HR Systems 2: The Return on Investment (ROI)
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
