Calculating the ROI of HR Software

You know that HR software makes organisations run more efficiently, ensures regulatory compliance and help employees work smarter together. But, while many management teams ‘get’ why you need a modern HR system and trust you to make the right decision, some still see HR technology as a cost burden: a nice to have, rather than a need to have.

So, in the face of reluctance from senior managers, how do you get sign-off for a new investment? The first step is to build a credible, compelling business case that resonates with your top team. One that highlights the benefits an HR system will deliver to the bottom line. That almost invariably means you’ll need to make your argument based on financial savings, or Return on Investment (ROI).

ROI measures the financial gain or loss generated on an investment relative to the amount invested. ROI is usually expressed as a percentage. A result of less than 100 per cent means the investment has a net cost.

The cost of your investment needs to include all costs for the project, which typically means accounting not just for the cost of the software, implementation and maintenance, but for your time too.

Return on investment calculation equation

Is there an easy way to calculate ROI for an HR system?

While simple online HR software ROI calculators can be a useful benchmark, they rarely stand up to scrutiny by financially savvy senior managers. They are more than aware that no two companies manage their HR data in the same way or follow the same HR processes. One company can make dramatic cost savings from automating a complex absence calculation and approval process; another with a much more straightforward approach may see a minimal improvement. An organisation moving from Excel spreadsheets to HR software for the first time will gain a different set of benefits from one replacing an older HR system with a more cost-effective and easier to configure Cloud-first options.

For your cost justification to be credible, you’ll need to build a business case you can defend.

Where should I start?

Someone, somewhere in your organisation will have had to ask for sign-off for an IT project in the past. Your first step is to talk with finance or IT and see how they approached it. An existing document may provide a framework to get you started.

The next question is to decide what to include. You don’t need to define every HR process and the associated cost savings; that’s not a realistic option and rarely required. Instead, focus on those areas where you know a new HR system will make the most impact – and where you can demonstrate a clear link to financial savings. For example, these could be related to:

1. Saving time

Time costs money, so looking at where an HR system will significantly reduce admin overheads across the business will give you clear financial benefits.

2. Ineffective processes

Could late or incomplete timesheets mean that customers aren’t being billed properly, or poor TOIL approval leading to unneeded overtime? Or is there a danger of missing key deadlines around payroll or failing to comply with GDPR or employment legislation? If poor processes are costing money or putting the business at risk, factor them into your business case.

3. Lost opportunities

Would an HR system speed up the time it takes you to hire new staff, so you could get them onboard and productive faster; or free up internal IT staff from having to look after an ageing legacy system, allowing them to spend their time on more productive work? If you can associate a financial value to these benefits, include them too.

Put together your ROI

Once you’ve identified the key financial benefits from your project, the next step is to gather together the data you need. For example, to estimate an ROI based on saving time, the key elements are likely to be:

Potential savings (Net profit)

  • Average annual employee cost: broken down by key employee groups, such as HR, line managers and employees. This should include all costs, not just annual salary. If you don’t have these figures to hand, a commonly used multiplier is 1.5 x salary.
  • Number of employees in each group: so you can calculate overall cost-savings.
  • Annual productivity gain per group: the estimated time saved across your key HR processes as a percentage. This will depend on your circumstances however, as an indication, you could be looking at the following ranges:
    • HR teams: HR professionals generally benefit from a reduction in admin overheads of between 30% and 60% or perhaps even more. OpenGI, a leading FinTech company, estimated implementing just three of Cezanne HR’s software modules reduced their HR admin overhead by 80%.
    • Line Managers: proactive notifications, smart approval processes and instant access to accurate reports can easily save managers an average of an hour a day – or around 13% of their time. Depending on what processes you are looking to automate with your HR software, you may be able to factor in a saving of between 10 and 15%.
    • Employees: while individual employees may not save very much time – perhaps just 1 or 2% – the cumulative impact can be significant. You’ll probably need to survey employees to get to grips with what’s costing them time, but you could allow for an average of around five to ten minutes each week for general HR processes such as checking on holiday entitlements, registering sick leave or accessing payslips. Adopting online timesheets could boost this to closer to an hour a week.

Cost of investment

  • Annual cost of the HR software: including subscription fees, data storage or support
  • First-year set up costs: such as data import, customisation or configuration services, project management or training costs. You’ll also need to factor in the cost of your own time as a separate item.
  • Ongoing costs: to cover any additional expenses you may need to pay, such as additional configuration or customisation by the vendor plus the time needed by your team for ongoing maintenance.
  • Payback period: the number of years you expect to use the solution for. In Everything you need to know about ROI, TCO, NPV, and Payback, Nucleus Research recommends using a three-year payback period to calculate your return on investment although, for HR software, a five-year period is probably more common. This smooths out the additional costs associated with implementation, so gives a more realistic figure.

If implementing a new HR system will allow you to make direct or indirect cost savings, for example because of cheaper subscription or maintenance costs, or by reducing IT overheads, these should also be factored into your calculations.

Once you have these figures, you can plug them into your ROI calculator. Nucleus Research offer a free-to-download ROI calculator that should cover all the elements you need.

Beyond the bottom line

Even if money matters most when building your business case, it is still important to present the benefits of a new HR system in the context of the overall goals of the organisation. Savvy business managers will have an eye on productivity and performance and will recognise the importance of managing people effectively. They’ll be aware of the potential costs of failing to comply with key legislation, such as GDPR, and should that effective, affordable technology is at the heart of an effective, agile business.

Top tips for ensuring ROI credibility

  • Work with real data: where possible use first-hand information and recognisable scenarios to keep stakeholders on your side. If you do use third-party sources, make sure they are credible and unbiased.
  • Keep it practical: focus on easily measured activities, such as the time it takes to validate and approve a holiday request, process payroll, sign off timesheets or consolidate data for management reporting; or on financial savings, for example, lower maintenance or upgrade costs, fewer internal IT overheads etc.
  • Be real: avoid the use of extreme scenarios or unsupported claims.
  • Ignore soft benefits: itemise soft benefits separately.
  • Break out the numbers: showing the detail of your calculations allows for a more informed discussion about the pros and cons of different approaches.
  • Build in variables: and include a worst case and best-case scenario where appropriate. It is important to demonstrate that you recognise that ROI is a modelling exercise.
  • Avoid over-simplistic ROI calculations: simple catch-all calculators won’t stand up to financial scrutiny.
  • Include all relevant costs: remember to account for ‘hidden costs’, such as the time you’ll need to set aside to manage the project or clean data.
  • Specify your payback period: remember to say whether you are using three years or five, and what your justification is.
  • Talk about risk: budget holders will be looking for reassurance that the investment will be safe. This is especially important if you are reliant on the supplier to customise or configure their product for you. It’s worth mapping out what could go wrong and what, if any, financial risk is associated with failure or delay.

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