Measuring HR Costs

Feb 23, 2016
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Why Measure HR Costs?

Several influences have increased the need to monitor HR costs accurately and thoroughly. Every manager should know how much money is spent on human resources. Some HR executives calculate this expenditure and compare it to similar expenditures at other organizations, although such comparisons are often unreliable because of the different bases for cost calculations. HR costs as a percentage of operating costs is a standard calculation.

HR staff should know the relative cost of programs and their components. Monitoring costs by program allows the staff to determine how costs are changing. If a program’s cost rises, reevaluating the program’s impact and overall success may be appropriate. HR staff may also compare specific components of costs with those of other programs or organizations. Significant differences may signal a problem. Also, costs associated with analysis, design, development, implementation, or operation can be compared with those of other programs within the organization and used to develop cost standards.

Accurate costs are necessary to predict future costs. Historical costs for a program serve as a basis for predicting future costs of a similar program or for budgeting for a program. Sophisticated cost models make estimating or predicting costs with reasonable accuracy possible.

When an ROI or benefit/cost analysis is needed for a specific program, it is necessary to develop cost data. For these analyses, cost data are just as relevant as the program’s economic benefits. Although establishing direct costs is easy, determining indirect costs related to a program is more difficult. To develop a realistic ROI, costs must be accurate and credible. Otherwise, the painstaking attention given to the monetary benefits is wasted because of inadequate or inaccurate costs.

Fully Loaded Costs

The conservative approach to calculating ROI has a direct connection to cost accumulation. HR program costs should be fully loaded for ROI analysis. With this approach, all costs that can be identified and linked to a particular program are included. When ROI is calculated and reported to target audiences, the methodology should withstand even the closest scrutiny in terms of its accuracy and credibility. The only way to meet this test is to ensure that all costs are included. Of course, from a realistic viewpoint, if the controller or CFO insists on not using certain costs, then leaving them out is best.

The Danger of Costs without Benefits

Communicating the costs of an HR program without presenting benefits is risky. Unfortunately, many HR managers have fallen into this trap for years. They present costs to management in all types of ingenious ways (for example, cost of the program or cost per employee). Although these costs may be helpful for efficiency comparisons, they can be troublesome without benefits. When most executives see the costs of an HR program, a logical question follows: What benefit was received from the program? This is a typical management reaction, particularly when costs are perceived to be high. To avoid this situation, some organizations have developed a policy of not communicating cost data for a specific HR program unless the monetary benefits can be demonstrated or a strategy is in place to develop the monetary benefits. This approach helps maintain a balance between the two issues.

Cost Guidelines

Some organizations may want to detail the philosophy and policy on costs in guidelines for the HR staff or others who monitor and report costs. Cost guidelines specify what costs are included with an HR program and how cost data are collected, analyzed, and reported. Cost guidelines can range from a one-page job aid to a 50-page document in a large, complex organization. The simpler approach is better. When developed, the guidelines should be reviewed by the finance and accounting staff. When an ROI is calculated and reported, costs are included in summary form, and the cost guidelines are referenced in a footnote or attached as an appendix.

Excerpted from Jack J. Phillips and Patricia Pulliam Phillips, Proving the Value of HR: How and Why to Measure ROI, second edition (SHRM, 2012)
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