The importance of measuring return on investment (ROI)

Posted on September 14, 2016 by Richard Ellor

The importance of measuring return on investmentThe growing importance of HR

The preoccupation with raising the profile of the HR and reward function amongst senior management teams and publicising its value across organisations has been around for a long time.
Back in 1997, US management academic Dave Ulrich first proposed his model of strategic human resource practice which suggested that HR professionals act as business partners to support and add value to different areas of the organisation1.

And in 2003, the Kingsmill Report, sponsored by the Department of Trade and Industry (as was) highlighted the importance of human capital management - the examination of the performance of people management practices that have a critical impact on an organisation's success or lack thereof2.

Kingsmill implied a causal link between people management and business success, and called for greater human capital reporting in companies' financial reports. The report established that HR professionals in many organisations were recording and measuring a whole range of data related to their people that should be included alongside any other financial metrics reported.

The perceived value of HR to organisations has grown in the intervening decade or so. And the World Economic Forum now points to talent - not capital - as being the vital factor linking innovation, competitiveness and growth in organisations in the twenty-first century4.

Gathering and translating better data is critical to validate these links between people and business success. But that data alone is not enough; it's crucial that reported people metrics are able demonstrate any return on investment in HR policies and practices.

Measuring absence, productivity and engagement

Unfortunately, despite the stronger position and profile of HR functions within organisations, some leadership teams in companies may see HR and reward strategies and initiatives as additional overheads.

Even something like a health and wellbeing strategy - that the HR function and employees know is crucial to the organisation in improving productivity and reducing HR costs - can sometimes be seen as an expense by the management team.

So that's why demonstrating that HR investment has business benefits is essential. But the problem for the HR and reward profession comes in designing meaningful metrics for things that can be more difficult to measure - such as productivity and engagement, compared to absence levels, for example.

ROI of a given spend is worked out by dividing the return on an investment by the cost of the investment. And profit is a really good reflection of how well organisations are doing. But showing how people specifically contribute to that profit is complex.

Most organisations - even non-profit-making ones - see return on their investments as fundamental to their purpose. Money is what board members sit up and take notice of. So if poor health and wellbeing among its workforce is costing money, then senior management need to know how much the company is losing by not dealing with the problem.

But even though the case for investment in health and wellbeing strategies might be clear cut, management teams may be reluctant to pump money into them without certainty that there will be a return on their investment.

So HR and reward professionals - often challenged to meet their objectives on a restricted budget - also need to find imaginative ways to demonstrate ROI with less investment in the first place. Once the board or the senior management team sees those results, further investment may be forthcoming.

The HR function knows that organisations which commit to effective people policies and practices can expect improved business outcomes. They can point to the research that demonstrates this. But they must also ensure there is a cost and a saving attached to the policies and initiatives that they implement.

Then they can really demonstrate their worth to the organisation.

Our white paper gives HR professionals a framework to build a business case for a healthy workforce. It focuses on developing a health and wellbeing strategy through setting clear organisational objectives. A fundamental part of these objectives is that they must be measurable and prove their return on investment, whether that is reducing absence levels or improving staff morale and engagement - both of which can have a profound impact on an organisation's bottom line.

Download our latest white paper: Building a business case for a healthy workforce.

1. Dave Ulrich, 1997, Human Resource Champions: The next agenda for adding value and delivering results
2. Kingsmill, D., 2003, Accounting for people: report of the Task Force on Human Capital Management