Human Capital ROI Simplified: Meaning, Formula, and Benefits
Today there’s a definite shift in workforce dynamics and more businesses are looking into employee welfare and considering implementing engagement tactics. In fact, a whopping 72% of companies are seriously considering investing in HR technology that drives engagement and improves employee experience.
What could be driving this change in mindset? The shift is part of overall business strategy and also recognition of the human aspect of employee welfare. However, the more compelling reason is that organizations are realizing that investments made into the needs of employees are proving to pay dividends in the short and long run.
Traditionally, organizations have been focused only on labor costs, often delaying or downplaying investing in the improvement of their workforce. The result is an unending cycle of spending with not much to show in return on investment in human resources.
In the absence of data, HR departments have found it challenging to quantify the direct impact of initiatives against profitability. Without clarity or insights, HR and financial departments are constantly at loggerheads about spends, thus limiting company-wide implementation.
Advancements in technology and data have paved the way for a solution – Human Capital ROI (HCROI). This formula has been developed specifically to demonstrate how strategic investments in the workforce have a direct impact on the bottom line.
HCROI helps HR teams measure the effectiveness of programs and make decisions based on facts and not gut feeling to push for more profitable HR investments.
Having said that, the HCROI formula isn’t always straightforward, as there are several factors to consider. In this article, we’ll explain the HCROI formula in greater detail. But before that, let’s understand what human capital is.
What Is Human Capital?
In simple terms, this is an intangible asset that includes the total economic value of employees’ experience and skills. The ‘capital,’ a term usually reserved for inanimate objects, refers to assets such as knowledge, skills, health, education, etc.
Is human capital the same as human resources? Resources often imply a finite source or one that can be exploited. Human capital, on the other hand, implies assets that can be invested in.
Human capital recognizes the vast potential of a well-supported, engaged, and strategically deployed workforce, as against resources, that treats them as mere numbers.
What is Human Capital ROI?
Human capital ROI (HCROI) is a strategic HR measure that aims to capture the financial value gained from the workforce as a result of the money spent on employees – whether it’s recruiting, employee compensation, talent management, training, etc.
You can calculate HCROI like this:
HCROI = Net Revenue ÷ Total Costs
Here, total costs include salaries, benefits, and potential capital costs and depreciation. However, this approach has limited reach. It does not take into account the complexities of human resources. Neither does it have the capacity to identify the source of inefficiencies or successes within the workforce.
Further, net revenue could be impacted by external factors, such as market conditions and industry shifts, making it a less reliable indicator of HR effectiveness or workforce profitability.
In order to truly leverage HCROI, organizations must dig deeper, focusing on specific HR initiatives. This formula works better:
HCROI = (Savings from Initiative − Cost of Initiative) ÷ Cost of Initiative
Here, the focus is on the effectiveness of specific initiatives taken by the HR department to influence workforce profitability. To calculate this, you’ll need to arrive at both tangible and intangible metrics related to human capital.
Top Benefits of Using the Human Capital ROI
Besides demonstrating the effectiveness of your HR initiatives, human capital ROI offers a host of benefits to enterprises. Here are the top five benefits.
- Understand the Impact of Human Capital Initiatives
- Show Tangible Results to Leadership
- Identify and Fill Gaps in Human Capital
- Improve your Human Capital Processes
- Eliminate Ineffective HC Processes
Understand the Impact of Human Capital Initiatives
Rather than go with gut feeling, human capital ROI shows you the actual results generated by your HR initiatives. This way, you can ensure all decisions are backed by data and every dollar spent can be accounted for.
Show Tangible Results to Leadership
Key stakeholders might not be privy to grass root level impact. With human capital ROI, HR teams can quantify the business impact of their efforts and demonstrate its effectiveness to the leadership.
Identify and Fill Gaps in Human Capital
The result of human capital helps managers understand where the organization is doing well and where it needs to buffer up its human capital. Using the formula can show the exact business outcome of adding or subtracting human capital on specific business operations.
Improve your Human Capital Processes
Calculating ROI also throws back feedback which highlights the pluses and minuses of existing human capital management practices and processes. This knowledge helps understand which part of the human capital process needs improvements, and managers can make adjustments, in real-time, accordingly.
Eliminate Ineffective HC Processes
The result generated by human capital ROI also helps close or remove any human capital initiatives that are not working. If a certain program has yielded no financial benefits after several years of implementation, it can be closed or tweaked to make it more effective.
Wrapping Up
Enterprises serious about furthering employee engagement and creating better employee experiences must begin to use human capital ROI. This is the sharpest way to demonstrate the impact of strategic HR investments to key stakeholders in your organization, including financial teams and other executives.
By partnering with ProHance, you will be equipped with all the data and insights to make intelligent, data-driven decisions that directly impact your business.
Our human capital management solution will work with you and help you track the right metrics to correctly calculate the ROI formula. We will provide you access to the latest technology on a user-friendly platform that can be easily used by your key team members. The solution is adaptable, growing as you scale, while also giving you the flexibility to pivot as necessary.
Learn how ProHance can help
Abhishek Tahlan
Abhishek is a marketing professional with more than 7 years of experience in the field of digital marketing. He has worked in various senior marketing roles across a wide variety of organizations and industries, including EdTech and Tech.
