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Hurconomics

A Framework for Measuring Return on Investment (ROI) on People

Have you ever wondered what constitutes the market value of most companies? All of a company’s tangible assets, including the cash at hand, work-in-progress, land, buildings and hardware, comprise only a small part of its market value. In some companies—IT companies, for instance—tangible assets account for less than 5 per cent of the market value. At least 90 per cent to 95 per cent of the market value is difficult to measure and is often referred to as intellectual capital. In most cases, this may consist of a loyal customer base, stable organizational structures, knowledgeable top management, high level of professionalism, the company’s credibility, consistent results, HR interventions, and retention or even attrition rates (sometimes highly branded companies have high attrition rates).

A great deal has been written about the return on investment (ROI) on HRD interventions by HR managers/CEOs. Most of these measures focus on the work of the HR department and tend to underplay the ROI on what particular managers do. How much does it cost to retain an MBA graduate? What is the ROI on an MBA graduate that a company hires in a campus placement session at a cost of, say, 10 lakh to 15 lakh, when a non-MBA graduate is available for half the cost and can perhaps perform the task more efficiently? What is the certainty that an MBA graduate will not waste even more of the company’s money once she/he is employed, by asking persistent but inconsequential questions and forcing the organization to collect irrelevant data?

What is the ROI on appointing a multinational consultancy firm that may enhance the company’s brand value but may fail to provide an implementable solution, or find a solution that can only be implemented by engaging another consulting firm?

What is the ROI on a 360° feedback exercise that compels an organization to spend 25,000 (including profiles, fees paid to consultants, workshop time and faculty provided for the workshop) for a top-level manager?

A certain project in a company can be completed by an in-house team for about 20 lakh. But when a tender is developed for appointing external consultants, the lowest quotation received is for 1 crore. The tendering process itself takes six months, a dedicated seven-member task force, 30 manager days, and a further eight weeks of the consulting team’s time, which is not billed to the company. What is the ROI for the company if it ultimately decides to engage consultants?

It is really quite amazing that managerial time and talent is not adequately valued. This book is an attempt to cost managerial talent in terms of time and evaluate the impact of various HR interventions in financial terms.

Hurconomics is a way of looking at people, processes, and events in economic and financial terms. It deals with the economics of human resources and attempts to analyse HR activities, processes, events, systems and decisions in terms of costs and returns. It also explores the financial metrics or measures of human resources. While these could include costs, benefits and ROI, a novel unit of measurement proposed and used extensively in this book is cost of time (COT).

HR investments or costs may be measured in COT units. A formula is then used to give such investments a financial value. Today, this formula is commonly used by HR practitioners and researchers, and its worth has been widely recognized.

Some years ago, I had developed the concept of hunits, which are measures of human resource inputs by an individual. A hunit is the equivalent of one hour of time given by a person applying her/his talent to any activity in the organization or family or society. The value of the unit changes from person to person. The hunit value of a person is her/his cost to company (CTC) or her/his annual income plus earnings/expected earnings divided by the number of hours of work she/he puts in (or is expected to put in) to earn that income. I hope that this measure will be found useful by HR professionals in the future for measuring talent application. This book, however, uses the concept of COT rather than that of hunits. COT is explained in detail in this chapter.

Costing Time: TVRLS Methodology

In most organizations, it is difficult to measure the performance of senior-level employees objectively. Comparing the ROI on senior employees is never easy, particularly because managers are placed in diverse departments where performance is amenable to varying degrees of quantification. Indeed, how does one compare the output of a production manager with that of a maintenance manager or a personnel manager? TV Rao Learning Systems Pvt Ltd (TVRLS) has devised a methodology¹ to assess the input costs (the ‘I’ in ROI, or the investment made by the company) of managers, which can be compared with a reasonable degree of objectivity. The cost to company (CTC) of the individual is taken as the ‘I’ for the individual employee or manager. Thus, if a general manager earns a salary of 6 lakh per annum, excluding house and other benefits, and community facilities, her/his CTC may actually amount to 12 lakh in the public sector. This estimate is normally based on housing costs, community facilities such as schools and hospitals, and other welfare expenditures.

Consider the following examples. KTR International Ltd (KTRIL) is a construction company involved in infrastructure projects. Its current turnover is 1,000 crore and it intends to multiply its turnover by five in the next three years. Its people cost is estimated at 100 crore. The general manager heading the cement unit carries a CTC of 10 lakh. There are eight deputy general managers (DGMs) who look after materials, quality, maintenance, marketing, personnel, finance, IT & logistics, and planning, respectively. Each DGM is in the salary bracket of 6 lakh, and, KTRIL being a private sector company, the investments on community services and the CTC of the DGMs are 8 lakh. The company prescribes that 2,000 working hours should be put in by each employee in a year, all managers working a five-day week. Every manager gets 25 days off in a year, if she/he works for 2,000 hours that year.

Consider, further, the following. The opportunity cost of a one-hour meeting of the GM with all DGMs to discuss even something as trivial as whether tea should be served at the table or at a common place is 37,000 or more; and that of a 15-minute telephone conversation between the GM and DGM (marketing) is 2,250.

If the GM habitually reaches meetings half an hour late, she/he is wasting 1,600 of the company’s money and incurring an opportunity cost of 16,000.

The annual cost of interaction between two GMs for an hour a day is 2 lakh; the opportunity cost is 20 lakh!

If two DGMs do not get along and send notes to each other even about trivial matters, often the GM has to intervene. In one particular year it was found that there had been 800 e-mail exchanges between two such DGMs. Assuming that on average each mail takes 15 minutes to compose and send, the cost can be calculated as 80,000 a year, with an opportunity cost of 8 lakh.

At KTRIL, the GM and DGM (HR) felt that the DGM (marketing) and DGM (production) would learn how to cooperate more effectively if they attended a programme on conflict management at IIM Ahmedabad (IIMA). If they were both sponsored to attend the training programme for five days, after how many weeks would the company begin to get an ROI on its training costs (the programme fee and travel cost for each DGM being 20,000 and 10,000, respectively), assuming that the conflict between the duo was reduced by 50 per cent after the programme? (Returns can begin only after costs are recovered.)

In addition, what is the opportunity cost of daily production meetings if on average there is a daily 90-minute meeting in a plant, and the plant is shut down for annual maintenance every year for two weeks, during which period production meetings are not held?

Calculating cost of time (COT) using TVRLS methodology

Step 1  Calculate CTC (all direct costs in terms of salary and perks + indirect costs incurred by the company for recruiting, maintenance, socialization, guidance and development of an employee + investments made or likely to be made to enable the employee to perform her/his current role or likely future roles as well). Let this be figure be X (where X = X₁ + X₂ + X₃).

Step 2  Estimate the number of hours an employee is expected to work in a year (the number of working days, excluding holidays and annual leave entitlement, multiplied by the average number of working hours per day, excluding travel time to and from work). This may range between 2,000 and 2,400 hours. Let this figure be T.

Step 3  Divide X by T. This will give the real cost per hour of an employee’s time. Therefore, the real cost of time (R-COT) per hour = X ÷ T.

Step 4  Calculate the opportunity cost factor (OCF) for the company. Opportunity cost is the return expected from the employee to the company as a result of its investment of time. While this varies from job to job and depends on expected performance, there is nonetheless a crude way of calculating OCF. Take the annual turnover of the company in financial terms as targeted for the current year (AT). Also find out the annual estimated people costs (annual people cost to company or APCTC = salaries + perks + all other people costs, including welfare costs). The HR department or finance department can give the approximate figure, as will the previous year’s balance sheet. Divide the company’s annual turnover by the annual people costs estimated for the year to get the opportunity cost factor. Mathematically, OCF = AT ÷ APCTC. Normally, in a manufacturing set-up, OCF ranges between 8 and 10. In IT firms and consulting companies it could be around 3 to 4.

Step 5  Opportunity cost of time (O-COT) is calculated by multiplying R-COT by OCF: if R-COT is 1,000 per hour and OCF is 3, then O-COT is 3,000; if OCF is 10, then O-COT is 10,000 per hour.

R-COT and O-COT are always expressed in terms of rupee cost per hour: An example

A senior vice-president (HR) working in an IT firm has a CTC of 25 lakh. She/he is expected to put in about 2,000 hours of work annually (8 hours a day × 250 days). Her/his R-COT is 25 lakh ÷ 2,000 = 1,250; the cost per day is therefore 10,000. If the firm’s OCF is 3, then her/his R-COT is 3,750 per hour or 30,000 per day.

In a manufacturing company, a senior vice-president may have a CTC of 24 lakh and is expected to work 200 hours a month or 2,400 hours a year. Her/his R-COT is 24 lakh ÷ 2,400 = 1,000 per hour. Her/his O-COT is 8,000 per hour if the company’s OCF is 8.

An executive vice-president (operations) of a machine tools company holds weekly meetings of all the heads of department (HODs). Each meeting lasts for two hours. There are six HODs who attend the meeting. Two of them—VP (manufacturing) and VP (systems)—come from two different plants located outside the head office. Their travel time is one hour from the HO. Four others are based in the same building as the EVP (operations). The CTCs of the various HODs in the form of R-COT are presented in Table 1.1. The table gives an example of how agenda items for a meeting can be evaluated for appropriateness. The scale used is as follows:

4	=	Very appropriate; take it up
3	=	Useful; take it up
2	=	Can be postponed or someone else can take it up
1	=	Not appropriate; drop it from this meeting and use other methods like delegation

 

TABLE 1.1 Evaluating the appropriateness of agenda items for a meeting

 

 

Cost of time: Who pays for the meetings you attend?

Recently, I attended a meeting to plan a world conference on ancient wisdom in management. The conference was to be organized by a person with powerful media connections and excellent contacts in high places. The CEO of a large company—a very well-connected man himself—was elected to chair the conference. He was excited about the conference and even donated a considerable sum of money towards it. He genuinely believed that ancient wisdom had much to offer and that contemporary management gurus ought to know that the Vedas and the Upanishads contained most of the principles taught by management gurus. He was certain that the conference would help Indian managers save a large part of their expenditure on hiring foreign consultants, and bring traditional Indian wisdom to the attention of international management experts.

About 40 persons attended the meeting, including some luminaries in the field of ancient philosophy, CEOs and management gurus. The meeting was held in Mumbai. About 50 per cent of the attendees were from Mumbai. The meeting lasted a full three hours and closed with lunch. The chairperson spoke for nearly 40 to 50 minutes. This, together with exchange of pleasantries, introduction of the members and tea breaks, accounted for about 40 per cent of the three hours. It looked as though the chairperson had invited people to listen to his ideas rather than to assimilate theirs. Typically, that is what chairmen of committees and task forces do. They believe that their main responsibility is to initiate a meeting, explain the agenda, raise issues and sort out controversies. I got barely three minutes to speak, as, on average, did the other fellow invitees. (This figure is obtained by dividing the effective time of about 120 minutes between the 40 invitees.) A more demanding speaker would have got about seven to eight minutes, and some about four to five minutes. Some invitees did not get an opportunity to speak.

I spent my own money to attend the meeting. The chairperson of the meeting being a close friend, I did not want to offend him by missing it. I paid nearly 6,000 on air travel. At a conservative estimate, my time is valued at 10,000 per day. Other direct expenses, including commuting, were 7,000. The billing time to my company was another 10,000 to 30,000 (the cost typically charged by IIM professors). All this to make a three-minute speech and to listen to my friend! The discussions concluded with the appointment of a conference committee to decide on the agenda and speakers for the conference. I was asked to be the advisor for this conference, a request I politely declined.

Let’s now calculate how much, on average, each person who attended this meeting for half a day would have cost her/his company. At a very conservative estimate they all drew a higher salary than me and would have cost their company 10,000 each. If even half of them paid an airfare of about 5,000 each (again, a conservative estimate) to reach Mumbai, it would be another 1 lakh.

Thus, my estimate of the cost of the meeting is:

Salary cost: 40 × 10,000 = 4 lakh (the opportunity cost of the time for these people will be at least three to four times = 16 lakh).

Travel cost of 20 persons: 20 × 5,000 = 1 lakh.

So the meeting cost between 5 lakh and 15 lakh. If all of us in the team had offered a half-day or perhaps even a full-day executive development programme, we could have offered 20 ‘one-day programmes’ in Mumbai on ancient wisdom, and, with a capable organizer, raised 1 crore. That is the opportunity cost of planning a conference with a large participation.

Who paid the cost? Neither the conference nor the person who sent out the invitations did. Huge costs were incurred just to listen to the chairperson for about 40 per cent of the time, and for members to share five minutes of wisdom with each other. The chairperson was proud and pleased that he could mobilize 40 people at short notice. The organizer was happy that he had the support of 40 luminaries for his conference, and that a new committee would take the conference forward. I felt that the money could have been used in many other ways. At least 100 adults could have gained literacy; or 20 students could have had their school fees paid for five years; or five MBAs could have been produced; or 500 patients could have been treated in hospitals free of cost; or 1,000 hungry people could have been fed for a day; or 100,000 textbooks could have been distributed to poor students. But we did not do any of those things. We discussed ancient Indian wisdom.

Every time you attend a meeting, you should ask the following questions:

• How much am I spending?
• Whose money is it?
• What is the purpose?
• Who is the beneficiary?
• Can the same thing be done at a lower cost, but with the same or even better results?

Be honest with yourself!

Cost of feedback

I checked into a five-star deluxe hotel on a Sunday evening. I was received at the airport by the chief PRO of the company I was to work with the next morning. Upon entering a deluxe five-star hotel an hour or two later, the reception desk asked my host and me to proceed to the executive check-in counter on the fifth floor. We were joined by the dean of a local management school.

At the reception I was asked to sign and provide a credit card as a security deposit. I suggested that prior billing instructions might have been given to the hotel. The receptionist answered, ‘No sir. If they were, we would not have asked you for the card.’

The PRO intervened and said, ‘Don’t worry, we will send you the billing instructions first thing in the morning.’

The officer at the check-in counter said, ‘I’m afraid I can’t wait. If you give me some instructions now, I can check in this gentleman.’

The PRO said, ‘Look, it is Sunday and the office is closed. The person who was supposed to send you the instructions is not available now and cannot send you the fax. I was told that the instructions had been sent, but something has obviously gone wrong. The person reports to me and I will make sure that the billing instructions are sent by the morning.’

The officer said, ‘Let me check with the reservation office.’

While this conversation was in progress, the waiter at the reception desk asked me if I would like to have a welcome drink. There were two other visitors with me. I thought it improper not to offer them a welcome drink. But if I asked the waiter for additional welcome drinks and he refused, it would cause embarrassment. Hence I declined the drink.

Sensing my embarrassment the waiter said, ‘Sir, can I send it to your room?’

I said, ‘Fine’, and went on to complete all the check-in formalities.

An hour later in my room there was no welcome drink. Nothing came.

I got a call from the reception saying that they had checked with reservations and the latter insisted on taking a copy of the credit card. It was their policy. I refused to give them my card and said that that they would have to sort the matter out with the company, which was their regular customer and also based in the same city.

The next morning, I entered the dining room for breakfast. A waiter escorted me to a table. ‘Sir, may I get you some tea or coffee?’ he asked. ‘Some tea please’, I said. I settled down to breakfast. For about 20 minutes the tea did not arrive. As I was concluding breakfast, a colleague, who had arrived the previous night, joined me. The waiter escorting him to my table asked him if he would like tea or coffee, and he said he’d have coffee.

The coffee did not arrive for the next 10 minutes, and then not until another waiter was asked to bring it.

The waiters had been trained to ask politely, but evidently hadn’t been trained to serve.

I asked my colleague if he had provided his credit card details. He said,

No, I guess they sorted out the matter by getting someone to send the fax last night. But do you know, Professor, the service in this hotel seems to be rather poor. Last night, I arrived late. I was very tired and as soon as I checked in at the executive counter, a waiter asked me if he could send a welcome drink to my room. I said yes. But the drink never arrived and today we’ve just had this experience with our tea and coffee.

We decided to give the hotel management some feedback so that things could be put right. After all, we had built our careers preaching to people that feedback was necessary to improve customer service.

Due to an emergency, my colleague had to cut short his stay and he left without giving any feedback to the hotel. Next evening, I decided to give some verbal feedback to the hotel manager. I asked the receptionist who would be the person to talk to about my experiences in the hotel.

‘What experiences, sir?’

I explained briefly. The receptionist did not seem to understand. There was an impromptu conference among two to three officers (all trained in hospitality management!) to decide on the most suitable person to listen to the feedback. They finally called the person concerned, who, it turned out, was standing a few feet away. He was an assistant manager I supposed. I made the mistake of asking him who he was in the hierarchy of the hotel. I assumed that he was the right person. It took 15 minutes for me to explain our experiences. I also narrated to him how the fruits in my room’s fruit basket had disappeared within a day.

I said that I wanted to give my feedback as I was a professor of management and regularly promote 360° feedback in organizations. After hearing me out with defensive interruptions, he finally said, ‘I am sorry, sir. It is an important matter for us. I request you to give it to us in writing.’

I was thoroughly irritated and said, ‘You must realize that I have taken out time to give you this feedback. If you don’t value verbal feedback, I am not sure what you will do with a written version. I am not going to waste any more time.’ He said he was sorry, but would still appreciate my feedback in writing.

By this time I had given up all hope of a positive response, and decided never to stay at that hotel again.

Later, I got call from another manager, apologizing for what had happened. Subsequently, I received calls from four different people, all when I was busy with my preparations for the next day’s session.

Next morning in the breakfast room the staff seemed to recognize me. They were whispering to each other. I began to wonder if giving the staff my feedback had been a bad mistake.

A few minutes later the restaurant manager entered, took the seat before me and began to tell me about employee attrition, the new trainees, the hotel’s work culture, and so on. Courtesy compelled me to listen to him. That delayed my breakfast. Though I reached the office on time, it was about 15 minutes later than I had planned. That amount of time in the morning makes a lot of difference.

There was a repetition of apologies in the evening. A fruit basket appeared that evening. I ate some of the fruit, and what was left disappeared the next day.

In the Jet Airways flight home the next day, a stewardess handed me a feedback form. I had half a mind to tell her that I had filled a feedback form on every second flight I had taken in the last two or three years but had not got a single letter of acknowledgement. Nor had the food improved on the Ahmedabad–Mumbai sector. I politely took the form, leaving it till the end of the flight to decide whether I even wanted to look at it. Incidentally, I am not sure that I will ever give any feedback to hotels.

What would be the cost of feedback if a professor’s CTC is 1,000 an hour. How much does a company lose if it does not send a car to receive her/him at the airport? How much does it cost if a taxi driver is not clearly instructed where exactly to take the visitor, and participants are forced to delay the session until she/he arrives?

When I go out of the city on consulting work, I am sometimes asked to take a prepaid taxi from the airport if company policy does not permit the hiring of a private car. In 2007–2008, IIM professors charged a consultancy fee of 1 lakh per day for an eight-hour work day, or about 12,000 per hour, which is 2,000 a minute. Senior professors charged even more. Professors are normally allowed to do consulting work one day a week. If a professor waits in an airport taxi queue for 15 minutes for a prepaid taxi and then another 5 minutes for the driver to emerge with his car, the total loss is 40,000. Add to this the time taken to apply for reimbursement, attach receipts and other details, instruct a secretary to send a bill and so on. On the other hand, hiring a private taxi may cost, say, 1,000. What is lost is a 40,000-equivalent of a consultant’s time.

I used to feel very embarrassed when HR managers came to receive me at the airport when I was on a professional visit to their company. Only when some of them remarked that they gained much from spending time with me, did it occur to me that these PR-oriented HR managers were actually very smart. They were using every minute of my time, right from the moment I exited the airport to the moment I left. During this time, they were either seeking advice or briefing me about the company or asking questions about the systems they were handling, and so on. Every minute was put to use.

Time is money. It is our biggest resource. Without time, we can’t do anything at all. But given time, much can be done.

The most important resource after time and money is competence. Competence is the knowledge and experience possessed by an individual and extends to a team, organization, society and nation. That is why young people are an organization’s or country’s most valuable resource. They have a long career ahead of them and if their competency is increased by developing appropriate skills, they become the capital the company can cash in on.

However, I would advise caution in calculating the cost of time. A friend used to accompany his wife to buy vegetables twice a week, on Wednesdays and Saturdays. After I explained the concept of cost of time to him, he actually began to calculate the cost of his time. The vegetable market was about 5 km from his residence, but right beside his apartment was a supermarket that had all the fresh vegetables they needed. His wife preferred the open vegetable market to the supermarket as she found that the prices there were 10 per cent lower. They normally bought vegetables worth about 200 each time and saved 20 per trip. My friend always felt rather uncomfortable accompanying his wife on her vegetable shopping excursions as it meant returning from office a little earlier than usual on Wednesdays and having to spend almost two hours with her on the trip. He calculated the cost of his time and mentioned to her that in order to save 20 his wife was using up 500 of his time and spending another 40 on petrol. She, then, reluctantly agreed to go shopping alone. But over the next two months my friend reported domestic friction. They had begun to quarrel over trivial issues. Then, his wife left for her hometown on a two-month vacation. In her absence, my friend had to cook for himself. Both his wife’s absence and his culinary ineptness robbed him of his peace of mind. Accompanying his wife to buy vegetables suddenly seemed a very small price. It is quite impossible to estimate how much it actually cost my friend to save 500 a week when he stopped going on vegetable-buying trips with his wife.

The Framework for This Book

The framework of real cost of time (R-COT) and opportunity cost of time (O-COT) will be used extensively in this book.

At the enterprise level, R-COT is the aggregate time of all employees, both full time and part time, as well as the time of people to whom work is outsourced. We do not need to compute the costs for each individual. We simply add all the people costs, including fringe benefits, replacement costs, training costs and so on; broadly, everything that is spent on people. These figures ought to be easily available from published balance sheets. Many indices can be derived from them.

The following are some of the possible indices:

• Revenue per hour of employee time: This can be obtained by dividing the total revenues generated in a year (or total sales) by the number of hours of people time. The number of hours of people time is to be estimated by multiplying the person years available in a year of all employees (part time or full time) by the total number of work hours expected from every employee in a year. This is normally between 2,000 and 2,400 hours.
• Profit per hour per employee: This can be obtained by dividing the total profit earned by the company during a year by the total number of person hours available during that year.

R-COT is an investment indicator and O-COT is a returns indicator: that is, when calculating ROI on human capital R-COT should be used as an index of investment and O-COT as an index of returns or expected returns. When considering the worth of the time invested, one should ask the following question: If O-COT for this time is, say, 10,000 per hour and R-COT is 2,500, is it worth investing the time? Is one likely to get anywhere near 10,000 in return for the investment that is being made? Or can the cost of investment be at least recovered?

Thus, with an investment of 4.1 lakh the organization should get 14 lakh in return as a result of the skills developed by this programme. If the average tenure of VPs in the company is two years and this particular VP has already spent one year, the company should aim at recovering the O-COT of 14 lakh from the inputs gained by the candidate from the training programme. The VP should be able to generate revenues worth 14 lakh in that year merely to recover the cost of training. The HR department may therefore ask, ‘Are the inputs significant, in that we can now reasonably expect to earn an additional income of 14 lakh in the year following the programme, through the efforts of VP (insurance sales)?’

Mostly, this is a matter of good faith. But the question can help to decide whether or not to sponsor a particular employee. And, further, if the company decides to sponsor, should the expectation of ROI from this programme be conveyed to the individual?

Should the expected ROI form a part of the employee’s KPA, or should her/his targets be revised on its basis?

It is easy to see that these concepts can help HR make decisions.

A Framework for Other Impact Measures

The purpose of this book is to enhance the sensitivity of managers (including CEOs) to the economic and financial impacts of HR. When we deal with HR at the national level we talk of economics, and at the organization level we talk of financial measures or indicators. Issues of efficiency and effectiveness can be measured in monetary terms. A recent article published in the Economic Times indicated that countries that have developed well had a culture of trust and reliability and more people who spoke the truth. Mahatma Gandhi’s passion for truth had an economic base. If everybody in a company or in a country speaks the truth, the overheads are likely to be low. There will be fewer follow-ups; material will arrive on time as promised; there will be less need to maintain records; and less need for managers and supervisors. That country would progress economically. The World Development Report and Human Development Report have established beyond doubt that less corrupt countries develop faster and better than more corrupt ones. Thus, social behaviour and other soft indicators have an economic implication.

The Human Development Reports published from 1990 to the present have consistently shown that those countries that have developed economically also possess well-developed human resources (Rao 1995). However, if a country progresses economically but does not have policies that promote human development, it is likely to lag behind. Economic development will not automatically result in human development. The latter must be orchestrated through the right combination of policies for developing necessary skills, education, health, infrastructure and other interventions. The promotion of human development, in turn, propels economic development. Countries like Nigeria were economically well-off in the late 1970s and the early 1980s, but have fallen behind because they have not pursued policies that promote human development. Countries like Sri Lanka, which have well-developed human resources, could not mobilize people to propel economic development because of internal ethnic conflict. Countries like Singapore, Malaysia, Japan, and China have exploited their resources cleverly and used far-sighted HR policies to develop their people. This accounts for their remarkable economic progress.

What is true of nations seems to be truer still of organizations. In fact, the connections between human resources and economic growth can be demonstrated better at the level of a firm. A number of American research studies (reviewed in Chapter 2) have shown the impact of good HR policies on a firm’s performance or shareholder value.

In India, organizations like Infosys, the Tata Group, the Birla Group and others have demonstrated that well-articulated and implemented HR policies ensure high levels of organizational performance and profitability. Ironically, most HR managers don’t seem to realize this, and many CEOs don’t know how to use their HR team to influence the firm’s performance. The following example illustrates why the top management and HR managers need to be sensitive to the impact of good HR policies.

The CEO of a particular firm was considered to be HR-oriented. During his three-year tenure, he implemented a large number of training programmes. Under one of the programmes, he sent all his junior managers and engineers (around 100 of them, in batches of 20) for a one-month management development programme at one of the IIMs. The expenditure on this exercise amounted to 1 crore. He also sent the top-level managers to a policy workshop to identify and support various management interventions. Additionally, his HR team organized a two-day life skills workshop for about 3,000 employees. The workshop focused on how to be good parents, how to take care of home and savings, and how to lead a good and healthy life. The company did well. When the CEO retired and a new CEO took over, some of those who had earlier felt sidelined in the HR department complained to the new CEO that a lot of money was being wasted and that the HRD expenditure, which ran into a few crores, should be greatly reduced. The new CEO promptly stopped all training programmes. The HRD team felt helpless and resentful, and did very little work during his tenure. As soon as his term was over and another CEO was appointed, the HRD chief requested him to review the earlier HRD policy and restart the training programmes. The new CEO consulted several employees but decided not to side with any party. He instituted an HRD audit to ascertain the impact of the programmes on junior managers, the top management and others who had participated in the programmes four years prior to his appointment!

The audit team made several interesting discoveries. For example, an IT person who had heard a project presentation (on materials management through the SAP system) by one of the junior managers as a part of the IIM training four years ago, had picked up some ideas and developed a system, resulting in annual savings of 4 crore. He acknowledged that this would not have happened but for his being part of the team assigned to evaluate the project of the junior managers attending the IIM programme. In another case, after attending the programme one of the junior managers studied the water management system and was able to save a few lakh gallons of water a month in the township. Some of the employees reported that they were thankful to the organization for giving them life skills training, as they were able to think differently and save more for their children’s education. One of them was proud that he had been able to send his children abroad for higher studies. On the whole, the employees reported that they took better care of their equipment as the programme had taught them the value of commitment to, and ownership of, whatever they did. The audit team concluded that although the training had ended four years ago, and company policy did not support any post-training implementation, the benefits derived from the programmes amounted to several times the investments made in the programmes. The audit team also concluded that the programmes ought to be revived and the company could benefit from training its workforce in particular. Despite the positive report and recommendations, however, the new CEO did not think that the revival of training programmes was a priority as the company was anyway doing well. Many CEOs don’t realize that sound investments in people help companies go far beyond their current performance.

In another case, the CEO of an IT company wondered if it was worth wasting so much time, money, and energy on short modules of soft skills training for its managers. The company conducted an audit. As part of the audit, a programme on negotiation skills was conducted. A two-day programme, it cost the company 10,000 per candidate. Each batch had about 20 candidates, and the purchase of. an online training package (for pre-training preparation) cost them another 1,000 per head—a total investment of 11,000 per candidate. Including the time and other costs of the managers, it cost the company 15,000 per candidate for the programme. To find out the ROI, a few employees who had undertaken the programme three months earlier were interviewed. Each employee was asked to narrate how she/he had used the programme inputs and benefited from it. During the interviews, one of the managers said,

Prior to this programme I was not aware that the project had negotiable and nonnegotiable components. After the programme, in all projects that I am supposed to handle I have begun to carefully identify and separate the negotiable components from the non-negotiable ones and state them upfront to the client. This saves a lot of my time and also prevents any ill feeling. For example, I recently concluded a project for 50 lakh that I would have lost but for the knowledge I gained on the programme. I also understood the mistakes I had made in the past. On average, I am able to save at least 35 to 40 per cent of my negotiation time.

This one candidate’s achievements could pay for the next ten batches to be trained.

These illustrations demonstrate that sensitivity to returns in financial terms is critical. If one is to go on collecting data, the cost of inputs is likely to rise. That ‘HRD is an act of faith’ ought to be appreciated, and one should learn to see the larger benefits. This book seeks to enhance sensitivity to the connection between HR and firm performance.

Indices of ROI

The following are the different types of ROI indices:

• Individual and group
• Direct and indirect
• Short-term and long-term

In The HRD Missionary, I presented a framework of how HR tools can build an HR climate, which in turn impacts HRD systems and organizational outcomes. The HRD tools and subsystems such as PMS, 360° feedback and training can create an enabling HRD culture and foster role clarity, trust and planning skills. This in turn would result in positive HRD outcomes like improved teamwork, greater synergy and better-developed roles. The ultimate outcomes are increased profits, growth and expansion (Rao 1990).

Subsequently, in my book on HRD score cards, I detailed the various indicators of the impact of HRD (Rao 2008).

An appreciation of all these indices is important in evaluating the impact of HR. For instance, individual-, group-, team- and firm- level indices include direct contributions to profit, revenue, cost reduction, client base expansion, IPRs generated, and so on. Direct contributions are monetary benefits derived directly as a result of efforts exercised. This is measured in terms of cost savings or financial improvements, profits and revenues.

The following are the areas where HRD can show results or have an impact:

• Talent attraction and acquisition
• Inducting talent: assimilation and integration
• Talent utilization
• Spotting and developing internal talent
• Retaining and rationalizing talent
• Improvements to organizational structure and systems through right sizing, separation management, succession planning, and review and redesigning.
• Intellectual capital formation and augmentation (see Chapter 2 for details)
  • Structural capital
  • Human capital
  • Social capital
  • Emotional capital
  • Relationship capital
  • Knowledge capital

The results of the impact of HRD should be shown in some form or the other. All HRD activities should result in some benefits to the organization, individuals or teams. There can be both direct and indirect measures of impact. The measures are themselves indicators of impact.

Investment indices at the enterprise level

1. Total employee costs, including part time and full time employees: Outsourced employee costs may be excluded or included depending on the assumptions the company would like to make. Normally, it is advisable to exclude them and treat them as technology costs or marketing costs, depending on the nature of the business. However, incomes expected from outsourcing should be included, as also all people costs, including benefits, cost of facilities like schooling, hospitals, townships and all other facilities provided to recruit, maintain, retain, develop and service the employees after retirement or separation.
2. Per employee recruitment cost (the sum of all recruitment costs divided by the number of employees who have been newly recruited and have joined during the year): In calculating recruitment costs, R-COT of all people who have participated in the recruitment process, beginning with indenting, processing, interviewing, and the final selection and recruitment, should be included.
3. Per employee development costs: These may include all direct and indirect costs of training and other development interventions. Direct costs are the fees paid, training-centre costs, material costs and so on, while the indirect costs include the sum of R-COT of all the persons who spent time facilitating interventions, such as training.

Indices of return on investment

Often, ROI is not directly attributable to people investments. However, with certain assumptions, they can be used:

1. Sales per employee: This is not attributable only to sales and marketing staff, but also to those who design and make the product, or contribute to the quality of the product or service offered, its ease of procurement, ease of service and so on. Hence, this is a good index of contributions made by all people. The extent to which one would like to factor in any departmental weightages is left to the organization. In calculating the costs, for example, the number of outsourced employees may be taken out and used as a part of the input costs.
2. Per employee profit: The reasoning is the same as above.
3. Per employee cost saving: This could be applied to select departments where there is a cost-saving drive, for example.
4. Per employee growth in profits: Sometimes this can be selectively applied to certain departments in which interventions have been made. For example, if in the sales and marketing department alone a new performance appraisal system has been introduced, it is possible to single out the per employee growth in sales and calculate the profits. Alternately, if a new product has been introduced and there have been improvements, that could be calculated separately.

These are simply a few examples of indices. They can be used at the firm level and are not suggested for use at the level of individuals.

References

Rao, T. V., 1990, HRD Missionary, New Delhi: Oxford & IBH.

_———, 1995, Human Resources Development: Experiences, Interventions and Strategies, New Delhi: Sage.

_———, 1999, HRD Audit, New Delhi: Response Books.

_———, 2008, HRD Score Card 2500, New Delhi: Response Books.