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HR Magazine, August 2002 - Supplement: Count On Business Value

By Bill Roberts  8/1/2002

HR Magazine, August 2002

Vol. 47, No. 8

Count on Business Value

HR Must advance to the second level of ROI-Business impact

As she prepared the business case for implementing a human resource management system (HRMS), Margaret Byl calculated the usual costs of the technology and the savings it would produce. But reducing HR transaction costs through automation—though important—was not the most important reason to purchase the system.

“The business case wasn’t just about doing HR better but about delivering business value,” says Byl, vice president of HR at Suncor Energy Inc. based in Calgary, Alberta, Canada.

Suncor—a mining, natural gas and refining company with about 3,200 employees—is one of a small but growing number of companies savvy enough to understand that the traditional

factors considered in calculating return on investment (ROI)—cutting administrative costs and reducing HR staff-to-employee ratio, for instance—are limited. Improving the entire company’s productivity is the priority.

So, Byl set out to measure the “business impact” of buying an HRMS. Byl’s conclusion matches a growing consensus among consultants and practitioners that the modern HRMS has already squeezed all the inefficiencies possible from transactions and reduced HR staff as much as it can. Now, as HR moves processes to the web, the measures of success will be increased productivity and added business value, experts emphasize.

Not everyone agrees, however, including many CFOs, who are skeptical of the HR profession’s business acumen, which is necessary to determine this type of ROI.

The trend, however, is to think about ROI more broadly. “It is legitimate to consider the administrative costs savings, but it should be a small piece of the business case for any investment,” says Naomi Bloom, an HRM delivery systems strategy consultant. Bloom, managing partner of Bloom & Wallace in Fort Myers, Fla., advised Suncor.

Beyond Traditional ROI
Historically, if they considered ROI at all, HR professionals focused largely on the people, paper and postage costs to be saved. In other words, how much does it cost to do something today without technology, and how much will it cost to do it with technology, including the cost of the new system?

But if companies don’t look for benefits beyond HR, they set themselves up for problems when they justify new systems in the future, argues independent consultant Jay Stright, formerly of AG Consulting. “If you only look at things from an administrative point of view, once you do them right, the only thing you can do better is do them cheaper,” he says. “But once you get to a certain point you can’t do them cheaper. What are you going to do the next time management tells you to cut costs?”

From the start, Stright says, HR should focus on the second level of ROI—business impact. “If you look at this second ROI, you will allocate dollars differently,” he says. HR professionals, who are perhaps more administrative by nature, must become more strategic to see beyond traditional cost-reduction ROI.

It seems HR professionals know they need to measure beyond traditional ROI. In its “2001 Human Resources Self Service/Portal Survey,” Cedar Enterprise Solutions Inc., a Baltimore-based HR consulting firm, found that ROI as measured by reduced administrative costs is just one objective sought by HR—and not even the most important one—that respondents hope to accomplish with self-service applications for employees and managers. Others include improving services to employees and managers and enabling HR to become a strategic business partner. (See “HR Has High Hopes for Self-Service Tools.")

HR professionals increasingly are afforded the opportunity to make their case. The Cedar survey found that most North American companies—67 percent—require HR to make a business case when pitching technology projects, up from 62 percent in 2000 (the first year Cedar asked this question). In addition, 38 percent of North American respondents collect metrics to gauge success after the implementation, up from 8 percent in 1999. The survey, the company’s fourth annual, included 240 respondents—an 11 percent response rate—from large companies in North America.

“ROI is a hot topic because companies still want to invest in technology, but they must have a good business case for it,” says Alexia Martin, Cedar’s director of research and analytics. “Management is demanding better business decisions be made for technology. ROI is just one piece of that.”

When it comes to ascertaining the business impact of ROI on technology, HR must rely on the departments using the system to report back. “The ROI in HR applications is not in the HR department,” explains John Johnston, director of strategic consulting and e-HR at Arinso International, a Brussels, Belgium-based consulting firm operating in the United States, Canada and 17 other countries. “It is in all the other departments of the organization. HR ignores that at its peril.”

It is easier for HR to remember that caveat if the organization’s culture emphasizes business value in all divisions, including HR. For example, Byl—the No. 2 HR executive at Suncor—was trained as a chemical engineer. Before her appointment as vice president of HR in January 2002, she spent several years in business development, conducting economic and business case analyses.

“The business driver for putting someone like me in this position came from wanting to have a more traditional project management focus in implementing the HRMS,” Byl says. Company leaders chose Byl because they wanted someone who could help lead a project that would deliver broadly defined business value, not just reduce HR costs, she emphasizes. Byl’s experience is complemented by that of her boss, Sue Lee, the senior vice president of HR, who has had a more traditional HR career.

Suncor did a traditional ROI calculation but used conservative estimates about how much it might save with more efficient transactions across the company. “We did a routine ROI looking at the investment, the costs taken out and the discounted cash flow,” says Byl. “But we also tried to understand where some benefits could come in non-HR areas.”

Business Value ROI in Practice
There are many ways for HR professionals to take the next step beyond traditional ROI. Consultant Bloom offers this example: A web-based resume processing application could reduce the cost of processing each resume. The before-and-after metrics could prove the system is cheaper and more efficient than the manual method.

“But the application doesn’t mean that I’m getting better resumes, or easing the hiring decision, or improving the DNA mix of my workforce or screening out wackos,” she says. “I might even make things worse if I reduce head count and lose the guy with good judgment who was keeping the loonies out and helping to filter the resumes.”

How can HR ensure that its programs have positive business impact? “Start at the top of the organization and ask what it is supposed to accomplish,” Bloom advises. “What are the outcomes for which this organization gets rewarded for success?”

In for-profit organizations, the measures are usually financial—improving revenues, profits and market share. The business strategy to improve all three will vary by company. HR should ask: What must workers achieve to meet these outcomes?

In Bloom’s example, instead of seeing the resume application strictly as a cost-reduction tool, HR could think of it as a way to recruit the people needed to meet specific business goals.

Need to reduce time-to-market for new products? The resume application should identify people who are risk takers and innovators.

Need to improve profitability through better budget management? New recruits need a cost-containment mindset.

“Once I know what the business outcomes are, I can consider how to use technology to redesign processes to achieve those outcomes,” Bloom says. “Now I have a formula for ROI.”

Sharing HRMS Data Outside HR
Johnston agrees with Bloom and adds that business value also can be attained by allowing non-HR employees to use the HRMS data in new ways. For example, a Manhattan-based bank continuously expands staff and shifts employees around. The facilities department acquires new office space and handles moves. When leasing new space, the department uses a standard amount of square footage multiplied by the number of employees, then rents that amount of space. But some people need less space than the formula requires. The facilities managers figure they routinely lease 15 percent more space than they need, wasting millions of dollars.

Also, facilities managers do not know which employees have changed departments. Whenever change or expansion is in the works, two staff people spend most of their time walking around to determine who is working where. Every cubicle, however, has a distinct number. And most HRMSs have a data field for work location. If HR would input the work location and give facilities staff access to the HRMS, facilities staff could more accurately calculate individual space needs, thus cutting lease expenses. That information also would enable facilities management to complete an office seating plan without walking around. Plans could be published on the intranet for all employees.

But the bank’s HR staff balked when Johnston suggested that plan; they did not want to take the time to input the cubicle numbers. Johnston then proposed letting facilities staff do that grunt work and keep the data updated, since it would benefit them. But that led to the second and larger objection: HR did not want facilities—or anyone else—to have access to the HRMS, even though HR could limit access to certain data fields, thus protecting private information.

“HR is the custodian of HRMS information, not the owner,” he argues. “The more people who use the data every day, the more business value there is. But these are things HR people are not typically thinking about.”

At Suncor, Byl also is looking for techniques for using existing data in new ways. One idea is to maximize the business value of automating salary planning.

“The time managers spend on salary planning is a hidden cost,” she says. There is a lot of manual work involved, but the company doesn’t measure how much time it takes, so it isn’t charged against any HR process. “Anecdotally, we know it takes a lot of time.”

Byl isn’t sure how this will play out, since the company recently selected an HRMS, which won’t be rolled out until 2004. But part of her job is to decide which areas to measure for business value before and after implementation. Other possible areas include employee performance management and recruiting, she says.

Overcoming CFO Resistance
Given that determining business impact ROI for HR systems is a burgeoning practice, HR professionals should be prepared to defend it to their CFOs. Most would rather receive the traditional ROI, which is what they’re accustomed to getting from HR. “CFOs are for the most part not accepting these arguments,” says Robert Stambaugh, president of Kapa’a Associates in Kekaha, Hawaii, an HR technology consulting firm. He advises HR executives to play the game and develop a traditional ROI as well when they pitch e-HR applications or new technologies.

Cedar’s Martin agrees: “I can make the case that investing in new HR systems will help you make money, but not many will buy it. There’s not enough proof yet.” Business value can be part of a business case, but most financial types want to see traditional ROI as well, she says. “Companies are trying to remove costs from their operations. The big cost components are labor, duplicate systems and distribution of paper,” which are traditional ROI measures.

Johnston, however, believes HR can overcome such objections by sitting down with finance experts before developing a business case. “Make the CFO your best friend. If you are going to do ROI and present it to senior management, the one person you know is going to shoot holes in numbers is the CFO,” he says. “HR people must sit down with financial types and ask them how to build the business case. Financial people get excited when they find HR people who speak their language.”

Byl agrees. The entire Suncor executive committee, which included the CEO, CFO and executive vice presidents of the business units, signed off on her project. She says it helps that most projects at Suncor, whether for an HRMS or for major equipment for a business unit, are presented in a similar way.

“They want to know what is the strategic reason, the investment required, the return we’ll get and the risk of getting that return,” Byl says. “When you use the same logic for HR that business units use, it is easier for them to support the project. When we speak their language, we gain credibility with this approach.”

Bill Roberts is a freelance writer based in Los Altos, Calif., who covers business, technology and management issues.

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