While Human Capital Return on Investment measures the aggregated success of your talent acquisition and workforce management efforts, it doesn’t explicitly guide you on where to focus future spending. Here’s how to select the initiatives to give you a long-term performance edge.
In part one of this two-part series, we discussed the benefits of calculating Human Capital Return on Investment (HCROI) as a measure of profitability for your organization. When companies invest in their people, they can improve their hiring, retention, employee loyalty, reputation, and financial returns—these are the hallmarks of companies that thrive over the long term. So, instead of thinking of human capital as a sunk cost or an expense, you can and should use HCROI to show how much value your people bring in, which is what the Securities and Exchange Commission (SEC) is urging companies to do.
However, once you’ve calculated your Human Capital ROI, the real work begins—figuring out how to turn this metric into tangible, beneficial action.
For the recruiting function, it’s especially tough to drive HCROI improvements. Talent acquisition has the lowest ROI of any human capital initiative because it requires resources spent on candidates who will never get hired to deliver productivity returns. Unlike with learning and development or employee engagement programs, you’re starting from a negative ROI, which means you have to source, screen, and recruit talent with the highest level of efficiency to minimize that initial deficit. But, the alternative is worse—never hiring, growing, or replacing. Hiring, however inefficiently, is a business imperative.
How it’s done will vary from organization to organization. In this article, we’re drawing on insights from our recent roundtable with Dr. Solange Charas, CEO and Founder of HCMoneyBall, to walk you through some strategies to help you drive that all-important HCROI number up.
#1: Use the data to identify high-impact initiatives
Talent acquisition and human resources are complex, multivariate functions. There isn’t one activity that drives performance outcomes. Instead, it’s the interaction between getting the right people, training them, and delivering the type of experiences they need to be productive, inspired, and engaged that creates value for the organization.
So, if you’re wondering whether it’s better to invest in recruitment programs versus retention programs, for example, or this tool versus that tool, the answer depends on your company’s specifics. You need to figure out which levers to pull to generate the best outcome for your organization because there is no one size fits all.
However, one universal truth stands out: of all the possible initiatives you could implement, one or two will have significant needle-moving impacts. These initiatives will generate the most bang for your buck by driving up HCROI. How can you identify which initiatives these are? The answer is simple: use your data.
“Don’t shoot squirrels, hunt elephants,” Dr. Charas says. “Make changes to programs that will have a big impact, not a little impact. Because if you’re going to invest dollars, invest dollars in a program that’s going actually to generate value for the organization. And what does value look like? Value ultimately will be measured by HCROI—what’s the return on investment of every dollar you put in a program?”
#2: Focus on the needs of the many, not the the few
Often, talent acquisition leaders worry that selecting programs, tools, and technology based on their financial returns will turn candidates into numbers and dehumanize the recruiting process. Dr Charas argues that it does the opposite—it’s a way of understanding what will benefit the majority of candidates and employees.
“Listen to your workforce and make decisions that are going to impact the majority of people, not the squeaky wheel, which is often what happens when we make decisions not based on data,” she says. As a function, TA often firefights, taking care of the problem, person, or group that aggravates the most or complains the loudest. When you don’t know which initiatives will genuinely benefit the company, that’s what you do—you take care of the most glaring issue regardless of whether it offers the most substantial returns.
A better approach is to speak to your workforce, interview those leaving about their reasons, gather candidate feedback on their experiences, and figure out what different generations need from a hiring perspective and beyond. Use those insights to formulate your hypothesis and run the numbers.
When you give people what the majority wants and needs, the return on investment will be self-sustaining.
#3: Use HCROI as the guiding light for business-case building
It’s tempting to see talent acquisition in isolation and go all-in on initiatives that you, as an experienced practitioner, intuitively feel will add value. We’re highly attuned to candidate experience in this space, for example, because we know that a positive candidate experience can deliver results in the long run—even if we don’t necessarily run a cost-benefit analysis and can’t articulate what those results might be.
Tech providers jump on this intuitive understanding and tout their products as a silver bullet for what are only vanity metrics since they’re not tied to specific business outcomes that will help propel the business forward. You might get a faster time-to-fill or a better interview-to-hire ratio, but what if you hire people who do not deliver labor productivity returns?
“The end goal should be an organizational level goal, not an HR level goal,” Dr. Charas says. “What’s the benefit that we expect from improving the candidate experience? And is the right cost-benefit there? So, when you think about these vanity technology platforms, decide what you expect the organization to benefit from and then use data to determine whether you’re on the right track.”
#4: Shine the spotlight on inefficiencies
There will always be optimization opportunities in the recruitment process, but the reality is that you can’t fix everything. Before you make changes or invest in new areas, it’s critical to identify the areas where you are losing money and focus your efforts there.
For Dr. Charas, attrition is the most considerable cost leakage companies experience. Not only is attrition a net negative for the business, but it’s also a hidden expense that shows up in overtime, temp labor costs, and maybe shuffling employees around. This ramps up burnout and often leads to more people leaving. If you don’t address it, it’s like a leak in your boat that keeps letting in more water.
“Because it shows up indirectly, management does not take the time to understand it,” Dr. Charas says.
She shares the story of a company in the professional services industry paying people $85,000 a year on average, generating around $235,000 per person of revenue—2.8 times their salary. When this firm thought about attrition, they phrased it positively—we save $85,000 every time someone leaves. Dr. Charas switched the conversation to the opportunity cost: the company wasn’t saving $85,000; they were losing 2.8 times that in revenue. “The financial people took a step back and said, yes, you’re right. The more people we have serving clients, the more capacity we have, the bigger our company can grow, and the more value we create for our stakeholders. And these people are relatively inexpensive compared to the value they’re generating.”
So, it’s all about weighing up efficiency and inefficiency from every angle—costs, opportunity costs, revenue, liabilities, and so on—and constantly circling back to HCROI as the ultimate measure of value.
Final thoughts
The fundamental idea behind using HCROI is to connect your recruiting investments and improvements to enterprise goals, comparing costs with concrete outcomes. If there is a connection, there is potential, measurable value to the business. If there isn’t, it’s time to cut programs that don’t work and invest in more promising initiatives.
Adding data to your intuition helps you speak in numbers the finance team can’t ignore. It’s about blending what you know with what you can prove, raising the status of TA from a cost burden to one that provides value to the entire company. Calculating HCROI cannot be a moment-in-time calculation or even once a year; you must regularly calculate the HCROI, ensuring as many variables are held steady as possible, to ensure your initiatives are effective.
