In my previous post I discussed why ROI falls short as a tool for making business decisions. Here I address why ROI doesn’t live up to the promise it’s supposed to have for evaluating human capital and HR.
HR is often asked to show the ROI of its programs and processes. Think about how this usually plays out. When applied to human capital or HR, ROI is almost always used defensively to justify programs and policies for which there is not enthusiastic support. At the same time, there often is unwavering support for people and processes that key stakeholders “know” are critical for strategic success. So if ROI is not the preferred method for understanding how people and processes contribute to strategic success, what is? And how can organizations better diagnose what levers they need to pull to improve strategy execution and organizational effectiveness?
For example, effective strategy execution often can be improved through better communication about goals and priorities. An HR objective of better communication about goals and priorities can lessen the amount of time needed to complete work processes, which in turn can improve resource use efficiency—a monetary benefit that can be included in ROI. However, the benefits of better communication do not necessarily show up directly and immediately in more efficient use of resources. Instead, more efficient use of resources is often realized only after a significant delay following the improved communication, or in conjunction with other interventions such as team coaching, improved leadership and IT support, or changes in the work design. The benefit of improved communication can be expressed in monetary terms and included in ROI only in the minority of cases where it has an immediate and direct impact on resource efficiency.
For another example, doing existing performance management processes more efficiently can save time and expenses, freeing up employees and managers to focus on organizational priorities. The monetary equivalent value of that time can be added to the conserved out-of-pocket expenses to calculate the ROI of the performance management process improvement. That is an efficiency calculation, a measure of time conserved by improving the process.
More important for strategy execution is whether the performance management system rewards and encourages the behaviors needed for the organization to succeed in the marketplace. A proper analysis of whether budget allocations support strategy execution depends first and foremost on whether that spending supports the organization’s competitive advantage. Does the performance management system promote behaviors aligned with or opposed to the strategy? Are the expectations for role performance consistent with the talent available to staff the roles, both internally and externally? Those are the ultimate measures of strategic value added, not ROI produced through minimizing the cost of conducting the performance management processes.
ROI is not an effective tool for assessing the long-term benefit from improved HR processes and organizational effectiveness. It should never be the only measure used to assess spending on human capital or HR programs, especially if those programs are supposed to improve organizational capability. A much better approach would specify how the HR program or human capital initiative supports building and maintaining the organizational capability needed for strategy execution.
