Cost Justifying HRIS

Investments

The Value-Added
Approach

An alternative approach requires the HRIS project team to

think in business terms, and find out how a new or upgraded

system will help the organization perform better. This valueadded approach focuses on the strategic contribution the new
system will make to achieve business objectives. It recognizes
the vital role of HR as an active business partner with the
organization's management and a critical service provider to
the business units.

As an active partner with executive management, HR helps

define solutions to problems of workforce utilization,

organization development, performance measurement, and
adaptation to evolving business demands. As a critical
provider of internal services, HR delivers a wide range of
information services that enable the business units to acquire,
develop, deploy and reward the skill sets and competencies
necessary for achieving the organization's business goals.

 The value-added approach tackles the cost justification issue

by linking the capabilities of the HRIS to the organization's

key business strategies. Using that approach, the human
resource systems manager first identifies the way the
comprehensive workforce information supports the
organization's business goals and makes achieving them
easier. The manager then develops an HRIS architecture and
deployment strategy tailored to support those goals.

Value-added or strategic justification recognizes the business

value of employee information. Using this approach, the HRIS

manager can define a pyramid of value to the organization,
with each level of the pyramid supporting the levels above it.
The pyramid is defined from the top-down, because the
manager must know and state the requirements of each level
in order to define the requirements for supporting it.

Working Down the Pyramid

Key business strategies: At the top of the pyramid are the organization's key business

strategies, often articulated in a mission statement or similar document, then confirmed and
amplified through discussions with senior executives. Those strategies define the
organization's business direction and often include initiatives such as expansion to global
markets, growth by acquisition, or development of new lines of business. The key strategies
also serve as measures for determining the organization's success or failure.

HR strategies to support key business strategies: Once HR leaders understand the key

business strategies, they can define the implications those strategies have for the
organization's workforce, and for the HR function. Human resource strategies are the functions
and capabilities HR must provide to support the organization's business direction. For
example, expansion into new lines of business may call for new competencies and skill sets
that must be acquired either by hiring new people or by retraining the current workforce. HR
strategies are articulated by senior HR executives and include a comprehensive statement of
what the department must contribute to achieving the organization's key business aims.

Information technology (IT) strategies to support key business strategies: Like the

HR strategy, the IT strategy is derived from the organization's strategic business statement
and defines the information technology environment necessary to accomplish the
organization's business goals. The IT strategy generally takes the form of an information
architecture statement describing the data and communication capabilities needed to support
business goals.

Implications for HR information management inherent in HR and IT strategies: HR

information management is where the organization's workforce management and information

technology directions intersect. The HRIS manager must understand both HR and IT
strategies before attempting to define an appropriate system platform, because the HRIS
must support the strategic directions of both the HR and IS. For example, an HR initiative to
empower line managers to make decisions at lower levels of the organization, along with an
information systems architecture that provides organization-wide connections through a linked
set of local area networks, will dictate an HR information management solution that permits
wide access to employee data.

 High-level HRIS requirements derived from information

management implications: The specific functional requirements of an

effective HRIS are also determined by knowledge of the organization's
strategic business direction. Any requirement should be stated in terms of
its support of some element of the organization's business strategy.

Potential HRIS solutions that satisfy the high-level HRIS

requirements: By understanding the business requirements of an HR

information system, along with the business, HR, and IT strategies that it
must support, an organization can define a set of solutions that satisfy
those needs. The key to identifying potential solutions is to keep in mind
the directions and strategies that must be supported. For example, an
organization trying to provide greater autonomy to individual business
units and line managers would be better served by a solution that calls for
decentralized maintenance of employee data.

Platforms to support the HRIS solutions: At this point, the HRIS

project team should identify specific software, hardware and service

providers who can provide a solution that supports the HR information
management strategy. Of course, that strategy and specific decisions
about selecting HRIS products are valid only if they support the
organization's strategic business direction.

An implementation approach for optimum return: Just as support for

strategic initiatives drives vendor selection decisions, it also should define

the approach to implementation. The schedule for implementing specific
capabilities of a new system should be driven by support for strategic
business initiatives, with those features and products that provide the
greatest business value to the organization being put in place first.

Cost Elements of a Comprehensive HRIS

The core HRIS
Enabling applications
Hardware
Dedicated servers.
New client workstations
Upgrades to existing

workstations
Operating systems
Database management
systems
Telecommunications
Local area networks
Wide area connectivity
Implementation resources
Internal information
technology resources
Customers or end users
Training
Project team
Consultants

New technologies
New business processes.
Initial costs.
Software packages that would

fit the employee base.

Upgrade issues.
Annual payroll time savings.
Total annual maintenance costs.
Increased efficiency.
User-friendliness.
Availability of technical support.
Available screens--whether the
programs have existing
standards for salary and
performance, Equal
Employment Opportunity,
benefits, and training.
Needs for customizing.
Time required to implement.
Training time required for HR
and payroll.
Interface with Microsoft
products.

Value Provision of HRIS

HRIS provides the:
Primary infrastructure used to deliver HR

programs.
Ensure HR regulatory compliance.
Company
Government

Produce the HR metrics.

HR Metrics
HR Metrics are used to evaluate not only

the HR function but also the contribution

of the organizations human resources to
the accomplishment of strategic
objectives.
Organizations use metrics to measure or
audit their HR programs and activities.
Through benchmarking, metrics can be
used to compare against other
organizations metrics.

Need for HR Metrics

due to the need for effective management

over human resource capital; i.e. the

intellectual capital that drives value.
it has become very important to
demonstrate the value of human resource
capital to executive management.
The primary focus is on people and how
are we going to develop our human
capital.

Efficiency Ratios

To see how well you are managing human capital, the Society of Human
Resource Management (SHRM) has identified ten key human capital
measurements:
1.

Revenue Factor = Revenue / Total Full Time Employees

2.

Voluntary Separation Rate = Voluntary Separations / Headcount

3.

Human Capital Value Added = (Revenue - Operating Expense - Compensation &

Benefit Cost) / Total Full Time Employees

4.

Human Capital Return on Investment = (Revenue - Operating Expenses Compensation & Benefit Cost) / Compensation & Benefit Cost

5.

Total Compensation Revenue Ratio = Compensation & Benefit Cost / Revenue

6.

Labor Cost Revenue Ratio = (Compensation & Benefit Cost + Other Personnel
Cost) / Revenue

7.

Training Investment Factor = Total Training Cost / Headcount

8.

Cost per Hire = (Advertising + Agency Fees + Recruiter's Salary/Benefits +

Relocation + Other Expenses) / Total Hiring

9.

Health Care Costs per Employee = Total Health Care Costs / Total Employees

10. Turnover Costs = Termination Costs + Hiring Costs + Training Costs + Other Costs

Some Factors
Important to benchmark the HR metrics

against past performance and other

companies.
HR Metrics, should have strong connections
to the strategies of the company. This helps
to ensure that the evaluation of HR really
matters to the organization.

Justification Strategies for

HRIS Investments
Two categories :
Risk avoidance: Are used when investments

are believed to eliminate or mitigate

significant future risks faced by the
organization.
Organization enhancement: Highlight how
effectiveness of the firm will be improved by
the edition of a new or improved HRIS.

Guidelines for Investment

Analysis
Main reason is to improve organizational

effectiveness.
Honesty is the best policy.
Focus on key functionalities
Benefit examination vs. Cost examination
Know your business
Develop the best estimate possible
Make it easy for the decision makers.

Main reason is to improve organizational

effectiveness.
The objective is not to purchase specific

hardware or software. The objective is to

improve organizational performance.

Be honest with yourself.

Each analysis should be done with an open

mind. The analysis should be taken as

investigation devoid of any personal biases
and without preconceived notions.
Developing a reputation as an impartial
evaluator will increase management
decisions makers confidence in analyses
done by the CBA team.

Focus on key functionalities

The analysis should focus on the

improvement in the organization functionality

that is to be achieved. Start with that
functionality and let it lead to the product.
Dont start with the product and attempt to
identify ways to justify its purchase.

Estimate benefits first.

Examine costs only after you have completed

the analysis of benefits.

Know your business:
What the business is, how the current

processes contribute in achieving the

strategic objectives. Understand the potential
for improvement.

 Develop the best estimate possible

Not to be over optimistic or conservative.

Develop the best estimate as per the

available data.
Distinguish between the analysis and the

packaging of that analysis for decision

makers.
Primary purpose of investment analysis is to

determining the improvement opportunity for

the organization. This does not have to be
confused with selling the idea to the
management decision makers.

HRIS Cost Benefit Analysis

Identifying source of Value for Benefits and

Cost
Direct Benefits
Indirect benefits
Implementation costs

HRIS Cost Benefit Analysis

Matrix
Direct (Hard)

Benefit
s

Costs

Indirect (Soft)

Revenue
enhancement
s

1.
New revenue
(new sales)

2.
Improvement potential
(better decision
making)

Cost
reduction

3.
Direct costs
(cancelled vendor
contracts)

4.
Potential costs
(saved staff time)

New
implementati
on costs

5.
Out of pocket costs
(software, service
agreements)

6.
Indirect costs
(increased technical
support needs)

Estimating the Value of

Indirect Benefits
Estimating indirect benefits magnitude
Direct estimation
Benchmarking
Internal assessment