Demonstrating HRMS ROI and Spotting Hidden HR Costs

The return on investment for your new HRMS is a core element of the initial business case, and a focus on making positive HRMS ROI a reality will run throughout the whole project.

The only reason to purchase an HRMS is the value you expect to return, whether in terms of efficiencies, reduced overheads, and so on.

Calculating HRMS ROI

HRMS ROI may be expressed in terms of finance, staff gains, handling of management information, or even all three. The core formula is straightforward:

ROI = (Net Benefit ÷ Total Cost) × 100, where net benefit is the total gain from the system minus its total cost.

The key is to identify specific HRMS metrics that you can measure both before and after the installation of the new system. The metrics have to be consistent because otherwise you won't be measuring like for like and the results will be both inconclusive and unconvincing to your stakeholders.

For financial HRMS ROI, you need to be clear on the current total cost of your existing system (whether it's a true HRMS or a pre-HRMS arrangement of databases and spreadsheets) and also be able to calculate the total cost of ownership (TCO) of the new system; bearing in mind in both cases the hidden costs of HR administration.

Recommended download: How to collect and analyze your HRMS ROI figures

Staff gains may be measured by looking at the current FTEs (full-time equivalents) required and then measuring the real personnel savings a new system allows. Often this will mean a focus on HRMS self-service: by devolving certain routine tasks to individuals and managers, the HR staffing complement may either be reduced or freed up to do more specialised work – either option represents an ROI for HRMS.

Administration efficiencies can be estimated by looking at reduced administration time, reductions in any manual processes, fewer workarounds and faster processing of outputs such as report writing and organization charts.

Hidden HR software costs

Regardless of the type of HR software, not all cost elements are obvious; there is, of course, more to maintaining a system than the initial quoted licence fee. These hidden costs must be taken into account when calculating TCO and HRMS, HCM or HRIS ROI:

• System installation - what it costs you to acquire the system and implement it successfully
• System upgrade - recurring costs related to upgrading your HRMS system
• Direct non-labor costs – including consultants, HRMS vendor fees and facilities, and any related corporate overheads
• Direct labor costs - labor costs for the staff necessary to support the system
• Maintenance costs - IT costs specifically related to maintaining the system architecture and function
• Indirect labor costs - labor costs for employees involved in ‘HR activity’ (e.g., collection of staff data, timesheet approvals, answering staff questions, etc.)

Final thoughts

Clearly, depending on the size and nature of your business, these costs will vary, and some may even be negligible; but for a true picture of cost, all need to be considered when seeking to demonstrate ROI.

Whatever the driver for a new HRMS, it is a significant investment of both time and money, and both will potentially be wasted if you cannot demonstrate ROI for your new purchase.

Of course, selection is only the first step in ensuring the return on your investment; well-managed implementation, user engagement, and ongoing post-implementation embedding and optimization will all influence the system’s true value to your business.