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The Hidden Value of an HRMS

If you understand that an information system can provide the foundation for technology that has a very visible, concrete financial return, then you really can see an ROI from an HRMS.

August 30, 2001
Related Topics: Human Resources Management Systems (HRMS/HRIS)
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This is a period of remarkable change for the human resources function. Almostin the blink of an eye, HR is being forced to shed its nearly 100-year charteras the caretaker of employees, and to become a strategic, value-enhancing businesspartner to the firm.

    With this dramatic change come some significant differences in the way HR plansand executes its initiatives, with a special emphasis on leveraging technology.

    Intuitively, HR has generally understood the value of technology, particularlyin large organizations where volumes of information had to be built and maintained,if only for the narrow but critical purpose of getting paychecks, in the rightamounts, to the right people at the right time.

    The terror of Y2K was a blessing in disguise, as it provided the perfect inducementfor CEOs and CFOs to approve large investments in powerful new HR informationsystems. HR pros did not always know how they would actually use all the functionalityof those powerful new systems, and even the CEOs and CFOs could not demand adetailed justification.

    The need to prove an acceptable ROI went right out the window in the face ofthe possibility of massive, catastrophic data loss. That's unfortunate, formany of the very same senior HR managers who have made such admirable effortsto become "business partners" with their non-HR counterparts are missingan enormous opportunity.

    An HRMS is exactly the tool they need to prove that HR can do much more thanchannel résumés, process benefits enrollment, and maintain a fileroom. It is not, in and of itself, the complete answer to the question "Howdo I prove HR's value to the organization?" but it is an absolutely critical,indispensable part of the answer. To take things a step further, companies thatwish to become or remain competitive cannot afford to not have a fully functionalHRMS.

    There are at least three significant reasons why this is true. The first reasonis perhaps the most basic. Just like any other part of the organization, theHR department has an obligation to control its costs. But to control costs,you must be able to measure them in the first place.

    Second -- and this has more far-reaching implications -- information aboutcompany performance is a critical competitive advantage; personnel informationis too important to omit from the equation; and no organization today can effectivelygather and analyze the breadth and quantity of data it needs for this purposewithout a fully utilized HRMS. The return on investment here is sometimes difficultto quantify, but is nonetheless quite real.

    The third reason for a strong HRMS is that it provides the foundation for atechnical architecture that can provide a financially measurable return on investmentin the form of greater productivity, and even reduced labor costs within theHR department. That "technical architecture" is more generally knownas employee or manager self-service.

Controlling costs
    Many companies have been measuring HR-related costsfor quite some time. There are many such costs, but those that are tracked mostfrequently include the following:

  • Total cost of payroll

  • Average salary cost per employee

  • HR salaries as percentage of total payroll

  • Payroll tax as percentage of total payroll

  • Cost per hire (usually related to advertising and recruiter fees/salaries)

    The data behind these calculations may come from avariety of sources: an HRMS, a payroll system, a general ledger system, etc.

    But other kinds of costs cannot be calculated unless you have the relativelybroad data-tracking ability that is found in a fully utilized HRMS. One of theseis the cost of a company managing itself. That sounds like a rather complicatedequation, but it can be as simple as the total salaries paid to supervisorsand above -- stated either as a simple number or as a percentage of total salaries.

    Simple as the calculation might be, however, you first need to know how manysupervisors and managers you have, and what they are paid. This and other measurements,including appropriate formulas, are explained in depth by Jac Fitz-enz in hisbook "How to Measure Human Resources Management." Once you know thecost of management - or of anything else - you can begin to control it.

HR data is essential
    Increasingly, human capital management is becoming recognizedas a non-financial component of an organization's financial success: HR strategy-- which should be focused on maximizing the overall quality of human capitalthroughout the organization -- is as important as sales or production strategies.A recent book titled TheHR Scorecard: Linking People, Strategy, and Performance discusses thisat great and eloquent length. As noted by Dave Ulrich and others in The HRScorecard, to build and maintain a stock of talented human capital, a HPWS(High-Performance Work System) does the following:

  • Links its selection and promotion decisions to validated competency models

  • Develops strategies that provide timely and effective support for the skillsdemanded by the firm's strategy implementation

  • Enacts compensation and performance management policies that attract, retain,and motivate high-performance employees

    Regardless of what it calls itself or how it structures itself, the human resourcesfunction always comes back to these three basic functions: attract, retain,and motivate. To do any of these three things effectively in today's large organizationsrequires measurement and analysis. Measurement and analysis require data. Lotsand lots of data. That requires an HRMS. Some examples:

    Attracting employees: Successful firms keep their salary structuresup-to-date and their employees' pay competitive. One sign that the company isnot doing these things well is that the salaries of new employees are closeto or even above the midpoint of their various salary ranges.

    How does HR keep track of this if they can't get regular, accurate reportsabout salaries in relation to salary ranges in a given time period? How cancompensation analysts identify the magnitude of the problem if they can't trackexceptions and adjustments? What they need to be tracking isn't just the factthat exceptions and adjustments are occurring; they also have to be able toreport which kinds of jobs are getting this kind of attention, in which divisionand geographic area, and the amount of money involved.

That kind of tracking and analysis requires raw data, which requires an HRMS.What's the ROI here? Over time, the company recoups its financial investmentthrough time saved (and repetitive effort eliminated), when they stop losingpotential new hires because the offered salary was insufficient, or becauseit took too long to get an exception approved and the applicant got tired ofwaiting.

    Retaining employees: Another "red flag" familiar to compensationanalysts is an increase in the number of requests for "market adjustments"to keep long-term employees competitive with new employees. Here again, data-- accurate, complete, up-to-date, and available for "slicing and dicing"from several different angles -- is critical in order to spot the problem inthe first place, and then to measure its scope and impact. An HRMS pays foritself by making that measurement and analysis possible.

    Can you measure that ROI? Yes: Track your terminations and the terminationreasons, then measure that against your cost to hire for those positions. Keepin mind that the "cost to hire" isn't really the full cost of replacement,because it doesn't take into account the productivity lost during the time ittook to find and train the replacements for those terminated employees.

    There are many pay-related measurements that a companycan track (as mentioned before, check out Jac Fitz-enz's book), such as thefollowing:

  • Average merit increase granted by job classification and job performance

  • Firm salary/competitor salary ratio

  • Incentive compensation differential (low versus high performers)

  • Percentage of employees whose pay is performance-contingent

  • Percentage of total salary that is "at risk" or variable

  • Range in merit increase granted by classification

    None of these measurements are complicated, but theydo require data. None of these measurements, in and of themselves, will fullyanswer questions about why employees are leaving or why employee commitmentseems to be low or why productivity isn't as high as you think it should be.But all of these measurements, individually, can provide vital clues; together,they provide a pattern; and the pattern eventually provides answers.    

    Motivating employees: Many companies do not take advantage of the fullfunctionality of the systems they buy. "Training administration" and"competency management" are rarely high priorities and usually arepostponed; in many cases, these functionalities never get used at all. Thisis extremely unfortunate, because anything related to tracking employee performancecan become a tool for managing employee performance, and that in turn can becomea means of improving employee performance. And of course, if you can improveemployee performance, you can improve company performance - the company's profitability.

    A very simple example of this would be tracking employee performance ratingsby job classification, division, and supervisor. When these are matched againstcompany performance measures -- sales volume, manufacturing volume, etc. --trends appear: "Division A had the best sales success last quarter, andit also had the highest average performance evaluations last year." Thenext step would be to find out what Division A is doing to motivate its people:What training have they had? What kinds of compensation programs are in place?Do the employees compete with each other, or cooperate? Then figure out howto replicate that in the other divisions. The ROI on having the data necessaryto do this might be a little complicated to measure, but it's certainly easyto understand.

HRMS as foundation for the future
    Recent years have seen an explosion of interest in applicationsand systems that used to be considered strictly "nice to have" icing-on-the-cakekinds of things, especially where HR was concerned. Initially, employee self-servicewas something that only really large companies could afford, and manager self-servicewas often limited to viewing lists of employees, rather than providing any realservice that would make the work of managing any easier. What with the costsand complications of implementation, and the "fuzzy math" that seemedto underlie the promises of return on investment, most companies couldn't bebothered with either employee or manager self-service systems.

    Things have changed.

    Self-service systems for HR are coming into their own, whether they are front-end,third-party applications or fully integrated with a back-end ERP. More and moreemployees are coming to expect that it will be as easy to change their addressor their payroll deductions, enroll in benefits, or update their health-caredependents as it is to buy a book online.

    More and more managers are discovering the convenience of electronic transactionssuch as salary increases and online performance appraisal. According to a surveyconducted by The Hunter Group (now called Cedar) and published in 2000, thenumber of companies implementing (or planning to implement) some sort of self-servicetechnology has grown in each of the last three years.

    There are still costs and complications to implementation, but the math behindthe ROI promises no longer has to be fuzzy -- and in fact, is rarely allowedto be. According to the Hunter Group (Cedar) survey, about two-thirds of companiesthat explore the possibility of a self-service solution now require a businesscase that quantifies the anticipated return on investment. There are methodologiesand tools available with which to develop very sound estimates of real, hard-dollarsavings that can be expected from a self-service application. HR can build abusiness case for investment in this technology that even a CFO will love.

    Beyond that, a strong case can be made for expected increases in productivityamong both employees and managers when self-service applications are available.Really useful HR self-service does not happen without the kind of data thatis available from a fully functional HRMS.

Summary
    There are many kinds of analyses that can be used tomeasure and demonstrate HR's value to the organization. Do they have any relationshipto the performance of the organization itself? Many of them do. The followingitems are just part of a list of HR-related measures that can be tied to highlevels of company performance:

  • Number of qualified applicants per position

  • Percentage of jobs filled from within

  • Number of hours of training for new employees (less than 1 year)

  • Number of hours of training for experienced employees

  • Percentage of employees receiving a regular performance appraisal

  • Percentage of employees whose merit increase or incentive pay is tied toperformance

  • Percentage of workforce eligible for incentive pay

    HR information systems have long been regarded as sort of a "black box"that was purchased because (a) the company had grown too big to use spreadsheetsfor tracking its employees, or (b) the payroll system that HR relied on waswritten in a programming language that had become obsolete, or (c) Y2K issuesforced the company into buying something, or (d) _____ (fill in the blank!).
In short, a necessary expense without much promise of a return. Major systemsare very expensive to buy and to implement, and by themselves do not resultin greater efficiency or productivity, and certainly not in reduced transactioncosts.

    However, if HR practitioners understand the strategic value of the datathat an information system can provide, and if they understand that the systemcan provide the foundation for technology that has a very visible, concretefinancial return, then you really can see an ROI from an HRMS.


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