Vendor Selection & Technology
A Quick Primer on ROI of Staffing Technology
by Taleo Research
The calculation of Return on Investment (ROI) is key to all technology purchasing decisions including HR-specific applications. The purpose of this article is to provide a quick framework for making a business case for acquiring best-of-breed staffing automation technology based on ROI. It is important to be able to articulate a business case to executives that makes clear the contribution of staffing to the overall financial health of the company. Only then can staffing be seen as a business partner, working toward fulfilling the most fundamental aspects of a company’s business plan.
A 2000 study by the Gartner Group found that 80 percent of HR decision-makers of global corporations were not able to state the ROI of a given project, in the study’s case an employee self-service portal. Beware of getting caught in this position, as it is one that will not be tolerated for very much longer by CEOs and CFOs. Substantiating ROI is no longer an optional and felicitous step in project planning, but a mandatory one. In this article you can learn from a selected summary of work from Taleo Research (www.taleo.com) that has helped many HR professionals to articulate and successfully present their case to their companies.
To show how a particular course of action is a sound investment requires becoming comfortable with using the language and reasoning of business, wherein everything must be assigned a dollar value, and a good decision is one in which the benefits deriving from it outweigh its costs. A return on investment is the reward gained over and above the cost of the investment. If every dollar invested returns $1.01, the reward represents a return on investment of one percent. The length of time it takes for the investment to pay for itself is referred to as the payback period, after which any additional reward represents a return on investment.
Some investments generate revenue directly; a machine producing a product twice as fast would, for example, reduce production costs by 50 percent. Those ROIs are relatively easy to measure. Other investments impact the bottom line by using fewer resources; producing a product with less raw material, for example, or producing more results with fewer resources. This is the way an HR system can generate a return on investment.
The savings arising from reducing expenses are sometimes referred to as “hard-dollar” savings. All companies pursue hard dollar savings—producing the same results with fewer resources—since such moves have a tremendous ability to affect a company’s profitability. Consider that a company with a five percent profit margin would need to increase revenues by $100 million per year to have the same impact on profitability as a $5 million dollar per year cost savings.
Soft Savings
So-called “soft savings”, by contrast, are not as readily apparent or as easily measurable, since they do not manifest themselves as dollars remaining in a budget. Here we may be addressing the use of time and levels of productivity, whether from the HR or IT departments, or the hiring managers. Savings won’t be realized in dollars spent but in increased productivity resulting from automation and process improvements. If the time saved can be applied to other important projects, the savings clearly have meaning. Good metrics calculating time, labor and process are needed to quantify these savings accurately.
It is also important to understand the basic financial concepts of the cost of capital. To take our previous example, a $1 invested today at a ten percent cost of capital will have to generate $1.10 return to only offset its depreciation. So a flat return is not a sign of success. Accordingly, to restate the earlier example including the cost of capital, the $1 investment that generates a $1.11 return has a one percent return for a ten percent cost of capital.
The last principle with which to be familiar is Cost of Delay. In a sense, the cost of delay is the flipside of the ROI calculation. Every month of inaction or delay costs the enterprise the value of the delayed benefits for that month. Multiply by 12, and adjust for the cost of capital, and you can estimate your annual cost of delay.
The implementation of a staffing management technology solution can make a positive financial impact on a company in two ways: directly, through direct cost savings or bottom line impact, and indirectly, through an improvement in the top line.
Here are a few of the savings to review:
- Staffing management solutions allow recruiters to manage ongoing relationships with candidates. Candidate relationship management reduces reliance upon sourcing spending to find candidates each time a hiring need arises. The hard savings may appear in a reduction in the advertising budget, a reduced dependency on search firms, or in the fewer number of job fairs held.
- Staffing management solutions store resumes digitally and often automate the routing of information between recruiters and hiring managers. Hard savings would result from a reduction in the material costs associated with the handling and filing of paper, and a decreased reliance on administrative support staff.
- By automating many low-value administrative tasks, staffing management solutions can help recruiters handle a greater workload of requisitions. The hard dollar savings resulting from this increase in recruiter productivity is derived from savings in salaries and compensation, as the same workload requires fewer full-time equivalent recruiters.
Indirect Benefits
Indirect benefits from implementing a staffing management solution may flow in many directions including a streamlined process and higher quality hires. A complete analysis would require an onsite study. Here we present just two significant gains to understand: increase in the speed of the staffing process, and EEOC exposure reduction.
Decreasing hiring cycle time is advantageous in a number of ways. The additional speed in responding to applicants made possible as a result of process improvements will produce productive employees sooner. Importantly, it will also increase the overall quality of the workforce, since top performers will not be lost due to quicker reactions by competitors. Better recruiter efficiency means more jobs will be filled in a given time, resulting in increased staffing levels, which will also directly increase the ability to develop innovative products and increase product development speed.
EEOC compliance is of extreme importance to many corporations. Staffing processes must be designed to provide all necessary documentation to limit potential liability to the corporation. Fines for non-compliance are steep, as are costs in time and resources to undergo an EEOC audit. Mitigating this exposure is valuable, and surely merits a line item when calculating ROI for a staffing management solution. One indirect yet powerful benefit of implementing a staffing management solution may be realized in the reduction of legal exposure as a result of implementing a standardized, consistent digital process with built-in centralized documentation and reporting along with EEOC data gathering.
Itemizing the expected benefits of the implementation of a staffing management solution is only half of the business case. On the other side of the equation are the expected costs. Only with a complete picture of both costs and benefits can one then assess whether a decision to implement makes sound business sense.
When contemplating an IT purchase, it is clear that the figure on the invoice is not the real cost an organization will end up paying out down the road. Total Cost of Ownership, or TCO, is a concept used to represent the true costs of owning enterprise software. A TCO analysis seeks to measure all of the expenses, both human and technical, behind a given technology initiative. It includes all costs related to the lifecycle of the technology, including procurement, deployment, maintenance and support. Thinking in terms of TCO helps the understanding and management of the budgeted and unbudgeted, direct and indirect costs incurred for acquiring, maintaining and using an enterprise computing application.
Direct, budgeted expenditures relating to the solution itself include costs for the software. In some cases, there will be substantial additional costs for the hardware and IT infrastructure necessary to run the application. A staffing management solution from an Application Service Provider (ASP) simplifies a TCO analysis greatly, since it does not require the purchase of hardware or upgrades to a typical company IT infrastructure. In essence, the company does not “own” the software, it pays a usage fee, though many such providers will place the source code in escrow if requested. If you do not license the application from an ASP (which generally provides technical support), be prepared for stiff charge-backs from the IT department to support and maintain the hardware infrastructure necessary to run the application behind your company firewall, as well as the maintenance fees covered below.
The second component of direct costs is labor, including consulting, technical support, operations and administration. Support and training make the system work for users, and the price of those services must be factored into the TCO analysis. Combining the financial and human resources necessary to run and support the business application will give you a sense of the TCO for a particular staffing management solution.
For direct costs, it is helpful to break the TCO analysis into initial and ongoing costs. Initial costs include the software licensing fees and professional services fees for implementation and training. Don’t forget to include internal staffing costs for implementation and support, as well as pulling people off of regular duties for training.
Ongoing costs include maintenance fees and the cost of major upgrades. Here again costs come from the vendor and the IT infrastructure maintenance and upgrades, especially if the staffing management software solution is not delivered via the ASP model. Remember the human side – tech support, ongoing training, system admin staffing costs. There is a cost to each. Resources are being dedicated, when they could be applied elsewhere.
Indirect costs are a more difficult aspect to quantify, but they can often add significantly to the TCO. Indirect costs include unproductive end-user time, troubleshooting, and system downtime. Examine every area of cost or effort, at every key milestone in the lifecycle of the solution.
Once each of the line items outlined above is calculated, you can make the ROI estimation. The ROI equals the projected savings minus the total cost of ownership, less the cost of capital, i.e. ROI = (Savings - TCO) - cost of capital. As you build your business case, remember also to place value on the cost of delaying a project’s implementation time frame. Identify benchmarks from your company or the industry to use as a point of reference. Use the resources from outside experts, such as Taleo Research, to help you understand the ROI for your company and to support your position. By articulating the ROI of your staffing management solution choice this way, you will substantiate the case that excellence in the hiring and deployment of human capital assets is key to corporate success.