Workscape Institute

Given today’s economic environment and the internal competition for investment dollars and capital expenditures, it’s no surprise that companies are looking for help in quantifying the potential value of such investments/expenditures through Return on Investment (ROI) calculations.

Follow up:

For HR and benefits administration professionals, an ROI process can be useful when deciding between maintaining the status quo or making some strategic and tactical changes in the way your organization handles benefits enrollment and administration.  Should the company continue with its in-house administrative approach or consider outsourcing?  Is it more cost-effective to continue with the current system (or provider) or to move to a new, more efficient technology?

Simply stated, a financial ROI is the anticipated gain from the investment minus the cost of the investment, the result of which is divided by the cost of the investment (gain-cost/cost.)  Of course, the easier part of the ROI analysis, relatively speaking, is determining the cost of the investment.  Calculating the anticipated gain is a bit more challenging.  It involves envisioning the future state and is probably as much art as science.  Here are some guidelines to help jumpstart the process:

ROI Focus

Any endeavor to calculate ROI must be in the context of the company’s critical business and strategic corporate objectives and should attempt to answer at least these two questions:

• "Can we afford to make this investment?"
• "Will making this investment pay for itself?"

Most important, perhaps, before embarking on the ROI journey, is the answer to the question:

• “Is a formal ROI analysis necessary for support and approval of the proposed project?”

ROI Scope

As I will describe in detail in Part II, ROI methodology will vary by vertical and purpose.  For example, four critical elements to consider for comparing Benefits Administration solutions are:

1. Technology Infrastructure
2. Organizational Structure
3. Business Process
4. Vendor Relationships

ROI Purpose

Earlier I asked whether a formal ROI analysis was necessary for support and approval of the project.  There is also the corollary to this question;

• “At what point after the decision will management review the ROI analysis to determine if the investment achieved the return?”

I’ve been involved in quite a few ROI processes over the years and the unfortunate reality is that it’s very rare for senior management to actually go back after the fact and review the initial ROI calculation to see if the expected financial benefits were actually achieved.  In those cases where that look-back exercise does take place, as often as not, from a purely financial perspective, the outcome does not achieve the expected return.

Does that diminish the value of the ROI process?  Absolutely not.  The process forces a company to:

• Take a hard look at the current environment;
• Quantify what it costs to maintain the status quo, and;
• Think through the desired future state and how to arrive there.

ROI analysis, when properly executed, makes transparent all areas of potential savings and provides rich data to better support today’s and tomorrow’s strategic decisions.  It is a best practice to measure quantitative and qualitative gains against the ROI projections when rolling out a new solution, but rigor and research employed during the ROI analysis provides insights even without these benchmark comparisons.  It is a process that generally yields value in the end.