by: Ron Hanscome, Vice President of HCM Strategy Consulting at HRchitect
Activity in the financial markets over the past few weeks has raised the specter of 2008 and contributed to fear of another economic downturn (or worse). While it is not my place in this blog to comment on the economy per se, it is clear that the timing could hardly be worse for those in the midst of planning and budgeting for calendar year 2012 HCM technology projects. In uncertain times like these business leaders tend to become more conservative, and usually increase their expectation that technology projects demonstrate a strong return on investment (ROI) in order to be approved. Given that your HCM implementation is sure to compete for budget dollars with other enterprise technology projects, how can you increase your chances of getting approval to proceed from that big budget committee?
Many HCM project justifications fail to gain approval because they focus on mere efficiency gains for the impacted HR processes. Saving time or reducing paper for a relatively small number of HR staff will not garner much interest from the C-Suite. Instead, think about how your enabling HCM technology will affect broader segments of the workforce, and thus truly impact the bottom line of the organization:
Make Finance an ally, not an adversary – start working with your Finance team early to understand the various ways that projects can be justified. HRchitect has discovered a wide variation in what is considered “direct” versus “indirect” cost savings, and how these can be factored into an overall approval cycle. It pays to understand the rules for your organization, so that you won’t be surprised later in the planning process. Here are some recent examples of calculated savings that were used to justify a proposed talent management suite (TMS) project for a large global client:
- Gathering information on global talent into one repository from disparate spreadsheets would increase visibility to all talent, and thus eliminate one expatriate senior leadership assignment per region per year; given the expense of a typical expat, this was estimated to save several million dollars per year.
- Comprehensive talent profiles would also increase the effectiveness of internal talent searches and reduce the need to hire and onboard external candidates, as well avoid the expense of two “bad” hires per division per year; estimated savings for this category exceed $1M US yearly.
Model the impact of your HCM project on the business – stop telling yourself that HR projects and programs are too difficult to accurately quantify; instead, begin with available research and build a model with assumptions that shows how your project can deliver bottom-line results for your organization. Take a look at the following example that utilizes findings from a 2007 SHRM research study that indicates leading talent management processes supported by enabling technologies can reduce attrition by 12-28% over a multi-year period due to increased engagement and retention — note that this example is merely a representation of a fictitious organization and does not reflect any particular HRchitect client – all the numbers are made up:
This relatively straightforward model shows the cumulative impact of a TMS implementation over a five year period, assuming selection of the TMS is completed in 2011 and the first components go live in 2012. In this scenario we begin with an employee population of 5,000, and predict modest straight-line growth over the five year period. Note that the predicted impact on attrition is quite conservative to begin with, and increases sequentially as more modules are implemented and the processes are adopted by the workforce; however, at the end of the period the total impact on attrition is still at the low end of the benefits estimated by the SHRM study. The initial attrition rate (18%) is used as a baseline, and compared to the predicted “actual” attrition rate to determine how many positions per year are ‘saved’ from the need to hire; that number is multiplied by the organization’s average cost per hire to arrive at direct recruiting cost savings ($444k).
The greater savings component in this model is derived from maintaining productivity of the incumbent workforce due to increased retention. In simplistic terms, every position that is “saved” from the need to hire a replacement means that a trained incumbent stays in place, and the organization escapes from having to train a new worker and suffer reduced productivity as that replacement comes up to speed. In this particular organization, across all positions, the model assumes it takes a new worker 1 year to become fully competent, and that the new hire averages 50% productivity over the period compared to a fully competent incumbent. When multiplied by the number of “saved” positions and the blended average hourly rate, the results are significant – more than $6M over the four years when the TMS modules are implemented. The relative weight “Time to Competence” savings have in your organization’s budget approval process is highly dependent on the Finance function’s view of “direct” versus “indirect” cost savings; HRchitect has found that certain industry segments with a greater focus on worker productivity measurement (e.g, healthcare, manufacturing) are more willing to consider this as a direct cost savings, as they suffer the expense (e.g., overtime, contractor) of having to immediately plug workforce gaps.
My big goal in showing this model is not for everyone to adopt it carte blanche – instead, I’d much rather stimulate your own thoughts as to what will work best for your organization. Don’t like the sample assumptions? Plug in your own. Do you think “Time to Competence” is a bogus savings component? Fine – make up your own! Do you object to treating all positions alike and using a blended hourly rate? No problem – revise the model to focus it on your critical job categories, and run multiple scenarios on that subset. In the end, the main thing is to broaden your horizons and think of how your HCM technology can help impact the largest workforce levers that drive business results.
As you build your models, make sure you understand and can defend every assumption, so that when you stand before that budget committee the result will be lots of affirmative head nods, and comments of, “Makes sense to me!” instead of puzzled frowns. Once you get to that place, your chances of loosening the budgetary purse strings will significantly increase.
As always, if you have any questions please let me know. Otherwise, fare well during this budget season!