ROI - Return of Investment
It measures the financial added value of an HR program or initiative.
1.Calculate the net project benefits
- Net profit = Earnings from investment – Total cost of investment
2.Calculate the project costs
The calculation of the net project benefits it’s usually a real challenge.
If you want to succeed with the ROI analysis you need to collect data about:
- Reaction vs. planned reaction of the initiative
- Initial level of knowledge and post initiative level of knowledge
- The success of implementation process. It means you need an implementation plan that needs to be compared to the reality.
- Business impact
- Intangible rewards
To be able to calculate the ROI you need to plan ahead, having the end result in mind. Usually, if you try to calculate the ROI of an initiative after implementation you will learn that there is not enough data to generate a clear conclusion.
A proven successful method follows the steps:
- Planning – define the objectives of the initiative
- Define evaluation methodology
- Identify baseline data
- Measure and track implementation – measure changes regarding:
- Knowledge, skills and attitudes
- Business performance variation
5. Collect data after implementation
6. Convert data to monetary value
7. Identify the costs of solution
8. Identify intangible rewards
9. Calculate the ROI
Initiative: Leadership program for management team
Objective: reduce turnover rate with 10%
Costs: trainer + associated logistic costs = 30.000
Course details: time investment of 8 hours/month during 12 month
Participants: 30 managers with an average pay of 60/hour
Previous year turnover cost: 1.25 mil.
Program effect: 3 years at the current turnover cost
Let’s start with the cost calculation.
We have 2 main costs:
- Trainer + associated logistic costs: 30.000
- Managers time spent in the course: 30 (managers) x 8 (hours/month) x 12 (months) x 60 (hourly cost) = 172.800
Total cost: 202.800
Let’s see the benefit calculation:
The easiest way to calculate the benefit is the to assume that the turnover cost will diminish with 10%.
Cost of turnover: 1.25 mil => 125.000 benefit
This amount is your saving for the next 3 years, so:
Benefit amount: 375.000
For the ROI calculation we need the net benefits.
Formula: Net profit = Earnings from investment – Total cost of investment
Net profit – 375.000 – 202.800 = 172.200
ROI = 172.200 / 202.800 = 0.849 => 85%
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