Business Mentor, Consultant And Trainer
Ta & Business Hr
Manager - Corporate Hr
Thanks for raising a query that made us think. Actually, discussion on HR forums should happen on this type of subjects. You deserve appreciation for writing your post with clarity and that too by not giving short shrift to the grammar!
Now coming to your query. The calculation that you have done is correct. I have gone through the Excel sheet from where you have taken the figures. In the example that you have given, ROI of 2.67 shows for every Rupee spent on human resources, the organisation gets the benefit of Rs 2.67 OR the ROI on human capital is 267%
I recommend you going through the following link to improve your understanding of the subject:
Human Capital Return on Investment Š† Theories and practices of compensations and benefits
Now the question arises is will there be different HCROI for the manufacturing sector and service sector. This is because the service sector does not have inventory therefore, their non-human expenses are less. So will there be an impact on ROI? To know the difference, I have studied balance sheets of two companies for the financial year ended on 31-03-2017. One is a prominent IT company and another is a Polyester Manufacturing company. The calculation is as below:
Example of IT Company: -
Total Revenue: - Rs 62,351 Cr
Operating & Direct Expenses: - Rs 6,044 Cr
Other Expenses: - Rs 5,094 Cr
Total C & B Expenses: - Rs 30,944 Cr
Therefore, HCROI = [62,351 – (6,044 + 5,094)]/30,944 = 2.65
Interpretation: - For every Rupee spent on the human resources, the company gets a return of Rs 2.65 OR ROI on human capital is 265%
Example of Polyester Manufacturing Company: -
Total Revenue: - Rs 866.78 Cr
Inventory: - 435.64 Cr
Change in inventory: - 22.64 Cr
Other expenses: - Rs 262.12
Total employee cost: - 68.41 Cr
Therefore, HCROI = [866.78 – (435.64 +22.64 +262.12)]/68.41 = 3.13
Interpretation: - For every Rupee spent on the human resources, the company gets a return of Rs 3.13 OR ROI on human capital is 313%
Learning for HR: -
a) The calculation of HCROI brings forth the importance of management of human resources. To improve this ratio, employees need to be trained, groomed, their career needs to be planned, the attrition percentage has to be managed. All this will help in the reduction of operating expenses, which in turn will improve HCROI.
b) HR professionals just cannot stop at the introduction of HR interventions like competency mapping, psychometric testing, this or that leadership model and so on. They need to measure the increase in HCROI before and after the introduction of the HR intervention.
Special comments for the companies where inventories are held: - Employee training improves the productivity of the employees. HR professionals need to measure the increase in HCROI because of employee training. Secondly, manufacturing companies, trading companies, real estate or construction company hold inventory for their operations. Reduction in inventory will obviously reduce the non-human expenses and it will help in the improvement of HCROI. Unfortunately, many HR professionals have a very poor understanding of supply chain management or even purchase management. Therefore, training of procurement professionals or improving their productivity is in the interest of HR professionals!
2nd May 2018 From India, Bangalore
Can you please elaborate on how to improve HCROI in service industry?
4th May 2018 From India, Delhi
Best way to improve HCROI in the service industry is to improve capacity utilisation. Higher the capacity utilisation, lower the manpower requirement. This, in turn, improves HCROI. However, before understanding the capacity utilisation, let us understand what capacity is.
A number of seats in the travel bus or aeroplane are examples of the capacity. Now suppose if the aeroplane is filled with the 50% or 100% capacity, the requirement of the number of cabin crew or grounds crew remains the same. It does not change. As far as travel bus is concerned, whether 50% of the seats are booked or 100% booked, the driver and conductor remain the same.
To improve the capacity utilisation, or to avoid the loss of capacity when the services are rendered, it is important to get the repeat business by the customers. Repeat business depends provided the service-providing company is able to develop loyal customers. Higher the loyalty, higher is not just the repeat business but referral business too. However, loyalty cannot be developed overnight. It requires sustained efforts to provide quality services consistently. Timeliness and flawlessness in providing the services matters lot. Again, this is possible provided the staff who are involved in providing the services are taught the processes and variation in the processes if any, is measured.
Another factor of improving capacity utilisation is asset utilisation. Improving the asset utilisation is possible provided the assets are movable or portable. How many air-miles an aeroplane travels in 24 hours, decides the utilisation of the aeroplane, which in turn is nothing but a measurement of asset utilisation.
The same thing applies to travel bus as well. After overnight travel, many travel buses are idle during the day. Transport companies can think of day-time utilisation of the buses. This will improve asset utilisation and in turn capacity utilisation. Therefore, HCROI also depends on asset utilisation.
There is a limited scope to improve asset utilisation in hospital or movie hall. The number of beds is the capacity in the hospital and the number of seats in the is the capacity in the movie hall. Both the service providers can plan to increase the capacity utilisation but both the services are immovable hence there is a limit for asset utilisation.
Lastly, the quality of the services improves the brand image and it helps to generate the additional business. This additional business helps in further expansion of the services. Expansion of the services lowers the backend costs. This reduction, in turn, improves the HCROI.
Capacity utilisation also depends on the optimisation of the costs associated with the business or optimisation of the consumption of the resources. This optimisation is achieved provided the Operations Research (OR) techniques are used. Unfortunately, OR techniques are not used prominently in India and for many HR professionals, the subject of OR is just Latin or Greek!
Hope the above clarification is sufficient to you.
7th May 2018 From India, Bangalore