After the jet lag trip to Asia yours truly jumped on a couple of planes (nothing direct had to connect) to go to Toronto for a morning training session at a HR software company called Kronos. I spent a cold and rainy morning with a group of HR executives doing finance training. Since I had about three hours to train I needed to keep it concise and I did. The focus was on income statement training and Return on Investment (ROI) training. We had an interesting session with a group of about 20 executives. Good participation and a lot of interest in ROI as a topic for this group. Kronos was sponsoring this session but it was done on behalf of an HR leadership group based in Canada. It was a good opportunity to expose these people to finance and help them see how finance relates to HR.
In the return on investment discussion we had some good conversation on how one would justify initiatives in HR. It’s not the typical ROI case study where a business buys a machine for $1 million dollars and increases production on the assembly line saving thousands of dollars a month. The machine ROI analysis is what I call hard evidence ROI analysis where the benefits of the investment tie directly to increased revenue or cost reduction like an automation machine would. Most investments in the HR world bring a return through evidence I like to call soft evidence. For example, how do you justify the salary of an HR manager to a business? The HR manger does not increase revenue or increase production like an automation machine so as a finance guy I say why hire HR. If the HR manager does not help us make more money then why hire them?
To justify investments in infrastructure headcount like HR we need to turn to what I call soft evidence. The benefits of good HR don’t directly drive profit but what are the financial benefits of better recruiting, lower turnover, and less risk of a harassment lawsuit? While all of these issues are important to grow a successful business it is hard to place a dollar value to them. So what is an HR manager to do when looking at these soft evidence investments? I say make estimates of the savings gained by better recruiting, lower turnover, and less risk of employee based lawsuits. While these numbers will be estimated it’s better than just going forward with my gut tells me we need that HR resource.
Financial analysis is loaded with estimates and assumptions so why not make some assumptions to justify the ROI investment in training for example. Once a financial estimate of the value of a good financial training program is put together for ROI analysis then debate and discussion can take place around the validity of the numbers. After the financial benefits are accepted one can do a net present value (NPV) or an internal rate of return (IRR) on these soft investments like one would on any investment.
The session went well and the lunch afterward hosted by my Kronos hosts was awesome. There is a pretty good steak and seafood chain in Canada called the Keg. I have been there several times in other Canadian cities. For lunch I had the lobster tacos. New on the lunch menu and I can highly recommend them. You can get more ROI training from our ROI Toolkit published by Harvard.