How to create a convincing ROI figure for your new HR software
Calculating the ROI (Return On Investment) of HR software is a challenge – but using these tips, you can help leadership understand the value of the investment.
As a busy HR professional, you are probably aware of the efficiency gains that modern HR software can bring. But those outside of HR may know little of this potential: in fact, this HR Technology and Pulse Survey by Gallagher revealed that the top challenge in securing HR tech investments is that ‘leadership doesn’t understand the value of the investment’.
The survey also found that business leaders had experienced ‘past failures with HR and benefits technology’ which was creating a credibility gap.
Given this, it’s not surprising that HR leaders are finding it hard to convince management to make investments in HR technology, even when a positive return on investment (ROI) is shown.
This is because savvy financial managers seldom rely on an ROI headline figure alone to make their decision, they dig down into the details and the case for investment is won or lost here.
This is why your ROI calculation (ROI = net income/cost of investment x 100) must be built on a foundation of data and sound assumptions, and below we have shown how to do this.
Where to start your ROI calculations.
Let’s start by working out the cost of investment, which is generally easier. Be thorough, because leaders will scrutinise this, and if they believe you have underestimated costs you may be sent back to the drawing board.
Ask the HR software vendor for their official rate card or go to the pricing section of their website to establish the following numbers:
- Annual direct costs of the HR software which may include subscription fees, data storage, chosen level of support, etc…
- Year one setup fees may include vendor costs relating to customisation, configuration, training, and project management, the latter of which normally relate to larger implementations. Internal labour costs of HR and technical support staff are to be included here as these costs can mount up too.
- Ongoing costs, (falling outside of the support package), which include additional configuration/customisation costs etc
It’s now time to look at the savings forecast. We recommend that you follow certain principles and avoid making what could be seen as inflated projections of savings which may damage the credibility of your saving forecasts.
Here are several tips to ensure you develop credible savings forecasts.
- Use first-hand information over third-party-derived data to back up your case. And, if using third-party data, focus on independent sources to avoid commercial biases.
- Focus on frequent and/or important activities where the time saving from the new HR software can be easily measured and/or substantiated with time-sheet records, for example:
- Holiday request approval process
- Timesheets completion and sign-off
- Manually maintaining sick-leave records
- Completion of performance appraisals
- Manager setting and tracking of goals
- Issuing, signing, and filing employment contracts and employee handbooks
- Monthly payroll data submission
- Essential sickness recording and reporting
- Calculate and show the time-saving per employee for each task/workflow and then multiply it by the number of employees to provide a more credible aggregate time-saving that is specific to your organisation. When multiplied by the relevant salary data this will give savings figures in pounds.
- Demonstrate the opportunity benefits of the aggregated time-savings from HR software.
For example, “the HR team will be freed up to accelerate the completion of outstanding, high-profile, and high-priority HR tasks”. These would be of course specific to your organisation and the corporate tastes of your leaders but could include tasks like
- Introducing a long sought-after benefit to attract and retain staff.
- Modernising some out-of-date working practices known to be reducing productivity and engagement.
- Detail any direct cost savings from retiring legacy software that has been superseded by HR software.
Having gathered all this information and gone through a thorough due diligence process you can prepare a credible ROI calculation.
ROI = Net income / Cost of investment x 100.
When laying out your calculation it is important to specify the payback period, typically between 3 and 5 years.
Having gone through this detailed discovery process you will have a firm belief in the ability of this tool to pay for itself and bring a return on investment.
This will also give you confidence in the boardroom and put you in a strong position to address any scepticism and pushback that they may emerge in the boardroom.
It is this boardroom cross-examination process that will make leadership truly understand the value of the HR investment and will ultimately determine if they say yes.