This is the fifth in a series of article about building the business case for human capital management initiatives. We discussed costs in Part 3 and benefits in Part 4. We also explained how working with Finance and Line of Business (LOB) leaders will help you estimate the financial impact of human capital programs.
Today we will show how to calculate ROI and the payback period. Which method you use will depend on the type of initiative you are planning and what your business practices require.
Partner with Finance
If your organization has a procedure and format preparing your case may be a matter of entering information in a template. Your partner in Finance will help you chart the right course. You will also lay the groundwork for your CFO to support your initiative.
ROI Calculation
Your ROI Worksheet is the source document for ROI calculations. We have showed you how to use the worksheet as a working model to capture costs and benefits. We will now dig into the actual calculation to present to your approvers.
Payback Period Calculation
Payback period answers the question: when will we recoup our investment?
In this method, calculate the values for each year until you see a positive cash flow. Your business may require that you calculate the payback period beginning at the time you launch the project, or it may begin at the end of the project. We have provided a sample worksheet for each case. We have also provided a sample based on a phased implementation.
Our first worksheet below is a simple representation of ROI calculation beginning at the completion of a project. In this type of calculation, we show the project costs regardless of how long it takes, then begin showing the payback at the end of the project.1
In the second type of calculation we show ROI calculation beginning at project start. This worksheet shows the annual project costs. The benefits begin in the year the project is complete. Since many implementations take only a few months, there could be benefits in the first year. Our example shows a project completing in 18 months.
Many companies decide to implement a multi-module platform over several years. In that case, benefits might begin the first year, but will grow over time as additional modules come online.
You may need to present a thorough analysis of more than one option. For example, if you are preparing a case for new talent management technology, you may have some approvers who favor best-of-breed solutions while others prefer a unified platform. Regardless of which you prefer, the best approach is to present both cases in depth.
Next Steps
In our next article, we show you how to calculate the risks in your initiative.
References :
1. Sheen, Raymond, with Amy Gallo. HBR Guide to Building Your Business Case. Harvard Business Review Press.
Phenomecloud is a full-service technology company dedicated to helping clients solve business problems, improve the capability of their people, and achieve better results.
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