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Article No.: 1911, November 1, 2019

Article Title: Why, Oh Why, Don't HR Folks Conduct Cost-Benefit Analyses?

Author: Linda Gravett, Ph.D., SHRM-SCP, CEQC

When I made the transition several years ago from accounting to HR, I didn’t realize how important and helpful my accounting background would turn out to be.  As an industrialDr. Linda Gravett photo psychologist today, I do my best to convince leaders in all aspects of a business that cost-benefit analysis can be time well spent.  Unfortunately, people don’t conduct these types of analyses for many reasons:

  •  They don’t know how
  • Results may show that favorite programs don’t work financially
  • Belief that this is a “smoke and mirrors” process 
  • It’s time consuming 
  • There’s no perceived positive outcome

I’ll make an effort in this article to convince you that these reasons can be overcome.

I like to start with the end in mind when preparing to engage in a project with a long-term objective.  Two assessment questions that I often use are:

  1.  Who will this project, and decisions/results within the project, affect? 
  2. What are the success criteria, behaviorally and financially?

When setting the success criteria, I believe it’s important to be very specific.  Examples are:  increase profit margin by 2% in 2020; 10 employees will be able to successfully test after two-week training to safely operate a fork lift; onboarding for five new employees in the Atlanta plant will be completed by January 31, 2020.  Before these criteria can be established, it’s necessary to touch base with internal or external customers to gain an understanding of their idea of “success” so it matches your own.  Lastly, you’ll want to assess the gaps between now and the desired outcome of a program or intervention to fully understand the benefits at the end stage.

If you want to know a key location for searching out objectives and goals for projects that you’re measuring, I look to an organization’s strategic plan.  For each project, I want to ensure that the results are aligned with the Mission, Vision, Core Values, Objectives, and Goals.

In the event you’d like to review what I’ve developed and use as a Return on Investment worksheet, a sample is attached.
 
 

RETURN ON INVESTMENT (R.O.I.) WORKSHEET
Step 1  Clearly state the business problem.  For example, our organization has an unwanted turnover rate of 32% for IT staff.
Step 2 Calculate the cost of the business problem.  For example, calculate the turnover costs for separation, replacement, and training for each IT employee that lest the organization last year.
Step 3  Identify a potential solution to the business problem based on historical data or benchmarking.  For example, a study of exit interviews may reveal that key first-line supervisors aren’t effective managers.  A combination of training and one-on-one coaching may be a viable solution.
Step 4 Calculate the cost of the solution.  For example, you could price having a consultant conduct a series of supervisory training workshops and the time for an HR staff person to develop and conduct a series of coaching sessions with individual supervisors.
Step 5  Implement the solution and monitor results.  The planned for result, of course, would be lower turnover of computer programmers after three months, six months, and a year as a result of more effective supervision.
Step 6 Calculate the net improvement benefit with this formula:
Cost of business problem before implementing solution (Step 2) minus
{savings after intervention, less cost of solution} = Net Improvement Benefit.
Example $585,000 Annual t/o cost in 2018 for IT staff
  $300,000 New t/o cost after 6 months
  $285,000 - $50,000 Savings, less solution cost
  $235,000 Net Improvement Benefit
Step 7 Calculate the cost-benefit ratio as follows:
Net Improvement Benefit (Step 6)  ¸ Cost of Solution (Step 4)
$235,000/$50,000 = 4.7 to 1
For every $1 spent for a solution, $4.70 was saved!  That's your Return On Investment (R.O.I)
Developed by Dr. Linda Gravett.
   
                               

Please email or call with questions or comments:  Linda@gravett.com, (513)753-8870

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