Confused About HCROI: Is It a Percentage or a Total Amount? Seeking Clarity

Dear All, I would like to seek your advice regarding the outcome of the HCROI. Is it an amount or a percentage? I am in doubt.

Understanding HCROI Calculation

For instance, HCROI = (Revenue - Non-human Capital Expenses) / Human Capital Expenses or can be explained as:

The formula for Human Capital ROI (HCROI) is Revenue less (Operating Expenses less (Compensation plus Benefit Costs)) divided by (Compensation plus Benefit costs).

So, if my Revenue is $1,000,000, Operating Expenses are $500,000, Compensation is $200,000, and Benefit Costs are $100,000. The HCROI calculation would be:

HCROI = [1000000 - {500000 - (200000 + 100000)}] / (200000 + 100000)

The result will be 800000 / 300000 = 2.66. Therefore, the HCROI is 2.66. I would like to know if this 2.66%? Is the Human Capital ROI 2.66% of Revenue, or is it 2.66 lakh?

Please advise.

Dear Amlan,

Thanks for raising a query that made us think. Actually, discussions on HR forums should happen on these types of subjects. You deserve appreciation for writing your post with clarity and 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, an ROI of 2.67 shows that for every Rupee spent on human resources, the organization gets the benefit of Rs 2.67, or the ROI on human capital is 267%.

I recommend you go through the following link to improve your understanding of the subject:

Human Capital Return on Investment – Theories and Practices of Compensations and Benefits

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 the 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 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 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 highlights the importance of managing human resources. To improve this ratio, employees need to be trained, groomed, and their careers need to be planned. The attrition percentage has to be managed. All this will help in reducing operating expenses, which in turn will improve HCROI.

b) HR professionals cannot stop at the introduction of HR interventions like competency mapping, psychometric testing, or leadership models. They need to measure the increase in HCROI before and after the introduction of the HR intervention.

Special comments for 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 companies hold inventory for their operations. Reduction in inventory will obviously reduce the non-human expenses and help in improving 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!

Thanks,

Dinesh Divekar

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Thank you, Dinesh Sir, for explaining HCROI so explicitly.

Can you please elaborate on how to improve HCROI in the service industry?

Dear Dr. Shipra Agarwal Narang,

Understanding Capacity Utilization in the Service Industry

The best way to improve HCROI in the service industry is to enhance capacity utilization. The higher the capacity utilization, the lower the manpower requirement, which, in turn, improves HCROI. However, before delving into capacity utilization, let us first understand what capacity entails.

The number of seats on a travel bus or airplane serves as examples of capacity. For instance, if an airplane is filled to 50% or 100% of its capacity, the requirement for cabin crew or ground crew remains constant; it does not fluctuate. Similarly, in the case of a travel bus, whether 50% or 100% of the seats are booked, the driver and conductor remain unchanged.

Enhancing Capacity Utilization through Repeat Business

To enhance capacity utilization or prevent the loss of capacity during service delivery, it is crucial to cultivate repeat business from customers. Repeat business is contingent on the service provider's ability to foster loyal customers. Greater loyalty not only leads to repeat business but also generates referral business. However, building loyalty is a gradual process that necessitates consistent efforts to deliver high-quality services. Punctuality and precision in service provision play significant roles. Achieving this level of service quality is feasible when staff members involved in service delivery are trained in the processes, and any process variations are monitored.

Asset Utilization as a Factor in Capacity Utilization

Another factor in boosting capacity utilization is asset utilization. Increasing asset utilization is viable when assets are movable or portable. The utilization of an airplane, measured by the air-miles traveled in 24 hours, determines its asset utilization.

The same principle applies to travel buses. Many buses remain idle during the day after overnight trips. Transport companies can explore daytime utilization strategies for buses, thereby enhancing asset utilization and, consequently, capacity utilization. Therefore, HCROI is also influenced by asset utilization.

Improving asset utilization has limited scope in hospitals or movie halls. Hospital bed capacity and the number of seats in movie halls represent their respective capacities. While service providers in these sectors can aim to boost capacity utilization, the immovable nature of their services imposes constraints on asset utilization.

Service Quality and Brand Image

Additionally, service quality enhances the brand image and attracts additional business, facilitating service expansion. As services grow, backend costs decrease, consequently enhancing HCROI.

Optimizing Business Costs

Capacity utilization also hinges on optimizing business costs or resource consumption. This optimization is achievable through the application of Operations Research (OR) techniques. Unfortunately, OR techniques are not widely utilized in India, and for many HR professionals, OR remains an esoteric subject.

I trust the above explanation suffices.

Thanks,

Dinesh Divekar

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