The False Argument of ROI in HR Investments


Nowadays, when pressing down costs and "not spending beyond the budget", in the best german style, is the most important business priority, I hear a lot, when I visit my clients, statements as: "I'm overwhelmed!!... but I cannot ask for more resources for my area, because I cannot justify the ROI of the investment!!".

In these cases, I usually offer my client to help him/her to look for together for ways in which this ROI "can" be justified properly, in order to ask the resources to the company management, and I usually offer it for free, so my client can have a glimpse of how I work, and the value that I can offer them. But what is actually surprising, is tha fact that the usual answer to my offer is "oh, thanks!!, but not I have no time for that!!". If you think it twice, you will notice the strong contradiction of claiming about the lack of resources and/or budget, and then rejecting the help on looking for a solution!! this attitude is like accepting that what we are living nowadays is a kind of "perfect storm" because of God's will, and som there's nothing we can do about it, just accept it and wait for  it to end. Sorry to say, but, if this is being a directive.... Please Help us, oh God !!

What actually happens in most of the cases, is that the Directive ( that usually is the HR Director in my case ) does not want to be visible. There is a trend to "become organizationally invisible", because, it is supposedly easier to go through the storm without suffering damages. So, being invisible, the probabilities of conserving the job position seem to be higher. But, obviously, this attitude is quite similar to the now famous captain of the "Concordia" ship in Italy, giving instructions on evacuation while he was in the boat near the beach!! Quite frankly, it is not very ethical, having the privileges of a directive, and then running off the boat when it begin to sink!! Let it be listen by whoever interested, but mainly the CEO's worried about motivation, engagement and productivity of their co-workers, because this kind of attitude destroys completely the credibility of the direction of a company.

Regarding the ROI requirement, it uses to be required by the General Management or by the CFO. And it is quite important to remark some facts connected with the ROI that we'll try to develop in the last weeks. The first one, is the fact that the financial ROI, as we know it, is a math formula more or less simple, that supposes, as almost all mathematical formulas, that in the environment, one variable is changing and the rest are stable. Being so the hypothetical scenario, in order to calculate the ROU we need to consider the investment amount, and I add to it the amounts that will be received in the future, in different moments of time, as a compensation or profit because of the investment, discounted at a rate usually considered as the market value of money.


But in real life, things never work like that.ROI  is usually considered as a valid methodology of deciding about an investment (positive ROI, and ROI bigger than the medium ROI of the sector or industry). As an example, let's say that we evaluate the investment on a machine that will help us to be more productive, saving costs in our productive process. In this case, the net revenue that we will receive is the saved cost on each production batch, so I can calculate if it will balance the investment in a reasonable period of time, let's say in one or two years. This result would mean that in one or two years I would have receive back the investment I did on the machine, plus a certain minimum profit, according to my requirements. So, with this evaluation, full of happiness, we all, in the direction committee, decide to approve the investment!!

But we don't think that, for this calculation to be true, there are certain things that need to "be stable", as for example, that the production rhythm must be maintained during the next two years, and consequently, our inventory management must continue being great as it is now, and of course, our sales volume must be also the same. And for all this to happen, there is a kind of strange variable that must intervene: people!!. People, that, perhaps, just perhaps, are not quite motivated, because due to this crisis, their salary is lower that it was, and it is quite difficult for them to cover their monthly expenses; or perhaps, because her husband or his wife were fired last week, and they don't know how they will be able to pay their mortgage... people, that are not like machines, that don't produce in a constant, stable and perfect rhythm.

But, if the HR Director asks for more resources, probably, the Direction committee will discuss much more than in the case of the machine, because calculating the ROI of a worker that is not engaged directly in sales or production tasks is much more difficult!!, in many cases, the HR Director won't have the approval, probably because "we need become efficient and save costs!!"!!


Nordiske-flag-660x350-1536833682Let me tell you something else on this theme. Since mid 90's of the last century, mainly in the Nordic-Scandinavian countries, the concept of "intellectual capital" started to be used. The Swedish company, Skandia, was a pioneer in this HR development, including a kind of scorecard, for the need of measuring the HR performance. This development was not due to "good will", or "human style" of management. Nothing about vagues reasons!!..No, the fact that many companies and academics are not facing nowadays is the question of the value of a company. We are completely surrendered to the idea that the value of a company is what the markets say, but we all know that speculation is a very important factor that distorts the real value of a company. If we calculate the fundamentals of a company, we approximate a lot to its real value. But, what happens when the value in the balance sheet tends to be zero?..Yep!!..This is happening since decades, and still we don't have a clear answer, at least in the same way that we have a ROI for machines and financial investments!!.. As a fact, more than 50% of the real value of a modern company, even if it is industrial, is not the net value that we can calculate with the help of the balance sheet and the P & L. If we extract the debts value from the assets , the net capital is not the company value.

Think about Google, or Apple!!.. the market value is not the accounting value!!..The market values the future supposed capability of the organization of creating future profit, and this "capability" is directly connected to the "team", to the "people". Do you remember how the market went down with the rumors of illness of Steve Jobs? If just one person, even such a genius, could influence the value of a company in such a way, is it not this a clear proof that the market and we all "value" intuitively the people capability as the main, or at least one of the main assets in modern organizations?... Of course it is, but still we have not enough good maths to express and calculate it!!..

However, still is more difficult to approve investments in "People" than in machines....because we cannot justify the ROI!! ....

It will continue. 


Joaquin Aguado
Joaquin Aguado