Cost Justifying HRIS Investments

The Value-Added ApproachAn alternative approach requires the HRIS project team to

think in business terms, and find out how a new or upgraded system will help the organization perform better. This value-added approach focuses on the strategic contribution the new system will make to achieve business objectives. It recognizes the vital role of HR as an active business partner with the organization's management and a critical service provider to the business units.  

As an active partner with executive management, HR helps define solutions to problems of workforce utilization, organization development, performance measurement, and adaptation to evolving business demands. As a critical provider of internal services, HR delivers a wide range of information services that enable the business units to acquire, develop, deploy and reward the skill sets and competencies necessary for achieving the organization's business goals. 

The value-added approach tackles the cost justification issue by linking the capabilities of the HRIS to the organization's key business strategies. Using that approach, the human resource systems manager first identifies the way the comprehensive workforce information supports the organization's business goals and makes achieving them easier. The manager then develops an HRIS architecture and deployment strategy tailored to support those goals. 

Value-added or strategic justification recognizes the business value of employee information. Using this approach, the HRIS manager can define a pyramid of value to the organization, with each level of the pyramid supporting the levels above it. The pyramid is defined from the top-down, because the manager must know and state the requirements of each level in order to define the requirements for supporting it.

Working Down the Pyramid Key business strategies: At the top of the pyramid are the organization's key business

strategies, often articulated in a mission statement or similar document, then confirmed and amplified through discussions with senior executives. Those strategies define the organization's business direction and often include initiatives such as expansion to global markets, growth by acquisition, or development of new lines of business. The key strategies also serve as measures for determining the organization's success or failure.  

HR strategies to support key business strategies: Once HR leaders understand the key business strategies, they can define the implications those strategies have for the organization's workforce, and for the HR function. Human resource strategies are the functions and capabilities HR must provide to support the organization's business direction. For example, expansion into new lines of business may call for new competencies and skill sets that must be acquired either by hiring new people or by retraining the current workforce. HR strategies are articulated by senior HR executives and include a comprehensive statement of what the department must contribute to achieving the organization's key business aims.  

Information technology (IT) strategies to support key business strategies: Like the HR strategy, the IT strategy is derived from the organization's strategic business statement and defines the information technology environment necessary to accomplish the organization's business goals. The IT strategy generally takes the form of an information architecture statement describing the data and communication capabilities needed to support business goals.  

Implications for HR information management inherent in HR and IT strategies: HR information management is where the organization's workforce management and information technology directions intersect. The HRIS manager must understand both HR and IT strategies before attempting to define an appropriate system platform, because the HRIS must support the strategic directions of both the HR and IS. For example, an HR initiative to empower line managers to make decisions at lower levels of the organization, along with an information systems architecture that provides organization-wide connections through a linked set of local area networks, will dictate an HR information management solution that permits wide access to employee data.  

High-level HRIS requirements derived from information management implications: The specific functional requirements of an effective HRIS are also determined by knowledge of the organization's strategic business direction. Any requirement should be stated in terms of its support of some element of the organization's business strategy.  

Potential HRIS solutions that satisfy the high-level HRIS requirements: By understanding the business requirements of an HR information system, along with the business, HR, and IT strategies that it must support, an organization can define a set of solutions that satisfy those needs. The key to identifying potential solutions is to keep in mind the directions and strategies that must be supported. For example, an organization trying to provide greater autonomy to individual business units and line managers would be better served by a solution that calls for decentralized maintenance of employee data.  

Platforms to support the HRIS solutions: At this point, the HRIS project team should identify specific software, hardware and service providers who can provide a solution that supports the HR information management strategy. Of course, that strategy and specific decisions about selecting HRIS products are valid only if they support the organization's strategic business direction.  

An implementation approach for optimum return: Just as support for strategic initiatives drives vendor selection decisions, it also should define the approach to implementation. The schedule for implementing specific capabilities of a new system should be driven by support for strategic business initiatives, with those features and products that provide the greatest business value to the organization being put in place first.

Cost Elements of a Comprehensive HRIS The core HRIS Enabling applications Hardware Dedicated servers. New client workstations Upgrades to existing

workstations Operating systems Database management

systems Telecommunications Local area networks Wide area connectivity Implementation resources Internal information

technology resources Customers or end users Training Project team Consultants

New technologies New business processes. Initial costs. Software packages that would

fit the employee base. Upgrade issues. Annual payroll time savings. Total annual maintenance

costs. Increased efficiency. User-friendliness. Availability of technical

support. Available screens--whether

the programs have existing standards for salary and performance, Equal Employment Opportunity, benefits, and training.

Needs for customizing. Time required to implement. Training time required for HR

and payroll. Interface with Microsoft

products.

Value Provision of HRISHRIS provides the:

Primary infrastructure used to deliver HR programs.

Ensure HR regulatory compliance.CompanyGovernment

Produce the HR metrics.

HR Metrics HR Metrics are used to evaluate not only

the HR function but also the contribution of the organization’s human resources to the accomplishment of strategic objectives.

Organizations use metrics to measure or audit their HR programs and activities.

Through benchmarking, metrics can be used to compare against other organization’s metrics.

Need for HR Metrics due to the need for effective management

over human resource capital; i.e. the intellectual capital that drives value.

it has become very important to demonstrate the value of human resource capital to executive management.

The primary focus is on people and how are we going to develop our human capital.

Efficiency RatiosTo see how well you are managing human capital, the Society of Human

Resource Management (SHRM) has identified ten key human capital measurements:

1. Revenue Factor = Revenue / Total Full Time Employees

2. Voluntary Separation Rate = Voluntary Separations / Headcount

3. Human Capital Value Added = (Revenue - Operating Expense - Compensation & Benefit Cost) / Total Full Time Employees

4. Human Capital Return on Investment = (Revenue - Operating Expenses - Compensation & Benefit Cost) / Compensation & Benefit Cost

5. Total Compensation Revenue Ratio = Compensation & Benefit Cost / Revenue

6. Labor Cost Revenue Ratio = (Compensation & Benefit Cost + Other Personnel Cost) / Revenue

7. Training Investment Factor = Total Training Cost / Headcount

8. Cost per Hire = (Advertising + Agency Fees + Recruiter's Salary/Benefits + Relocation + Other Expenses) / Total Hiring

9. Health Care Costs per Employee = Total Health Care Costs / Total Employees

10. Turnover Costs = Termination Costs + Hiring Costs + Training Costs + Other Costs

Some FactorsImportant to benchmark the HR metrics

against past performance and other companies.

HR Metrics, should have strong connections to the strategies of the company. This helps to ensure that the evaluation of HR really matters to the organization.

Justification Strategies for HRIS Investments

Two categories :Risk avoidance: Are used when investments

are believed to eliminate or mitigate significant future risks faced by the organization.

Organization enhancement: Highlight how effectiveness of the firm will be improved by the edition of a new or improved HRIS.

Guidelines for Investment Analysis

• Main reason is to improve organizational effectiveness.

• “Honesty is the best policy.”• Focus on key functionalities• Benefit examination vs. Cost examination• Know your business• Develop the best estimate possible• Make it easy for the decision makers.

Main reason is to improve organizational effectiveness.The objective is not to purchase specific

hardware or software. The objective is to improve organizational performance.

Be honest with yourself.Each analysis should be done with an open

mind. The analysis should be taken as investigation devoid of any personal biases and without preconceived notions. Developing a reputation as an impartial evaluator will increase management decisions makers’ confidence in analyses done by the CBA team.

Focus on key functionalitiesThe analysis should focus on the

improvement in the organization functionality that is to be achieved. Start with that functionality and let it lead to the product. Don’t start with the product and attempt to identify ways to justify its purchase.

Estimate benefits first.Examine costs only after you have completed

the analysis of benefits.

Know your business:What the business is, how the current

processes contribute in achieving the strategic objectives. Understand the potential for improvement.

Develop the best estimate possible› Not to be over optimistic or conservative.

Develop the best estimate as per the available data.

Distinguish between the analysis and the packaging of that analysis for decision makers.› Primary purpose of investment analysis is to

determining the improvement opportunity for the organization. This does not have to be confused with selling the idea to the management decision makers.

HRIS Cost Benefit AnalysisIdentifying source of Value for Benefits and

CostDirect BenefitsIndirect benefitsImplementation costs

HRIS Cost Benefit Analysis Matrix

Direct (Hard) Indirect (Soft)

Benefits

Revenue enhancements

1.New revenue (new sales)

2.Improvement potential(better decision making)

Cost reduction

3.Direct costs(cancelled vendor contracts)

4.Potential costs(saved staff time)

Costs

New implementation costs

5.Out of pocket costs(software, service agreements)

6.Indirect costs(increased technical support needs)

Estimating the Value of Indirect Benefits

Estimating indirect benefits magnitudeDirect estimationBenchmarkingInternal assessment