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Investment Associates

Identify three ways that the HR metrics can be used to justify the purchase on an HRIS.

In the contemporary business environment, many organizations have identified that an effective Human Resources (HR) management enhances organizational effeciencies. To enhnace the functions of HR department, firms have realized that the integration of Human Resources Information System (HRIS) provides primary infrastrutures by which HR department performs effectively. Despite the benefits that an organization could accrue from the integration of HRIS investment, effective cost-benefit analysis (CBA) is critical to make an investment decision. Without a comprehensive CBA on HRIS investment, the HRIS project may be disatratrous and a firm may not enjoy the benefits from such investment. One of the effective methods that a firm could employ for the justification of HRIS investment is the use of human resources metrics. The HR metrics reveal the number of factors human resources contribute to the business advantages. By using HR metrics, an organization will be able to measure whether there is a need to invest on HRIS. While there are several methods HR metrics can be used to justify HRIS investment, this paper considers three of them.

One of the most effective HR metrics to justify HRIS investment is the use of Human Capital ROI (Return on Investment). A Human Capital ROI measures the "return on investment ratio for employees" (.( Calson. & Kavanagh P. 124). The decision to continue with the HRIS investment will depend on the ratio of rate of returns that an organization is getting from employees. A formula to calculate the Human Capital ROI is as follows:

Revenue - (Operating Expense - {Compensation Cost + Benefit cost})

(Compensation cost + Benefit cost)

Using the formula will assist a firm to make an HRIS investment decision. Typically, a firm will proceed with the HRIS investment if it revealed that HRIS project will increase the company's the ratio of return on Human Capital investment.

Human Capital Value Added (HCVA) is another HR metrics to justify the HRIS investment. Human Capital Value Added is used to measure the level an employee add values to an organization. The workforce knowledge is very important in measuring a firm's performances. An organization with large pool of highly skilled employee will consider investing in HR department than an organization with high percentage of unskilled or semi-skilled labor. A formula to calculate the Human Capital Value Added is as follows:

Revenue - (Operating Expense - {Compensation Cost + Benefit cost})

Total Number of FTE

The formula is to measure the profitability of firm's employee. For example, $100,000,000 - $70, 000,000 - $34,000,000

HCVA =

$500

HCVA = $44, 000, 000

$500

HCVA = $88,000

The result of HCVA will influence management decision to proceed with the HRIS investment.

An annual employee turnover rate is another metrics that could be used to determine the HRIS investment. Employee turnover measures the rate employee leave an organization for other organization. In the United States, many employees prefer to work in an environment that would improve their IT skills. Where this is lacking, there would high rate of employee turnover. The formula to measure the annual employee turnover rate is as follows:

# of employees existing the job

Avg actual # of Employees during the period

X 12

+ # mos. In period

With the formula, an organization will determine if the rate employees are leaving the company is over the national average. A company may invest in HRIS to improve employees' working environment and minimize the rate employees are leaving the company if there is high rate of annual employee turnover. .( Calson. & Kavanagh)

2. In preparing a Cost-Benefit Analysis for the project, discuss some of the costs and benefits involved in this investment in HRIS

A Cost-Benefit analysis is simply the comparison of the projected costs with the benefits that will be accrued from an investment. Making Cost-Benefit Analysis before making investment decision is very important to avoid project failing to meet the user's requirements.Typically, the cost of an investment is an outlay costs required for the purchase, implementation and maintenance of an investment. On the other hand, benefits are the financial gain in the investment life cycle. There are two types of costs that would be used when preparing CBA. The direct and indirect costs are the major type of costs used for CBA. To prepare costs for HRIS investment, the direct costs will be costs that will be used to buy computer hardware, and software packages, service agreement, installation support, software support, training, and software license. However, indirect costs are the costs that cannot be easily quantified. For example, during the implementation of the HRIS investment, indirect costs would be costs of loss of productivity in the other department in the organization. To enjoy the benefits in the HRIS investments, an organization should ensure that benefits derived from an investment must be greater than the costs incurred for an investment.

There are direct and indirect benefits that could be enjoyed as a result of an HRIS investment. The direct benefits will be revenue enhancement during the implementation of an IT investment. With HRIS investment, an organization could enjoy increase in revenue because of employees will better equipped with modern IT equipments for HR operations. The direct benefits will also include the reduction in travelling expenses, reduced facility costs, reduced costs worker's replacement and reduced instructor's expenses. Indirect benefits from an HRIS investment will be improvement of training effectiveness. Indirect benefits of an HRIS investment may also be the reduction of employee's turnover. Typically, employee's turnover will be expected because many workers will begin to derive more satisfaction in their working environment. .( Calson. & Kavanagh)

3. Discuss three common problems that could occur in a Cost-Benefit Analysis for an HRIS and how would one avoid them.

One of the common problems that could arise in a Cost-Benefit Analysis for an HRIS is the limitation of the accuracy of data when using direct estimation for cost-benefit analysis. The accuracy of the analysis solely depends on the expertise of the estimator. To avoid this problem, it is recommended to use multiple estimators for the cost-benefit analysis. An organization will compare the results of each estimator before making an investment decision.

More problems may occur when using internal assessment for cost-benefit analysis. An organization needs to have sufficient historical data to use internal assessment for analysis. With lack of sufficient historical data to conduct analysis, CBA may become problematic.

Another problem may occur when an organization decides to use benchmark data for CBA. The benchmark data is the use of the magnitude of indirect benefits of other firms. Benchmarking is advantageous for firms within the same industry. The shortcoming of this approach is that the experience of other firms may not be applicable to a firm implementing CBA. To avoid this problem, a firm is advised to use combination of direct estimation, internal assessment and benchmarking for cost-benefit analysis for HRIS investment. .( Calson. & Kavanagh)