The bottom line: How to calculate ROI in Human Resources

Every manager has two words that keep them awake at night — the bottom line. The frightening effect grows when the department you manage is less easily quantifiable, and HR is the king of those fields.

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While we’re all aware of how important people are for a business. They drive revenue, spark creativity, and make the organisation what it is. Wanting to support your employees should be a priority for any business, but when it’s so difficult to prove how it supports the dreaded bottom line, it becomes much harder to convince stakeholders to spare some cash for any HR initiatives.

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That's when we need to prove the ROI - a way to put into numbers how much a project will benefit the company. But what exactly is ROI? And how can it be applied to HR?

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What is ROI?

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Return on investment, or in short, ROI, is a way to measure the profitability of a certain project relative to its cost. To simplify this, ROI is the relationship between the capital that was invested and the profits (or losses) generated from the investment.

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The formula for calculating ROI is pretty simple: 

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ROI = [(Payback - Investment)/Investment]*100

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In other words, to calculate ROI, you need to divide the return (how much money you gained) by the cost (of the investment), and then multiply the result by 100 to end up with a percentage, which is then sometimes portrayed as a ratio.

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What is ROI in Human Resources?

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As you can see, ROI is an extremely useful tool when it comes to representing the benefit of a particular investment. However, when it comes to HR, the outcome of projects is rarely portrayed in numbers. It usually stays within the qualitative, amorphous region of ‘improved morale’, ‘better engagement’, or ‘employee happiness’. In many ways, this is why ROI is so important for Human Resources — it’s one of a few metrics that can give more weight to HR decisions, alongside ELV and other HR indicators (we also recommend to follow rates of turnover and absenteeism, for example).

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The fact that HR elements tend to be less numerical doesn’t mean that there’s no way to quantify them. What’s more, it’s not even complicated, but pretty straightforward. Imagine you are running a campaign to reduce work-related stress. This may involve inspirational posters, in-house therapists, and flexible working. Using surveys, you can calculate the level of stress that currently exists in your organisation (converting it to the financial cost), and the cost of the programmes you’re offering to combat it. The value of the programme revolves around the reduction in costs of work-related stress, so that’s what the ROI is going to indicate.

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Why is it important to calculate ROI in Human Resources?

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As previously mentioned, there aren’t many quantifiable metrics that can be used in HR, given how people-based the profession is. This is why many HR managers struggle to support their initiatives with stakeholders or even simply show their successes in a tangible way.

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Using measures like ROI boost the credibility of projects — but it doesn’t end there. It boosts the credibility of HR as a whole. This means that the services provided by the HR department will be highlighted and their benefits assessed more accurately, proving its central role for the company.

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This becomes even more important in times like today. With a financial crisis, more and more businesses are trying to cut costs, and the first initiatives to go are those that can’t prove value. With ROI, HR professionals can provide tangible data on the fiscal benefits each campaign incurs.

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How can I calculate ROI in Human Resources?

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The main question remains — how can you actually calculate ROI in Human Resources?

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Well, the answer is that it’s not that different to ROI generally. The formula is still ROI = [(Payback - Investment)/Investment]*100, but the main difference is the need to represent the return in a numerical way, when most of the goals of an HR project are not quantitative.

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There are a number of ways to do this, but they all revolve around understanding the value of your project. Let’s take a relatively simple example: training programmes. These are usually constructed to provide a tangible benefit — increasing the speed or quality of production or a service. In a specific factory, a training programme may have helped produce X times more products, which can then be converted into monetary value for the purposes of the formula. Then, you can divide the value by the cost of implementing the training programme in the first place.

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For more difficult instances, here’s a plan to follow to ensure you’re collecting the necessary data:

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How to calculate Human Capital ROI (HCROI)?

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If you’re looking for a more holistic picture of your HR investment, you may need to apply the HCROI formula. This involves dividing the organisation’s net revenue (gross revenue after deducting operating expenses, salaries, and benefits) by the cost of salaries and benefits. This will give you a bird’s-eye view of your HR function as a whole.

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The resulting percentage will indicate the ROI generated by your human capital investment. A positive ROI indicates that the benefits outweigh the costs, while a negative ROI suggests a loss on the investment.

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Remember, calculating Human Capital ROI involves estimating and measuring both tangible and intangible factors. Some benefits, such as increased employee engagement or improved company culture, may be challenging to quantify precisely but should still be considered when assessing the overall impact of your human capital investment.

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If you want to learn about Thrive’s stellar ROI and how we can help you with your HR, people development, culture analysis, and recruitment, book a demo today.

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