Proving the Value of HR: How and Why to Measure ROI

Proving

the Value

of HR

Practical HR Series

Proving

the Value

of HR

How and Why

to Measure ROI

Jack J. Phillips and

Patricia Pulliam Phillips

Society for Human Resource Management

Alexandria, Virginia

USA

www.shrm.org

This publication is designed to provide accurate and authoritative information regarding the

subject matter covered. It is sold with the understanding that neither the publisher nor the

author is engaged in rendering legal or other professional service. If legal advice or other

expert assistance is required, the services of a competent, licensed professional should be

sought. The federal and state laws discussed in this book are subject to frequent revision and

interpretation by amendments or judicial revisions that may significantly affect employer or

employee rights and obligations. Readers are encouraged to seek legal counsel regarding spe￾cific policies and practices in their organizations.

This book is published by the Society for Human Resource Management (SHRM®). The inter￾pretations, conclusions, and recommendations in this book are those of the author and do not

necessarily represent those of SHRM.

©2005, 2008 Jack J. Phillips and Patricia Pulliam Phillips. All rights reserved.

This publication may not be reproduced, stored in a retrieval system, or transmitted in whole

or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or oth￾erwise, without the prior written permission of the Society for Human Resource Management,

1800 Duke Street, Alexandria, VA 22314.

The Society for Human Resource Management (SHRM) is the world’s largest professional asso￾ciation devoted to human resource management. Our mission is to serve the needs of HR pro￾fessionals by providing the most current and comprehensive resources, and to advance the

profession by promoting HR’s essential, strategic role. Founded in 1948, SHRM represents more

than 225,000 individual members in over 125 countries, and has a network of more than 575

affiliated chapters in the United States, as well as offices in China and India. Visit SHRM at

www.shrm.org

HR: Leading People, Leading Organizations

Edited by: Karen Eddleman

Index by: Sharon Johnson

Cover design by: Carol Williams

Interior design by: Shirley Raybuck

Library of Congress Cataloguing-in-Publication Data

Phillips, Jack J., 1945-

Proving the value of HR : how and why to measure ROI / Jack J. Phillips and Patricia Pulliam

Phillips.

p. cm. — (Practical HR series)

Includes bibliographical references and index.

ISBN 978-1-586440-49-7

1. Personnel management. 2. Rate of return. I. Phillips, Patricia Pulliam. II. Title. III. Series.

HF5549.P4595 2005

658.3’125—dc22

2004028403

Printed in the United States of America.

10 9 8 7 6 5 4 3 2

i

Contents

Preface xi

Acknowledgments xvii

Chapter 1 The Accountability Crisis 1

Defining ROI 2

About Terminology 3

Major Influences on HR Accountability 3

A Paradigm Shift for HR Accountability 8

Is HR Ready for Additional Measurement and Evaluation? 12

The Payoff of ROI 14

Chapter 2 The ROI Methodology 17

The Essential Measurement Mix 17

Why ROI? 19

Types of Data for ROI Methodology 20

An Example 24

The ROI Methodology 27

ROI Standards 31

Chapter 3 Preparing for ROI 37

When to Use ROI 37

Selecting the First Project for ROI Analysis 43

Initial Analysis—The Beginning Point of an HR Program 44

Steps in the Analysis 46

Linkage to Evaluation 51

The Role of Objectives for HR Programs 52

Planning for ROI Projects 57

ii • Contents

Chapter 4 Data Collection Issues 63

Sources of Data 63

Business Performance Monitoring 65

Questionnaires and Surveys 67

Tests 70

Interviews 71

Focus Groups 72

Observations 72

Improving the Response Rate for Data Collection 73

Selecting an Appropriate Method 78

Chapter 5 Data Analysis 81

Data Tabulation Issues 81

Using Isolation Techniques 93

Converting Data to Monetary Benefits 94

Chapter 6 HR Cost and ROI 105

Cost Issues 105

Cost Monitoring Issues 107

Major Cost Categories 109

Cost Reporting 112

ROI: Basic Issues 114

ROI Interpretation 116

Cautions When Using ROI 124

Chapter 7 Measuring Intangibles 129

Key Concepts about Intangibles 129

Typical Intangible Measures 136

Chapter 8 Communicating and Using Evaluation Data 147

Principles of Communicating Results 147

Selecting the Audience for Communications 149

Developing the Information: The Impact Study 152

Selecting the Communication Media 155

Communicating the Information 157

Analyzing Reactions to Communication 161

Using Evaluation Data to Drive Improvement 162

Using the Strategies 165

Proving the Value of HR • iii

Chapter 9 Taking a Sensible Approach to ROI 167

The Basis for Resistance 167

Fearless Implementation 168

Appendix: ROI Case Studies 181

Index 185

References 193

Acknowledgments and Attributions 195

Additional Resources 199

About the Authors 203

iv

Figures

1. Shift to Quantitative Measures 10

2. Readiness for Additional HR Measurement and Evaluation 13

3. The Recommended HR Measurement Mix 18

4. Chain of Impact of an HR Program 24

5. The ROI Methodology 26

6. Levels of Needs Analysis 46

7. Critical Linkages: Linking Needs, Objectives, and Evaluation 47

8. Linking Needs Assessment with Evaluation 51

9. Sample Data Collection Plan 58

10. Simple ROI Analysis Plan 60

11. The Chain of Impact 83

12. Posttest Only, Control Group Design 85

13. Sexual Harassment Complaints 87

14. Calculating the Cost of a Sexual Harassment Complaint 99

15. Relationship between Job Satisfaction and Turnover 102

16. Typical HR Program Cycle 108

17. Identifying Intangible Measures 132

18. Tangible versus Intangible Assets 135

19. Table of Contents for an Impact Study Report 154

20. One-Page Summary of Impact Study 160

21. What Do You Think about ROI? 168

22. Establishing Evaluation Targets 170

23. Selection Tool for ROI Impact Study 172

Illustrations

Proving the Value of HR • v

Tables

1. Some Key Terminology 4

2. HR Measurement Trends 9

3. Paradigm Shift for a Results-Based Approach 11

4. Types and Levels of Evaluation Data 21

5. Examples of Types and Levels of Data 25

6. Programs Suitable for ROI or Business-Level Analysis 40

7. Examples of Hard Data 48

8. Examples of Soft Data 49

9. Examples of Objectives for HR Programs 54

10. Original and Revised Objectives 56

11. Questionnaire Design Steps 68

12. Typical Reaction/Satisfaction Questions 69

13. Typical Content Areas for Post-Program Questionnaires 70

14. Observation Methods for Data Collection 73

15. Methods of Collecting Data 78

16. Steps to Isolate HR Program Effect Using Participants’ Estimates 90

17. Example of a Participant’s Estimation of Impact 90

18. Impact and Analysis Questions 92

19. An Example to Illustrate Steps to Convert Data to Monetary Values 97

20. HR Program Cost Categories 110

21. Leadership Development Program Costs 113

22. Misuse of Financial Terms 118

23. The Chain of Impact Drives ROI 119

24. Typical Intangible Variables Linked with HR Programs 129

25. Comparison of Tangible and Intangible Assets 130

26. Characteristics of Data 131

27. Test for Converting Intangibles to Monetary Value 134

28. Communication Planning Questions 149

29. Key Questions for Selecting Audiences 150

30. Rationale for Specific Target Audiences 151

31. Steps to Provide Feedback during Program Implementation 158

32. Communicating Impact Studies to Senior Management 159

33. Matching Strategies to Levels 166

34. Evaluation Targets for Wachovia Bank 170

vi

Section 1: Assessment and Current Status

CD-ROM Figure 1a HR Self-Test

CD-ROM Figure 1b HR Self-Test: Scoring and Interpretation

CD-ROM Figure 1c HR Self-Test: Analysis

CD-ROM Figure 2 Paradigm Shift Exercise

CD-ROM Figure 3 HR Contribution: Exercise

Section 2: Planning

CD-ROM Figure 4 Evaluation Planning: Worksheet

CD-ROM Figure 5a Wachovia Bank Case Study:

Isolation & Conversion Questions

CD-ROM Figure 5b Wachovia Bank Case Study: Discussion of Answers

CD-ROM Figure 6 Data Collection Plan

CD-ROM Figure 7 ROI Analysis Plan

Section 3: Setting Objectives

CD-ROM Figure 8a Department of Internal Affairs Case Study:

Levels of Evaluation Questions

CD-ROM Figure 8b Department of Internal Affairs Case Study:

Discussion of Answers

CD-ROM Figure 9a Matching Evaluation Levels to Objectives: Exercise

CD-ROM Figure 9b Matching Evaluation Levels to Objectives: Answer Key

CD-ROM Figure 10 Developing Reaction and Satisfaction Objectives

CD-ROM Figure 11 Developing Learning Objectives

CD-ROM Figure 12 Developing Application Objectives

CD-ROM Figure 13 Developing Business Impact Objectives

CD-ROM Contents

Proving the Value of HR • vii

Section 4: Data Collection

CD-ROM Figure 14 Sample Action Plan for Levels 3 and 4

CD-ROM Figure 15a Sample Action Plan for Level 3 ACTION PLAN, Parts I and II

CD-ROM Figure 15b Sample Action Plan for Level 3 (Continued) ACTION

PLAN, Part III

CD-ROM Figure 16 Chain-of-Impact Questions

CD-ROM Figure 17 Sample Sizes Needed to Achieve 95% Confidence in

Survey Results

Section 5: Isolating the Effect of the HR Program

CD-ROM Figure 18a First Bank Case Study: Isolation Questions

CD-ROM Figure 18b First Bank Case Study: Discussion of Answers

CD-ROM Figure 19a National Bank Case Study: Monthly Increase in Credit

Card Accounts

CD-ROM Figure 19b National Bank Case Study: Isolation Questions

CD-ROM Figure 19c National Bank Case Study: Discussion of Answers

Section 6: Converting Data to Monetary Values

CD-ROM Figure 20 Examples of Measures

CD-ROM Figure 21 Range of Turnover Costs as Reported in Various Studies

CD-ROM Figure 22 Costs Associated with an Accident

CD-ROM Figure 23a Appropriate Conversion Techniques: Exercise

CD-ROM Figure 23b Appropriate Conversion Techniques: Questions

CD-ROM Figure 23c Appropriate Conversion Techniques: Discussion of

Answers

CD-ROM Figure 24a Data Credibility: Exercise

CD-ROM Figure 24b Data Credibility: Questions

CD-ROM Figure 24c Data Credibility: Discussion of Answers

Section 7: HR Program Costs

CD-ROM Figure 25 HR Program Cost: Estimating Worksheet

CD-ROM Figure 26a HR Costs: Exercise

CD-ROM Figure 26b HR Costs: Questions

viii • Proving the Value of HR

Section 8: ROI Calculation

CD-ROM Figure 27a Regional Bank Group Case Study: Calculation of Actual

Business Results

CD-ROM Figure 27b Regional Bank Group Case Study: Fully Loaded Project

Costs

Section 9: Communicating Results

CD-ROM Figure 28 Impact Study Outline

Section 10: Implementation

CD-ROM Figure 29 Project Plan to Move from Activity-Based to Results-Based

HR

CD-ROM Figure 30 Criteria for Selecting HR Programs for Impact Studies and

ROI Analysis: Worksheet

CD-ROM Figure 31a CEO Commitment Checklist

CD-ROM Figure 31b CEO Commitment Checklist: Interpretation of Results

CD-ROM Figure 31c CEO Commitment Checklist: Question

Section 11: ROI Forecasting

CD-ROM Figure 32 ROI at Different Times and Levels

CD-ROM Figure 33 Pre-Program ROI Forecast Model

CD-ROM Figure 34 Multinational Manufacturing Case Study: Expected ROI Val￾ues for Various Scenarios

CD-ROM Figure 35 Important Questions to Ask on Feedback Questionnaires

CD-ROM Figure 36 M&H Engineering Case Study: Level 1 Data for ROI Calcula￾tions

CD-ROM Figure 37 Wachovia Bank Case Study: Forecasted versus Actual Data

CD-ROM Figure 38 Relationship between Test Scores and Performance

CD-ROM Figure 39 OPM Case Study: Supervisor Competencies

Proving the Value of HR • ix

Section 12: A Complete ROI Case Study: Metro Transit Authority￾Measuring ROI for an Absenteeism Reduction Program

CD-ROM Figure 40 MTA Case Study: Data-Collection Plan: Exercise Version

CD-ROM Figure 41 MTA Case Study: ROI Analysis Plan: Exercise Version

CD-ROM Figure 42 MTA Case Study: Data Collection Plan: Actual

CD-ROM Figure 43 MTA Case Study: ROI Analysis Plan: Actual

CD-ROM Figure 44 MTA Case Study: Absenteeism and Bus Delays before and

after Implementation

CD-ROM Figure 45 MTA Case Study: Cost of Absenteeism

CD-ROM Figure 46 MTA Case Study: Cost of Absenteeism Comparisons

CD-ROM Figure 47 MTA Case Study: Supervisor Estimates to Isolate the Effects

of the Initiatives

CD-ROM Figure 48a MTA Case Study: ROI Exercise

CD-ROM Figure 48b MTA Cast Study: Monetary Benefits

CD-ROM Figure 48c MTA Cast Study: Costs

CD-ROM Figure 48d MTA ROI Calculation

CD-ROM Figure 49 MTA Case Study: Communication Plan

Formulas

References

Acknowledgments and Attributions

Resources from the Authors

xi

Though your balance-sheet’s a model of what a balance-sheet should be,

Typed and ruled with great precision in a type that all can see;

Though the grouping of the assets is commendable and clear,

And the details which are given more than usually appear;

Though investments have been valued at the sale price of the day,

And the auditor’s certificate shows everything O.K.;

One asset is omitted—and its worth I want to know,

The asset is the value of the men who run the show.

(Archibald Bowman, “Reporting on the Corporate Investment,”

Journal of Accountancy, May 1938, p. 399)

For decades, organizations have struggled with placing a value on employ￾ees and, more specifically, on the value of human resources (HR) programs.

Today’s HR professionals need a balanced set of measures and process￾es to show the value of the HR contribution. Measuring the return on

investment (ROI) is emerging as a promising tool to provide convincing

data about the contribution of specific HR programs and processes. It is

now a part of the measurement mix.

The interest in ROI has been phenomenal. The topic appears on almost

every human resources development (HRD) conference and convention

agenda. Articles on ROI appear regularly in HRD practitioner and

research journals. Several related books have been published on the top￾ic, and consulting firms have sprung up overnight to tackle this critical

and important issue.

Several issues are driving this increased interest in ROI and its appli￾cation to a variety of HR programs. Pressure from clients and senior man￾Preface