Is it possible to calculate the benefits you are likely to achieve from automating your HR function and embracing new concepts such as talent management? Go back to the fundamental purpose of your HR strategy, and estimate the benefits in cash terms. It sounds simple, but the devil is in the detail, writes HR Zone technology editor John Stokdyk.

The simplest benchmark for measuring the value of your workforce is to divide the organisation's market capitalisation or paper value by the number of employees.

Though crude, this measurement of human capital value effectively rewards organisations that have worked out how to achieve the most value from their employees. Toyota is good international reference as its market capitalisation is bigger than General Motors, Ford and Daimler-Chrysler combined. Being able to gain more value from its people is one of Toyota's key differentiators and a clear reward for its commitment to human capital management (HCM) methods in the 1990s.

The Japanese group's North American motor manufacturing subsidiary has been a PeopleSoft user since 1996 and upgraded to the internet-based PeopleSoft Human Capital Management and Enterprise Portal to deliver HR information to employees in real time to help optimise their activities. Cost reductions arose from automating the HR processes and the company saved a further $50,000 a year due to the lower maintenance costs of the browser-based system, according to Toyota's US vice president for information systems Jim Bolte.

He set the annual savings from self-service HR at $7 million alongside 10 per cent in reduced training costs to achieve an estimated 200 per cent return on the company's investment.

The Toyota example demonstrates that HR and talent management software can not only help organisations achieve their strategic goals, it can also pay off with reduced recruitment, training and administration costs.

How do you measure the benefits?

In essence, there are two sides to the investment equation – on one side are the direct costs of running your existing HR admin system (whether paper or electronic) and those that would arise from selecting and implementing a new system. Then there are indirect costs and benefits to assess, where you need to model the impact of running inefficient systems (for example the costs of bad decisions, inadequate training or high staff turnover) against the potential benefits you would gain from processes that would improve performance, morale and organisational flexibility.

It sounds easy, but the devil is in the detail. How you quantify the expected benefits and whether you achieve the desired returns goes back to the fundamental purpose of your HR function and what you expect it to achieve.

The list that follows collects cost/benefit calculations from a variety of sources, including Vizual HR, which helpfully provides an online HR cost analysis tool on its website. This is not an exhaustive catalogue of HR value drivers and make a point of treating any claimed or expected returns with a healthy dose of scepticism. Instead, treat this list as a starting point for your own estimates and make additions and refinements to match your organisation's goals and structure.

• Improved performance – Automated HR processes save management time, allowing leaders to focus more on value-adding activities. They also help to align employees with departmental and organisational goals – people focusing on their key targets will be more likely to achieve them. Experts suggest that it is reasonable to achieve 1 to 2 per cent productivity improvements through more efficient HR processes and better management of employee goals and development needs.
• Employee motivation and engagement – Better career management and training opportunities that link personal development to the organisation's goals, backed with flexible remuneration and benefits, can lead to more satisfied and productive employees. Your organisation will benefit from lower staff turnover and associated recruitment costs (see below). Service industries, in particular, have identified a clear correlation between the contributions of highly engaged employees to a business's overall profitability.
• Reduced staff turnover – Unexpectedly losing a top executive can incur net costs of 50 – 150 per cent of his or her net salary. Implementing a talent management system that reduces a single executive loss can produce an instant payback. Even a process as simple as conducting orientation sessions with new starters can generate returns by reducing turnover and improve performance and productivity in the first 90 days of employment.
• Automation of employee requests – (aka "self-service") Any business with more than 100 employees pays a heavy cost for managing holidays, absence and appraisal processes. The use of an electronic system allows HR professionals to access information instantly and employees to view their details quickly – saving time and money for all concerned.
• Time & attendance improvements – Companies that have installed time and attendance systems typically see an immediate 1 to 2 per cent increase in attendance levels, according to Vizual HR.
  "Unexpectedly losing a top executive can incur net costs of 50 – 150 per cent of his/her net salary. Implementing a talent management system that reduces a single executive loss can produce an instant payback."
• Managing absence – Objective measurement and analysis can highlight unacceptable costs to the organisation that may need remedial action. Just as importantly, it may help to establish that a limited problem may exist where a few longer-term cases create the impression of major overall problem.
• Reduced grievances – Effective grievance and labour relations reporting can help organisations reduce the number of grievances handled or work stoppages, and lead to improved employee satisfaction.
• Headcount reductions – Streamlining HR processes and self-service applications require less administrative drudge work. The HR function can achieve better results with fewer people, or you can move people from low value positions to roles where they can have a more positive impact. Outsourcing payroll or HR removes direct employment costs and replaces it with a more flexible, negotiable cost model. Instead of worrying about HR and compliance issues, your senior executives are freed to focus on their primary responsibilities.

There are other cost savings and benefits that can arise from HR transformation that you need to identify and quantify when building the business case. Make sure the gains and savings are clearly set out in your project specification and that the reports and data you will get back will provide evidence to measure whether the system is delivering against the targets you set.

As a parting comment to the unwary, PA Consulting Group's Bettina Pickering reminds companies not to neglect the importance of monitoring and measuring when they embark on HR software installations. "Many companies never see a payback from implementing such a system because they don't baseline, so they won't really know if they've gained or not."

Calculating ROI

The Philips ROI methodology promoted by the ROI Institute sets out a 10-step process. The first stage is to identify the specific business drivers that the solution should address and discuss how it will contribute to those drivers.

During the second detailed planning phase, the baseline data that will underpin your ROI calculations process must be clearly defined and collected. The information will need to be assessed and validated through further business impact assessments, during which the objectives may need to be revised to ensure that stakeholders agree on the desired application/behavior change and the business impact measures that will be influenced.

Ultimately these business impacts are converted to monetary values to calculate the ROI. Intangible benefits need to be identified and reported along with business metric improvements. Taking these into account, the ROI is produced by comparing the monetary benefit calculation with the costs of change, including any incurred to overcome barriers encountered during the transformation.