hrmeansbusiness

Archive for February, 2009

Why do organisations select, in particular, HR systems that are out of scale to their organisation profile? How do they compute the Return on Investment (ROI) for these applications?

Over the past few years I have worked with many clients who want to buy their first HR system, replace an existing one, or see if they can get more out of what they already have.

I am frequently struck by the fact that somewhere along the way these organisations have chosen to burden themselves (or are proposing to) with software that would require an army to actually keep it running at full capacity, and costs an inordinately large sum of money to purchase.

The mere fact that there is provision in a system for recording O and A Level attainments does not mean that those fields have to be populated!

Many fields are simply just not used and have no relevance to the needs of the organisation, but providers are usually shy at “switching off” unwanted features.

For instance:

Recruitment modules can present a very labour-intensive solution for any organisation that is not running year-long large-scale resourcing campaigns;

Training modules will handle every aspect of booking and managing training courses, but the module should take the grind of administration out of the task, not create a new rod for the HR officer’s back.

Of course, it is usually the HR Officer grades who get to use the application more than anyone else, being familiar on a daily basis with inputting, navigating around the system, and actually producing the reports, whereas HR Managers and above are primarily concerned with the reporting output and its interpretation or supply to internal clients.

It is essential to keep focused on the organisational requirements when specifying HR software. There can be no other consideration.

Most Payroll software is generic, and can be judged on its ability to handle the required numbers of staff, weekly and/or monthly pay patterns, and so on; I recommend to my clients that rather than detail the minutiae of Payroll features, it is better to focus on the quirkier requirements of an organisation’s pay methods, and request the potential provider’s solution,

Employees have to be paid, that is a cost that cannot be avoided. It is a question of deploying the most effective yet economic means of doing this.

The choice in most cases lies between:

an integrated in-house HR & Payroll application;

an outsourced Payroll being fed by an in-house HR system;

an outsourced Payroll providing basic HR reporting.

The guiding principles can go out of the window when the HR part of the equation is under consideration. Systems are more often than not selected because the provider:

1) has a well-advertised profile;

2) has supplied to competitors or sector peers;

3) is deemed to be a substantial player, and therefore risk-free (and by implication, blame-free if the selection doesn’t work out!)

4) passes an overly-stringent Due Diligence exercise by the

Procurement function.

As a result perfectly adequate systems, costing less from smaller and less well-known suppliers can be overlooked or discarded.

The traditional way that systems were selected often involved nothing more complex than considering the number of employee records held; if you had more than 1000, you were headed towards a major provider (Tier One in the common parlance). Yet I have seen organisations with numbers as low as 400 employees approving software costing in excess of £70,000; software that could easily handle fifty times that number of records!

To avoid this, the prospective purchaser must draw up a matrix of the essential features, and a subsidiary list of further features for which it is certain there will be requirement; do not include fanciful notions – if your organisation has a high proportion of shift-working casual workers, then you will not be thanked for shelling out for a Self-Service module!

Talking about Self-Service…. You have to be very clear in your mind about how beneficial this can be. To merely enable employees to change a few of their personal details is not empowerment – or progress. Self-Service is not cheap; you need to ensure that the culture and the processes are receptive to this type of enhancement. If you are unfortunate enough to introduce this and it subsequently does not work…well, it doesn’t bear thinking about, does it?

The biggest gain for HR is Automation (and its advanced derivative,Workflow) of the basic administrative functions. At the moment, this is only available with the larger and more expensive applications, but expect all providers worth their salt to have this as part of their offering within the next twelve months.

Quite simply put, Automation will take care of the routine tasks without anything falling down the cracks of manual diaries and peoples memories; you can programme a whole series of date / action driven events to occur and know that they will be executed. When you come to weigh the benefits, one of the biggest “earners” on your investment will prove to be the reduction of administration harnessing Automation.

A key aid to selection is to compare the various offerings on a financial yardstick, and what better than to use Return on Investment (ROI). This will be language that your Financial people will understand and appreciate!

The methodology for producing an ROI for HR Systems is contained in the next article “HR Systems: The Return on Investment (ROI)”

© Denis W Barnard 2009

In order to compute the ROI on your HR & Payroll System you first need to understand the concept and the metrics.Broadly, ROI is expressed as a percentage over a given period of time. For an HR / Payroll system, a sensible life span calculation would be 4 -5 years, mainly taken against a backdrop of acquisitions within the industry and technology change.

To calculate ROI, you must first fix the metrics, and then convert the outcomes into cash terms. This is an invaluable tool when comparing offerings, and of course can be used for any form of comparative investment.

Basic metrics would be:

Annual Net Benefits:

These are the Gross Benefits minus ongoing costs such as Interest

Time Period

The defined life of the application

Initial Costs

The total cost of the application; for calculation purposes, the initial consultancy is capitalised, along with the software and any additional hardware required.

Example 1:

If you considered that the implementation of a new or replacement application costing £50,000 would have features that would save the equivalent time of one employee whose salary was £24,000, and you gave a life span of 4 years for your application, and interest rates were 5% then:

Gross Benefit Year 1 £24,000 (100% of an employee cost)

Gross Benefit Year 2 £24,000

Gross Benefit Year 3 £24,000

Gross Benefit Year 4 £24,000

Total £96,000

Less:

Interest Year 1 £ 2,500

Interest Year 2 £ 2,500

Interest Year 3 £ 2,500

Interest Year 4  £ 2,500

Total £(10,000)

Net Benefit over 4 Years £86,000

Formula used in this case:

ROI = (Net Benefit – Total Cost) divided by Total Cost then x 100

Thus: (£86,000-£50,000) divided by £50,000 x 100 = 72%

Net Benefit is in effect the total money earned from your Investment.

The investment is the amount you put in to achieve that Net Benefit.

The illustration is extremely simplistic, as it does not take account of factors such as the reduction of errors or the improved efficiency in operation. However, it should be enough to inspire practitioners to take a more fiscal approach to their selection processes, and achieve higher credibility as a result.

In this example, the ROI is 72%, which I would consider to be a very decent return.

Example 2:

Now let us compare the above example against another piece of software in our selection net, costing £25,000 would have features that would save the equivalent time of two-fifths (40%) of an employee whose salary was £24,000, same life span and interest rates;

Gross Benefit Year 1 £9,600 (40% of annual employee cost)

Gross Benefit Year 2 £9,600

Gross Benefit Year 3 £9,600

Gross Benefit Year 4 £9,600

Total £38,400

Less:

Interest Year 1  £ 1,250

Interest Year 2  £ 1,250

Interest Year 3  £ 1,250

Interest Year 4  £ 1,250

Total (£5,000)

Net Benefit over 4 Years £33,400

Formula used in this case:

ROI = (Net Benefit – Total Cost) divided by Total Cost then x 100

Thus: (£33,400-£25,000) divided by £25000 x 100 = 33.60%

Clearly then, a lower ROI than Example 1, but still a reasonable return for the outlay, which is sometimes all the corporate budget will bear.

It is up to each organisation to set the bar for the required ROI; I can almost guarantee that it will be seen quite quickly that this type of computation has not been applied to too many other expenditures! Try this sum on Company Cars or Healthcare…

In summary, I would urge this:

Big is not always Beautiful – unless you are Big yourself! Do not be too driven by publicity or the high profile of a provider…all that matters is that the offering meets all your immediate and medium-term needs.

Use the power of metrics to refine your decisions. Once you start to use ROI benchmarks, your decision path will be that much easier to navigate.

© Denis W Barnard 2009

It is essential to keep focused on the organisational requirements when specifying HR software. There can be no other consideration

The acquiring organisation must always be sure beforehand of what they require. This requires objectivity; in many cases this process can benefit from an independent and informed view, on the premise that the client may not be aware of all the benefits (or disbenefits) that can accrue.

There are any number of checklists out there to “assist” the identification of the perfect system, but they take no account of actual business processes, which vary from organisation to organisation.

Once the benefits have been determined, a Return on Investment calculation and a Capital Budget can be set. Traditionally, this has been a minefield, as many HR and Payroll departments have not always been able to clearly quantify what the financial implications are and justify them to the Board.

Bear in mind the effective life of an application such as this will be around 4-5 years.

Always remember to include the costs of Migration of Data and any possible Server and in-house software upgrades that may be necessary.

Some applications do not run at optimum on certain platforms.If you are having Automation or Triggered Actions (or its advanced form, Workflow), make sure your email client is compliant with that of your proposed system.

Do not burden yourself with software that requires an army to keep it running at full capacity. You are paying for all these lovely features from which you may derive very little benefit or have no place in the business objectives of the organisation.

Remember who has to use this on a day-to-day basis. Of course, senior HR professionals view Reporting as the strategic output, and they are right to think so. Ensure that the Report writer can be understood and used by others who will be producing those reports.

When selecting, do not be overly swayed by the fact that the favoured provider has a well-advertised profile, has supplied to competitors or sector peers and is deemed to be a substantial player, and therefore risk-free (and by implication, blame-free if the selection doesn’t work out!)

Perfectly adequate systems, costing less from smaller and less well-known suppliers can be overlooked or discarded.

Look for a provider who is constantly evolving and improving their product offering. An active User Group is usually a good indicator of this.

Be very clear about Self-Service and the benefits. They may not be so great as can appear at first sight, will only work well in certain organisational environment, and involves considerable culture shift. Do the sums; I have only ever seen a few very good business cases for it.

The biggest gains from a well-selected HR system?

1. Automation (or Triggered Actions / Workflow):

Quite simply put, Automation will take care of the routine tasks without anything falling down the cracks of manual diaries and peoples’ memories; you can programme a whole series of date / action driven events to occur and know that they will be executed. When you come to weigh the benefits, one of the biggest “earners” on your investment will prove to be the reduction of administration.

2. Reporting:

A good Report Writing utility enables detailed and timely data for any purpose. It will be intuitive for all users to set up and use, and turn the production of management information into a pleasure rather than a chore.

3. Confidence:

An appropriate system encourages use; one that is not well-chosen withers on the vine. There are thousands of businesses in the UK with HR software that has all but been mothballed, or being used for a fraction of its capability because it was not chosen correctly.

In summary:

Big is not always Beautiful..all that matters is that the offering meets all your immediate and medium-term business needs.

Use the power of metrics to refine your decisions. Once you start to use ROI benchmarks, your decision path will be that much easier to navigate.

© Denis W Barnard September 2009