefit from a comprehensive approach to performance management at reduced costs.
•Total compensation statements: Most organizations recognize the benefits of improved employee communication, and many have accepted that total compensation statements, which articulate the total value of all types of compensation, can be a valuable retention tool. Yet many organizations remain foiled by the logistics of production, printing and distribution of total compensation statements. Increasingly, organizations are turning more sophisticated database, Web and print-on-demand technologies to decrease costs and improve service levels for employees.
These areas offer a few ideas about the potential for relatively quick ROI for technological intervention in some parts of the HR function. Which of these works best depends on the unique circumstances of every organizations and overall HR and technology strategies.
Remember too, that these technologies don’t do anything all by themselves. At the end of the day, it’s the people who make the changes. Any technology program you put in place is only as good as the change management effort behind it.
Ed McMahon is national practice director, technology solutions for Watson Wyatt Canada. He can be reached at (416) 874-4925 or [email protected].
