Dear Amlan,
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 І 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!
Thanks,
Dinesh Divekar
+91-9900155394