The Biz Box: Business

How do you calculate the ROI for HRM software?

Written by Justus van Hoegee on . Posted in Business

Employees, managers and HRM departments can all benefit from dedicated HRM solutions, particularly in the SMB sector. However, every investment needs to be backed up by a solid business case for the people controlling the purse strings. Unfortunately, many HR managers struggle to accurately pin down what the realistic return on investment for HR software will look like.

Many organizations see HR as a soft skill. The HRM department manages questions from employees, takes care of leave and absence administration, and is responsible for recruitment. In the SMB sector in particular, it can be difficult to crystallize the added-value of using software for many of the activities involved. The HRM department spends an average of 60% of its time on a range of administrative processes. That leaves 30% available for employees, and 10% over for the role as business partner for the commercial activities.

The value of HRM in numbers
Most HR managers can clearly define the advantages of properly considered strategic HRM if they’re given the opportunity to act as business partner rather than administrator. What they’re often less able to do is create the formal financial business case for the desired situation. Taking their function and turning the value they create into hard numbers is generally not in their core skill set, in turn making it hard for them to effectively defend an investment plan for new IT.

Calculating your ROI
For SMB businesses where HRM is ‘just part of the process’ and basically managed by one person, a dedicated HRM solution is often seen as too expensive. This is often perceived in relation to the size of the company, but less often based on properly considered numbers.

The only way to convince management that additional investment is going to deliver a return is via that sound, properly evidenced ROI calculation. Or in other words – what is the required investment going to do for the net profit of the business and within what time frame? In the majority of cases, the maths looks something like this:

Asking for a number of quotations from different software vendors to clarify the direct costs is not the most difficult part. The real challenge lies in determining what the total costs saving looks like when the entire organization is making use of the new system. 

What are going to measure, exactly?
The core of the problem is that many businesses don’t really know what it is they should be measuring when it comes to HRM. There are of course several factors that are more evident than others – absence through illness, personal days off, number of job vacancies that have been filled etc. Genuinely useful figures on the way in which that recruitment process is handled, operational HRM, and total time and money invested in managing absence and exit procedures however are often harder to come by.

Convincing management
If HRM doesn’t have a firm grip on these numbers in trying to define the current situation, it becomes very difficult for them to be able to sell the required investment. The task for HR management is to get the short and long term goals of the organization clear. They can then focus on being fully accountable for their role in achieving them– to shareholders, financial partners and other internal and external stakeholders. The organizational goals need to be set out in clear language: the language of cold, hard cash. At the end of the day the business is there to create profit. HR management must be able to position their contribution to that – and that means more than by indicating that employee satisfaction has risen by X%.

So, what exactly do you need to do to be convincing and get the money on the table? Here three key steps in focus:

1.    Analyse your total process
Every activity that’s done, within every HRM process, from recruitment to operational HRM and conversations with employees and managers, needs to be logged and recorded. How often do employees ask for leave? How much time does each request cost the employee, line management and HRM to get it processed? What are their costs? This information can deliver a global price for the process in question across a specific time period. Sick leave is another example. How much does processing absence through illness cost the organization? Consider this in addition to the costs generated through reduced productivity associated with missing employees. Determining which activities need to be monitored and how they should be grouped can be an intensive task to complete. However, it's the necessary basis for a presentable pitch on how much the execution of HRM activities currently costs the company. 

2.    Select your software suppliers
The next step involves the selection of (a group) of suppliers for your HRM software. Set them to work, ensuring they convince you that their proposal for the purchase and implementation of the software is accurate. Part of that is also making sure that they fully convince you of how long processes take to manage in their system – with evidence from existing users in addition to a pretty PowerPoint presentation. This will ensure that you can accurately calculate what your time and cost savings will likely be.

3.    Create your business case
Create a business case based on the information from the software supplier offering the most attractive (and evidenced) results and present this to your management together with your analysis and conclusions.
Happily there are a number of HRM software suppliers that offer very detailed ROI calculators. These can help you to determine which details you need to consider, what data you should measure, and how you should put the results together in one overall cost picture. This should save you time in coming to your financial conclusions – already your first win. Good luck and enjoy the process!