COST- BENEFIT

ANALYSES FOR HR
INTERVENTIONS
 INTRODUCTION
•HR scorecard helps to determine the discrepancies that exist between firm’s current and
ideal HR structure in quantitative terms.
•Cost benefit analysis can be termed as a microcosm of the HR scorecard framework.
•Determining which elements of work can be “ costed” is highly strategic task and it
should be tied to firm’s strategic and operational goals . For increasing the efficiency we
need to identify the HR activities that really make a difference.
•The HR scorecard helps to identify the “doables” and “deliverables” that will become the
focus of cost benefit analysis process.

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 Operational versus
Strategic Cost-Benefit
Analysis 1 3
 Cost-Benefit Analysis
Operational
• Designed to lower cost.
• Focuses on improving activities that
the organization already perform.
• Costing such activities helps the firm
to explore ways to reduce recruiting
and training related costs, comparing
the benefits of outsourcing v/s in
house etc.
Strategic
• Designed to help implement firm’s
strategy.
• Derived from firm’s strategic and
operational goals.
• Focuses on finding answers to
questions like how to improve
strategic focus of employees.
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Which HR activities to
cost, and why? 2 5
 Cost- benefit analysis can prove both time consuming and expensive so it becomes
important that the HR leaders clarify their goal before investing in a costing project. It is
very essential to categorise the HR activities that should be costed.
 HR scorecard can be a very powerful tool in this process and can help to identify the HR
doables and deliverables.
 To be meaningful any project should have the following attributes:
Strategic importance
Financial Significance
Widespread impact
Links to a business element of considerable varibility
Focus on key issue, problem or decision facing line managers

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Determining the ROI in
HR: a three step process 3 7
For the purpose of calculating the ROI of any HR policy we need to first access
total costs and total benefits associated with the investment and then calculate
benefits less costs. This can be done by the following generic process:
I. Identify potential costs
II. Identify potential benefits
III. Calculate the ROI of the program using appropriate index

Here, the main challenge lies in the collection of data because most firms don’t
regularly track their cost and benefit data and end up estimating.

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 Identifying Costs and Benefits

• Potential benefits are difficult to explain due to 2 reasons: a.) They are likely to come
some time in the future while its costs are borne today. b.) Level of benefits and
probability of receiving them are uncertain.
• The solution to this problem can be coming up with plausible estimates as well as
confidence intervals. Eg. ROI on a training initiative taken as 22 ± 3% shows high
probability of success.
• These numbers can be generated by expert judgment and careful analysis and it is
really very important to develop the cost categories before making cost estimates.

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Understanding fixed and variable costs: It is important for HR professionals to
understand the basic accounting conventions in order to find out whether a particular
practice makes sense from an economic perspective as opposed to an accounting
perspective.
Accounting systems are designed to allocate firm’s resources in a limited number of
categories consistent with GAAP and many companies do use this cost allocation
method but it can distort the decision making process because we need to think about
the role of fixed costs in any cost benefit analysis.
Fixed costs are economically relevant only if we spend directly on them or they incur
an opportunity cost elsewhere in the organization.
Understanding sunk costs: HR professionals often want their projects to get completed
thinking they have already invested so much although continuing with the project
further may cause losses. To avoid this “fallacy of sunk costs” periodical
reevaluation of project becomes necessary.

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 Understanding the financial impact of employee performance
Determining ROI in people entails comprehending relative impact of high and
low performing employees on the firm. There are 2 important ideas here:

First is to find economic contribution of average employees to do a reality check

on how the organization is deploying their resources. For this we calculate the
net benefits less costs. For the firm to earn profit the employee must contribute
atleast her wages and benefits to firm’s success.

Second is to find the variability of impact of employee performance on firm

financial performance.

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 Calculating Benefits less Costs

• The next step is to compare the costs with the benefits to determine the next benefit
associated with a particular program.
• In order to calculate the ROI of a program we need to subtract the program costs with
its benefits or dividing dollar value of the program by its costs. In a similar way we
can also determine the Payback period ( no of years before a program fully covers its
costs) and breakeven volume ( eg. No of participants who must attend training
program for the program to break even)
• However the investments in HR are quite complex and calculations like ROI need to
be done by incorporating multiple time periods as well as time value of money.

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• Firm also requires that the program in which they are investing also compensate them
for Marginal Cost of Capital- which is the interests that they need to pay to lenders if
they have borrowed money for conducting the program.
• NET PRESENT VALUE (NPV) analysis draws together all these factors- costs and
benefits over multiple time periods, compensation for time value of money and firm’s
cost of capital in order to access overall potential of a proposed HR program.
• This can be done by restating the program’s costs and benefits in the today’s money
value and subtracting the present value of costs from present value of benefits.

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Cost- Benefit Analysis Procedures: A hierarchy of Approaches

Level 3

Ben efi t estim ates: in tu itio n

Co st Estimates: Go o d

Level 2
Cal cu lati o n s: Payb ack,
b reakeven
F req u en cy: Irreg ul ar

Benefit estimates: intuition

Cost Estimates: intuition

Level 1
Calculations: none
Frequency: never

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LEVEL 1: These organizations are most prevalent.They do not routinely calculate costs
or benefits with their HR program. The downsizing of Hr departments and movement
of HR resources close to line organization has exacerbated this trend. They generally
do not perform any ROI.
LEVEL 2: Organizations have begun to think systematically about costs associated with
their HR programs. However they generally use intuitive or subjective estimates.
They use relatively unsophisticated procedures like payback periods or single period
ROI calculations. And they conduct these analysis infrequently.
LEVEL 3 : These organizations are the rarest. They have high degree of sophistication.
They calculate costs and benefits of their program using NPV analysis. These
analyses are conducted regularly.

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Summary: Comparing Cost-Benefit Analysis and HR Scorecard Development

Both of these activities help HR function create value.

Cost-Benefit analysis differ from HR scorecards in their breadth(they are much
narrower and more project based) and their longetivity ( they provide one answer
only.
HR scorecards are more broad in scope and lays a theory about how people create
value throughout the business. They are used by much wider audience, viewed and
updated regularly and used as a tool in strategy implementation.
Both Cost-Benefit Analysis and HR Scorecard Development are important and
complementary and most of the firms use them sequentially. They develop
scorecard in order to identify where they want to be in future and use cost benefit
analysis to choose most efficient way to reach their desired future.
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THANKS!
Presented by:
Somya Pandey (2019MB10)

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