HR Cost Benefit

Cost Benefit Analysis is normally used in governments to evaluate the demand of a project in certain markets. The project costs and benefits are studied in terms of people’s willingness to fund the benefits. Project inputs are normally seen as opportunity costs. The practice is to list all the stakeholders affected by the project and assign a monetary value to the effect on their welfare as valued by the individuals.

This procedure uses monetary value of initial and ongoing costs against expected returns. Analysts estimate costs and benefits by

• using survey methods
• inferring from market behaviour

For instance, a manager may compare manufacturing and marketing costs against envisioned sales. He/she may decide to produce the product if it is expected that the income will cover the costs. CBA aims to combine all costs and benefits on a common platform. A chosen discount rate is used to calculate future costs and benefits in present-value. Normally, the discount rate for present-value is an interest rate correlated with the financial markets. A high discount rate results in a very low value on the benefit of future generations. This encourages the support for the project as it will help the environment. Historical studies show that in reality, peoples’ discount rates tend to go down. As CBA aims to assess the public’s willingness to pay, this aspect is typically built into studies.

CBA assigns monetary values to intangible items which could contribute to project failure. These items can be loss of reputation, market penetration, business strategy and so on. Cost-benefit calculations uses time value of money by converting the future expected expenses and benefits into a present value amount.

Many tasks inherent in HR functions do not generate an income; rather they incur expense. Therefore organizations frequently cut costs by reducing their HR investment. However, the solution of re-assigning HR tasks internally may not be as cost cutting and efficient as it would appear.

Methods of Estimating Cost

Methods used in estimating costs, are

• Reference to Similar Projects or Structure – This method provides a basis for costing as it evaluates in exhaustive detail of all the resources which previous experience has shown as vital.
• Enquiry from Possible Suppliers or Outsourcing companies – Enquiries from prospective HR service suppliers or outsourcing companies, is a useful way of obtaining the price of HR services. Prices should be qualified according to service levels needed.
• Use of Published Surveys and Official Regulations – Much of the costs, such as guaranteed minimum wages and salaries, are set by official regulations. Surveys provide information the real level of wages and salaries, etc.
• Use of Technical Experts – Technical experts are usually in a position to provide the needed solution, estimate, and procedures. Their expertise helps in assessing costs which depend on specific service level desired.

Reasons to measure HR costs

• Monitor departmental costs
• Measure impact and overall success
• Predict future costs
• Calculate a return of investment (ROI)

HR Cost Types

HR costs can be classified as

• Fixed and variable cost
• Opportunity cost
• The value of money over time
• Estimated value of employee time

Determining the ROI of specific HR intervention, whether as an end in itself or as a means of deciding on policies and practices, is not difficult as it might first appear. Nevertheless, it does require some knowledge of finance, accounting, and the process of capital budgeting. It also requires a consistent, step-by-step process.

Human resource management departments apply various human resource management practices. Firstly, those practices have a cost itself, such as cost of compensation, cost of staffing, cost of training, cost of industrial relations, and others. Furthermore, secondly, human resource is recorded as intangible asset in balance sheet. return on investment of human resource may be matter of financial statement analysis. Human resource management department may compare costs of human resource management practices with benefits of them. Major benefit of human resource might be increasing individual performance.

Cost-benefit analysis focuses on human resource management decisions. It is designed as a tool for managers to organize and communicate their decisions more systematically and rationally.

Cost-benefit analysis begins with the decision. It focuses on determining which alternative is the best resource investment by specifying the alternatives to be considered, the resources each alternative requires, and the likely changes in work force value that each alternative will produce. Thus, cost-benefit analysis focuses on the decisions to be made, and their effects on a dynamic work force, rather than on procedures for estimating the value of human assets at one point in time.