Why ROI



Why ROI?

Several features of the ROI Methodology make it an effectual measure for HR managers:

• ROI is the ultimate measure. In the range of measurement possibilities, ROI represents the ultimate: a comparison of the actual cost of an HR program to its monetary benefits by using the same standard ratio accountants have used for years to show the ROI for equipment and buildings.
• ROI has been the elusive measure. Many HR managers have long assumed that measuring the return on investments in human resources is impossible. Recognizing that investment is essential and that human potential is an unlimited power, many HR leaders argued that ROI could and should not be applied to human resources. The concept of ROI, therefore, has been surrounded by misconceptions, myths, and mysteries that have prevented many HR executives from pursuing it. Because of the increase in evidence showing otherwise, ROI is no longer an elusive measure.
• ROI has a rich history of application. The ROI Methodology is not a fad passing through the organization. It is a measure of accountability that has been in place for centuries. Wherever there is a significant expenditure, there is a need to know the financial impact of the expenditure. ROI will continue to be an economic measure in the future.
• Operating managers understand and relate to ROI. Most managers in an organization have special training on how to manage the business. Some have business or management degrees or even master’s degrees in business administration. These managers understand ROI and routinely use it to value other investments. They have a desire to have ROI data for major programs. They know how to use it, appreciate it, and support it.
• ROI builds excitement among stakeholders. One of the most visible sources of pride and satisfaction comes when the HR department organizes, implements, or operates an HR program that results in a positive ROI calculation. No other measure can generate the amount of energy, excitement, and enthusiasm as ROI can, particularly when the ROI value exceeds expectations. Most stakeholders involved in HR programs intuitively believe that the programs add value, but ROI, as a measurement tool, confirms this intuition using a credible, validated process.
• ROI is a top executive requirement. Thanks in part to the popular press and media attention to ROI as an evaluation tool, executives are suggesting, asking, requiring, and sometimes demanding that ROI be calculated for certain HR programs. Previously, executives assumed that ROI could not be developed, given the logical and persuasive arguments they heard from the HR staff. Now, these executives see many examples in which ROI is becoming a justifiable part of the measurement mix. The global recession has intensified this issue to the point that executives now suggest that ROI should be required for HR expenditures.

Human resources is treated the same as other business functions, and the HR department, like other departments, must produce value. Gone are the days of blindly increasing HR investments with no clue as to their financial payoff.

Excerpted from Jack J. Phillips and Patricia Pulliam Phillips, Proving the Value of HR: How and Why to Measure ROI, second edition (SHRM, 2012).