How to measure ROI of HR department? This may be a less obvious question to raise but definitely eyebrow-raising. Nevertheless, this query, albeit simple, may have complex answers and explanations.
There can be no doubt that the HR department is significant in the productivity of enterprises and in meeting the goals of the company. This department is considered an investment of a company with the people working in the department as assets. However, similar to other departments, the HR office is subject to control and evaluation. Companies would still assess the return of investment of their HR departments. There can be no way of making an assessment other than using metrics or tools to determine not only the department’s worth but also its efficiency and efficacy.
Perhaps, the indication of the performance of HR departments can be assessed from the productivity level of production workers, including those in the management level. It also involves assessing the productivity level of individual workers in the organization. The role of the HR department can have influence to the performance of an individual worker, as measured using several factors including productivity.
The increased performance and productivity of individual workers may have something to do with the roles and responsibilities of the HR department. However, the rising employee turnover rate may also be a measure of the performance of the HR personnel. Higher turnover rates in any job position may mean that the HR department is not efficient in hiring qualified workers or loyal employees. However, the rising turnover rate of employees and employee position should not be solely credited to the failure of the HR department. The working environment and work policies are other factors for the negative impact in employee turnover.
In calculating the ROI of HR departments using the accounting method, an equation could be involved. This equation includes numerator and denominator in which the numerator is the earning or result, either actual or estimate, while the denominator is the amount of investment used. However, when this equation is used, it is more probable for the amount of investment to be quantified rather than the earning or result of the investment to derive the rate of investment return. Another thing is that the investment poured on HR department and for the HR personnel to use is not only a capital expenditure. The HR department incurs expenses from time to time for it to function. Because of these probable attributes, the ROI of HR department cannot be quantified easily. Instead of deriving the ROI using the standard equation, other metrics can be used to measure the rate of investment return of employee-management department.
KPI, which stands for key performance indicators, can be used in measuring the ROI of HR departments. The turnover rate of employees is one of the KPI’s in measuring the performance of the HR department. Other KPI’s may include cost per hire, acceptance rate, training cost per employee, revenue per employee, resignation rate, average remuneration, and absence rate. The management level or owners of companies may also have to consider the total costs incurred for the HR department to function.
Even if there are KPI’s that can help quantify and measure ROI of HR department, complexity is deriving the exact amount or rate still exists. However, even if there is difficulty, ROI of HR departments is still measurable. Approximation in amount or rate is a probable aftermath of the calculation. One last thing to remember is that the elements and nature of calculating the ROI of HR department may vary, depending on the goals and objectives originally set by the company concerned.