Tag: Advanced Accounting B.com Notes

Management Styles

An organization experiences different management styles that may change or remain steady with time.

There are different management styles that we come across while observing the management patterns of different private and public sector companies.

Collegial Style

In the collegial style, resources and rewards are uniformly distributed. The management control over the employees is restricted, resulting into employee empowerment. Individual duty is the basis of organizational performance.

Organizational success depends on the commitment that an employee has towards the work and the business. This key element and distributed values help create a unity of direction and focus on the part of the employees.

Meritocratic Style

In the meritocratic style, employees are bothered about productivity and cohesion. The management puts stress on performance. In short, this management style believes in the fact that power should be distributed on the merit basis.

Appointments are made and duties are assigned to individuals on the basis of their “merits”, namely intelligence, credentials, and education, which are determined through evaluations or examinations, for example, Civil Service Exams.

Elite Style

In the elite management style, the organizational hierarchy is highly improvised. Power, resources, and rewards are focused at the top levels of the hierarchy. Employees have no say in the decisions made by the senior management.

Leadership Style

The leadership style of management has a lot in common with the elite style of management, but rather than a faction of leaders at the top level, it has leaders at different levels of the hierarchy.

Structure

Every line manager is responsible for planning manpower of the respective department and the top management is responsible for the planning of resources for the entire organisation. The personnel department supplies relevant information and data to all the line managers and helps those regarding interdepartmental transfers, promotions, demotions etc. Personnel department also helps in using the techniques and forecasting the manpower.

Personnel department forecasts internal mobility surplus or deficit of human resources for the entire organisation, prepares action plans regarding redeployment, redundancy, employment, development and internal mobility and submits plans to the management at the top which either by its own or by appointing a committee reviews departmental plans and overall plans, make necessary adjustments and finalises the plans. Personnel department in its turn prepares modified plans for the departments based on finalised overall plan and communicates them to respective heads of department.

Personnel department may co-ordinate the control activity of human resource plan and it has to send coordinated reports to the management at the top for actual review, control and monitor the human resource system. The management at the top may appoint a committee consisting of heads of department and external identification of deviations, reasons thereof and steps to be taken to correct the deviations. The committee further helps the management in executing the programmes of corrections.

Human Resource Plan Factors:

External Factors:

• Government Policies: Policies of the government like labour policy, industrial relations policy, policy towards reserving certain jobs for different communities and sons-of the soil, etc. affect the HRP.
• Level of Economic Development: Level of economic development determines the level of HRD in the country and thereby the supply of human resources in the future in the country.
• Business Environment: External business environmental factors influence the volume and mix of production and thereby the future demand for human resources.
• Level of Technology: Level of technology determines the kind of human resources required.
• International Factors: International factors like the demand for resources and supply of human resources in various countries.
• Outsourcing: Availability of outsourcing facilities with required skills and knowledge of people reduces the dependency on HRP and vice-versa.

Internal Factors:

• Company policies and strategies: Company policies and strategies relating to expansion, diversification, alliances, etc. determines the human resource demand in terms of quality and quantity.
• Human resource policies: Human resources policies of the company regarding quality of human resource, compensation level, quality of work-life, etc., influences human resource plan.
• Job analysis: Fundamentally, human resource plan is based on job analysis. Job description and job specification determines the kind of employees required.
• Time horizons: Companies with stable competitive environment can plan for the long run whereas the firms with unstable competitive environment can plan for only short- term range.
• Type and quality of information: Any planning process needs qualitative and accurate information. This is more so with human resource plan; strategic, organisational and specific information.
• Company’s production operations policy: Company’s policy regarding how much to produce and how much to buy from outside to prepare a final product influence the number and kind of people required.
• Trade unions: Influence of trade unions regarding number of working hours per week, recruitment sources, etc., affect the HRP.

Performance Evaluation and Planning is a key process for Duke. Its purpose is to ensure employees receive candid performance information for the year and clear goals and development plans for the coming year. Evaluations will be used in making pay increase decisions and other personnel decisions.

1. Evaluation of Performance for Past Year.

Role Responsibilities

Responsibilities are based on what is included in the job description and other duties as assigned

• The evaluation is based on the extent to which the employee satisfactorily performed the regular duties of the job

Individual Goals

Individual goals should be based on, and linked to, the needs and direction of the department.

• Goals are established and agreed upon by manager and employee at the beginning of the performance year and should be expressed as measurable actions and results
• The evaluation is based on the level of achievement of goals

Behaviors

Behaviors are the “how” an individual acted in performing responsibilities and achieving goals. Behaviors:

• Measure and focus on how the work gets done, not just what gets done
• Includes, but not limited to, the behaviors listed in the Duke Values

Overall Evaluation

Provides an overall evaluation of how an individual performed based on the results of his/her role responsibilities, individual goals and behaviors. The overall evaluation should be:

• Supported by the appropriate documentation or comments
• Reviewed with the employee after approval of the managers manager

2. Planning for the Coming Year

Goals for Coming Year

This section lists the category of goals for the individual and a description of the goal and measures or targets.

• Goals may be activities to complete that are outside the regular job responsibilities, i.e., complete a special project
• Goals may also be specific measurable targets (i.e., achieve a percentage reduction in budget, or improve quality by a certain amount)

Development Plan

Identifies the skill or behavior improvement areas and individual needs to perform in their current job or prepare for a future job. The development plan:

• Is established and agreed upon by manager and employee at the end of the performance year
• Describes the development needed and how the individual will develop (i.e., through training, special assignment, coaching, practice, etc.)

HRP objectives include:

• Adapting to rapid technology changes
• Powering product innovation
• Adjusting to a more globalized economy
• Preparing for generational and cultural shifts
• Anticipating job and skill changes
• Facilitating growth
• Improving business operations
• Mitigating risk
• Preventing talent shortage or surplus
• Complying with local, state, and federal regulations
• Implementing a successful onboarding process

Process

• Determining the Objectives of Human Resource Planning: The foremost step in every process is the determination of the objectives for which the process is to be carried on. The objective for which the manpower planning is to be done should be defined precisely, so as to ensure that a right number of people for the right kind of job are selected.

The objectives can vary across the several departments in the organization such as the personnel demand may differ in marketing, finance, production, HR department, based on their roles or functions.

• Analyzing Current Manpower Inventory: The next step is to analyze the current manpower supply in the organization through the stored information about the employees in terms of their experience, proficiency, skills, etc. required to perform a particular job.

Also, the future vacancies can be estimated, so as to plan for the manpower from both the internal (within the current employees) and the external (hiring candidates from outside) sources. Thus, it is to be ensured that reservoir of talent is maintained to meet any vacancy arising in the near future.

• Forecasting Demand and Supply of Human Resources: Once the inventory of talented manpower is maintained; the next step is to match the demand for the manpower arising in the future with the supply or available resources with the organization.

Here, the required skills of personnel for a particular job are matched with the job description and specification.

• Analyzing the Manpower Gaps: After forecasting the demand and supply, the manpower gaps can be easily evaluated. In case the demand is more than the supply of human resources, that means there is a deficit, and thus, new candidates are to be hired.

Whereas, if the Demand is less than supply, there arises a surplus in the human resources, and hence, the employees have to be removed either in the form of termination, retirement, layoff, transfer, etc.

• Employment Plan/Action Plan: Once the manpower gaps are evaluated, the action plan is to be formulated accordingly. In a case of a deficit, the firm may go either for recruitment, training, interdepartmental transfer plans whereas in the case of a surplus, the voluntary retirement schemes, redeployment, transfer, layoff, could be followed.
• Training and Development: The training is not only for the new joinees but also for the existing employees who are required to update their skills from time to time.

After the employment plan, the training programmes are conducted to equip the new employees as well as the old ones with the requisite skills to be performed on a particular job.

• Appraisal of Manpower Planning: Finally, the effectiveness of the manpower planning process is to be evaluated. Here the human resource plan is compared with its actual implementation to ensure the availability of a number of employees for several jobs.

A HR practitioner is a person who works within the human resources department in a company or organization. Duties are varied and include finding candidates to fill job vacancies, writing job descriptions and person specifications, assisting employees with any problems they are experiencing and ensuring all paperwork such as employment contracts are up-to-date. HR practitioners often specialize in a variety of sectors.

Talent Acquisition should be anchored in the principle of “hiring for attitude and polishing the skills”. It should be HR’s lookout if the applicant is culturally fitted to the organization or not.

Employee Relations / Engagement is expected to create programs that will enhance the work or professional relations within the organization. And Employee Discipline is centered on the principles of due process while upholding respect and impartiality in handling each administrative case.

It is also HR’s responsibility to ensure that the Compensation and Benefits of the organization are externally competitive and internally equittable. If those will not be given emphasis, productive and talented employees will be pirated by others. There should also be a Performance Management System that is clearly established and is less subjective in measuring the actual performance of each employee that is based on updated job description and behavioral or attitudinal attributes that were laid down from the very beginning.

HR should also rally for budget on Learning and Development in order to create a culture of voraciousness to learn and upgrade one’s self. Without sharpening the saw of the employees, after a period of time, the organization will have a problem promoting qualified employees because there is a surplus of dead logs.

Organizational Development is centered on research and HR data analytics. This is the brain of HR. It provides quality information which programs, interventions, HR standpoints and recommendations are based from. It is an independent body, quite a tall order but this is the nucleus of integrity.

Having said all of these, an HR practitioner is expected to always have a mindset that he or she should always be bigger than politics, criticisms, envies and attacks. Of course, perfection is not what I mean. It is trustworthiness and sensibilty. HR’s loyalty is not to a person or to anyone but to the common good and sustainability for everyone.

Our profession may not be the most glamorous, but it is certainly not the profession for those with weak hearts, underdeveloped moral fibers and who are less analytical.

Short Term and Long-Term Human Resource Planning

Short Term Human Resource Planning is essentially derived from the long-term human resource planning, which is usually done for a period of 1 year. It contributes towards fulfilment of long-term objectives and one of the key issues involved in short term Hunan Resource Planning is matching of available human resources with the existing jobs. Long Term Human Resource Planning is essentially done for a period of five years or sometimes beyond it.

Human Resource Planning and HRIS

Availability of a robust HRIS in an organization can play a crucial role in determining the effectiveness of Human Resource Planning in an organization. A well-developed HRIS, can enable availability of crucial information or data regarding the human resources and accordingly result in accurate projections for the future requirements.

Mergers and acquisitions (M&As) are tools businesses use to achieve organizational objectives tools that have profound impacts on the employees of the organizations at every level as two organizations attempt to integrate into one. A merger is generally defined as the joining of two or more different organizations under one common owner and management structure. An acquisition is the process of one corporate entity acquiring control of another corporate entity by purchase, stock swap or some other method.

Main reasons why companies merge together are:

i) To save the costs of production, particularly in a merger of former competitors.

ii) A merger also can generate capital to enter markets or launch products the companies would not be able to do as separate entities.

iii) Additionally, companies may possess complementary best practice and technical knowledge that makes it easier for them to compete in the market.

But sometimes acquisition can be risky because many things can go wrong with even a well-laid plan to grow by acquiring:

i) Cultures may clash,

ii) Key employees may leave,

iii) Synergies may fail to emerge,

iv) Assets may be less valuable, and

v) Costs may increase rather than fall.

HR practitioners in preparing for the challenges and practical realities of M&A transactions, including:

• Creation of new policies to guide the new organization.
• Retention of key employees.
• Employee selection and downsizing.
• Development of compensation strategies.
• Creation of a comprehensive employee benefits program.

HR professionals face a number of challenges during M&As, including:

• Attempting to maintain an internal status quo, or to effect change either to facilitate or thwart (in the case of a hostile takeover) a possible merger or acquisition, as instructed by upper management.
• Attempting to provide guidance to upper management from a “people” perspective as to whether organizational goals will be better fulfilled in the form of a merger versus an acquisition, or by making internal changes.
• Assuming that a merger or acquisition has been approved, discerning all aspects of the two separate organizations and the one combined organization that will be affected.
• Communicating with employees at every step in the M&A process with both an appropriate level of disclosure and an appropriate level of confidentiality.
• Devising ways to meld the two organizations most effectively, efficiently and humanely for the various stakeholders.
• Dealing with the reality that M&As usually result in layoffs of superfluous employees under the combined organization. This reality entails coordinating separation and severance pay issues between the combining organizations.
• Proactively avoiding legal issues for violation of federal and state anti-discrimination laws and the Worker Adjustment and Retraining Notification Act (WARN).
• Participating in the defense of lawsuits that may be brought as a result of a merger or acquisition.
• Aligning the HR function to achieve the organization’s strategic objectives. See Aligning Workforce Strategies with Business Objectives.
• Addressing the ethical dilemmas involved, in which an HR professional may be required to eliminate his or her own position, the position of a current co-worker, or the position of an HR counterpart in the combining organization.

The topmost common obstacles to achieve success with a merger or acquisition are:

• An inability to sustain financial performance.
• Loss of productivity
• Incompatible cultures
• Key managers and scarce talent leave unexpectedly
• A clash of management styles
• Cuts in pay or benefits programs create ill which will reduce productivity
• An inability to manage / implement change
• Objectives / synergies not being well understood
• Management doesn’t communicate its business rationale or its goals for the new company, and employees flounder in the ensuing confusion.

Many researchers have given some important reasons due to which companies merge or acquire:

1) Synergy: The most used word in M&A is synergy, which is the idea that by combining business activities, performance will increase and costs will decrease. Essentially, a business will attempt to merge with another business that has complementary strengths and weaknesses.

2) Diversification / Sharpening Business Focus: These two goals have been used to describe thousands of M&A transactions. A company that merges to diversify may acquire another company to reduce the impact of a particular industry’s performance on its profitability. Thus, companies often focus to merge with other companies that have deeper market penetration in a key area of operations.

3) Growth: Mergers give an opportunity to the acquiring company to grow market share without having to really earn it by doing the work themselves – instead, they buy a competitor’s business for a price. Usually, these are called horizontal mergers.

4) Increase Supply: Chain Pricing Power: By buying out one of its suppliers or one of the distributors, a business can eliminate a level of costs. If a company buys out one of its suppliers, it is able to save on the margins that the supplier was previously adding to its costs; this is known as a vertical merger. If a company buys out a distributor, it may be able to ship its products at a lower cost.

5) Eliminate Competition: Many M&A deals allow the acquirer to eliminate future competition and gain a larger market share in its product’s market. The downside of this is that a large premium is usually required to convince the target company’s shareholders to accept the offer. It is not uncommon for the acquiring company’s shareholders to sell their shares and push the price lower in response to the company paying too much for the target company.

6) Increasing capabilities: Increased capabilities may come from expanded research and development opportunities or more robust manufacturing operations. Similarly, companies may want to combine to leverage costly manufacturing operations. Capability may not just be a particular department; the capability may come from acquiring a unique technology platform rather than trying to build it.

7) Gaining a competitive advantage or larger market share: Companies may decide to merge into order to gain a better distribution or marketing network. A company may want to expand into different markets where a similar company is already operating rather than start from ground zero, and so the company may just merge with the other company.

Human Resources is a strategic business function and is today perceived as a strategic business partner aligned with the organization’s vision and strategy.  HR is the catalyst in helping an organization define its mission, vision, values, and goals.

Outsourcing is a force behind the virtual organization movement. Outsourcing is simply obtaining work previously done by employees inside the company from sources outside the company. If someone has specialized in an activity which is not strategically critical to our business and is able to do that cost effectively, it is better to get it from outside.

HR outsourcing is the process of in which certain human resources activities are outsourced to external partners which helps the organization get advantage of specialized skills, reduce cost and enable HR personnel to focus on strategic initiatives.

The organization gets benefitted in the form of excellent quality, reliable supply, and rock bottom price. It can also focus exclusively on doing what it is good at thereby enhancing its own competitive advantage.

Many organizations outsource administrative and transactional activities which are non-core, enabling HR Personnel focus on core activities. What activities an organization needs to outsource depends on the nature and size of the organization, internal skill sets, regulatory environment in which it operates, financial advantage, partner capabilities, key HR initiatives, culture.

HR functions which are generally outsourced are:

• Payroll and related compliances
• High volume recruitment
• Benefits administration
• Administration of employee lifecycle activities
• Labour law compliances
• Training

The following are some of the needs of HR Outsourcing:

• Enabling businesses to focus on core operations
• Delivering cost savings whether direct or indirect
• Helping to create a stable, cost-effective operating platform
• Transferring focus from internal processes to achievement of business goals
• Realizing investment in HR transformation and IT systems
• Ensuring compliance with legal, regulatory and best practice re­quirements, and
• Transferring risk and liability for people issues.

“HR Outsourcing Trends” by the Conference Board, the following are the most common internal barriers to outsourcing:

• Questionable cost/benefit justification;
• Inadequate readiness of people and systems;
• Organizational resistance from within HR; and
• Inability to manage relationships with outsourcers.
• When an organisation outsources an activity, it also gives up a considerable amount of authority. It does not have complete control over the outsourced activity.
• Outsourcing may turn out to be cheaper in the present context, but there is a risk involved because outsourcing costs may go up in the future.
• Outsourcing when associated with downsizing may tarnish a company’s image.
• Outsourcing may be a demotivating force for the existing employees of the company because of the fear of losing their job or loss of control.

Future Development

Outsourcing and Technology:

Technology is one factor that has changed the HRM domain. Emerging technologies like HRIS (Human Resource Information System), application software (Oracle HRMS) and self-service human resource packages have changed the way HR-services were being administered. Organisations that were unable to keep up with technological changes decided to outsource their HR activities.

Managing the Outsourcing Relationship Restructuring and Outsourcing:

There is a need for specialists who are good at managing the outsourcing relationship. The specialist should strengthen and nurture the relationship over a period of time and this requires considerable experience and foresight on part of both the parties. The relationship should encourage a culture of knowledge sharing and mutual learning.

Monitoring and Evaluating Vendor Performance:

Before the HR activity is outsourced, the performance standards for the activity have to be conveyed to the vendor. External consultants can be consulted to develop performance standards. There is a need for frequent communication between the outsourcer and the vendor. In order to enhance performance, the organisation can also resort to schemes where it shares the amount saved due to reduction in compensation claims with the vendor.

Role of HR Manager:

HR managers today need to have multiple skills. They should be adept at solving business problems apart from managing human resources. They should play an active role in the formulation and implementation of business strategy. HR managers who are generalists and can fit into any role are in short supply. Because of the lack of availability of HR generalists, organisations may resort to HR outsourcing.

Restructuring is when an organization changes its internal structure to increase efficiency and cost effectiveness. This act can involve merging two formerly unique entities, separating an entity into multiple parties or incorporating a formerly unincorporated enterprise. Restructuring can occur as the result of one business buying another company or an enterprise increasing in size. For example, a sole proprietorship might grow into a mid-sized business with potential to expand nationally. It would be in the company’s best interest to incorporate and begin observing regulations that apply to a business of its size. Strategic restricting can minimize financial losses, decrease production costs and otherwise impact the company’s bottom line.

Companies may embark on organizational restructuring after changes in vision and strategy, or in hopes of cutting costs by revitalizing processes or pruning parts of the company. When it’s done, a small business will have a new organizational structure and a changed workforce. The influence of the human resources department on job design, assignments and training can have a lasting impact on the strategic success of the new organizational structure.

The organization can be regarded in two ways: as a system or as a form. In management and marketing the concept of viewing the organization as the system is popular and more focused on examining the relationship between organizations and their environment.

From this point of view, we are used to consider the organization “a system built by energetic input-output where the energy coming from the output reactivates the system”. The typical scheme of organization includes the structure with departments, programs, divisions or teams and the organization’s policy, culture, plans and procedures. All of them function in cooperation and combine a kind of summation which results in outcomes and scores of the company.

Workforce Characteristics

Human resources should influence the strategic choices leading to restructuring. To develop strategy, the owner must consider the company’s competitive position, including employees’ strengths and weaknesses. HR supplies the owner with a workplace assessment a thorough inventory of the employees’ skills and other characteristics such as talent, turnover, education and experience. The inventory is compared against the strategies under consideration to calculate how well the company’s workforce can enact them.

Once strategy is chosen, HR then evaluates how it must transform the company’s workforce to fill the company’s needs in the context of the restructuring and strategy.

Organizational Structure

Organizational structure determines job scope, working relationships and resource sharing, so it has a profound impact on how business gets done. Keeping the company’s strategy at the center of structural decisions allows HR to make the best choices. For instance, if a small business wants to focus on fine, custom-built products, the organizational structure must promote individual accomplishment instead of mass production.

Job Design

Job design and talent choice as critical in talent management generally, and these are especially important factors to consider when restructuring an organization. HR must reassess the tasks and workflows needed to effectively do business and compare those to the organization’s existing jobs and processes. Positions may stay the same, change or be removed. Some tasks may require new positions. Considerations when designing jobs include how specialized a job should be, how much authority an employee needs to accomplish work and how much supervision is needed.

HR Restructuring Strategies for Reengagement

Restructuring is an unsettling process for employees. HR must make sure that the remaining employees are primed to be successful in their new situations. It’s a good idea to create a sample restructuring communication to staff that describes the process, goals and aims of the restructuring, to put staff at ease.

But these parts of organization may also become dysfunctional and bring no effects while they operate in dynamically changing reality. This happens if one forgets about the people inside the organization and sees the organization as the raw scheme from the bureaucrat perspective instead of regarding it as well as the valuable team of individuals. Organizations are also the socio-technical systems including two main components. One is a social component and means people and the other is a technical component which includes technologies and machines. The organization should therefore combine the system approach and the social approach in its functionality, because the most valuable asset the company can possess is the loyal and qualified group of people with the same goals who operate in this structured cluster. The problems inside the organization may occur when it comes to restructuring and at the same time there exists a clash between executives who see the company as the system (departments, divisions, subsidiaries, etc.) and the workforce which considers the company as their source of living and the shared community. The restructuring of organization due to various strategies may then bring negative impacts which frequently diminish the final impression and result of positive outcomes. The task for the executives and representatives in the company should be the correct evaluation of the possible restructuring process results in terms of positive and negative impacts, as well as implementing the most efficient restructuring strategies which will help to manage the process in the most risk-free way.

Motives, strategies and implications of restructuring

There might be hundreds of reasons why the organization need to restructure, but the most significant is the market expectations. The business environment these days is so dynamic and turbulent that it is hard for the companies to keep up and follow the newest trends and frequently they lose their stability, especially the finance one, and competitiveness. Therefore, the companies go through changes and decide to restructure.

Basic reasons to restructure are:

• To make the organization more profitable and integrated
• To achieve efficiency and effectiveness
• To reduce unwanted and overwhelming expenses
• To implement new technologies
• To open to new markets on a global scale
• To meet the customers’ demands in a quicker and smoother way
• To be more competitive and achieve the market advantage
• To raise from the crisis or survive a currently adverse economic climate
• To move in an entirely new direction and enhance the share-holder value.

The changes inside each separate field are the most appropriate in terms of final results. Therefore, it is advised that organization concentrate on individual parts and restructure according to the division into:

• Operational restructuring,
• Financial restructuring,
• Decisive restructuring,
• Restructuring in organization.

The structural change should be done by a particular strategy. There are various strategies which are commonly implemented by many entities in the process of restructuring:

• Downsizing, layoff, rightsizing or smart sizing
• Starbursting or networking
• De-layering
• Outsourcing
• Business process re-engineering
• Enterprise resource planning
• Total quality management
• Virtualization
• Verticalization

According to Sikula “the ultimate purpose/objective of human resource planning is to relate future human resources to future enterprise need so as to maximise the future return on investment in human resources”.

Human resources are sometimes considered a “soft” industry, because it can’t always provide quantifiable financial data about its workload and doesn’t typically create revenue either. Investment in HR can make executives nervous, because projects and programs often provide no tangible results although the idea of “improved morale” or “greater employee satisfaction” seems like a good thing, whether that translates to a significant increase in revenue or improved productivity remains questionable. Calculating the return on investment provides a way for HR professionals to demonstrate the worth of the profession.

“Return on Investment,” or ROI, is the term given to a mathematical calculation used in the finance industry and business in general. The ROI measures the financial return on an investment made, or it can be applied to a business measuring the performance of the firm by assessing the net profit compared with the overall net worth of the company. In more recent years, the ROI concept has been adopted by other industries to evaluate projects and programs on a smaller scale.

Importance of ROI to HR

Using quantifiable metrics improves the credibility of HR as a profession, and allows upper management to identify specific, measurable ways that HR services benefit the organization. It’s no longer enough to state that a certain program is believed to be beneficial you need to be able to prove the worth of your actions. In difficult economic times, the value of support services often seen as tangential to the organization’s core mission or product comes under increasing scrutiny. Consequently, it becomes even more important for HR professionals to show how HR services directly impact the bottom line, while identifying and eliminating programs that are not financially efficient.

Examples of ROI in HR

HR can use ROI metrics to analyze the value of almost any of its services, as long as a dollar cost can be determined. For example, if HR introduces a new health and safety program, its effectiveness can be measured by the associated reduction in costs of work-related injuries. The value of a new employee orientation program can be measured in terms of an ROI by assessing the costs saved by correlated reductions in turnover. Diversity programs, HR information systems, training, development and mentoring initiatives are additional examples of HR programs that can be measured by the ROI calculation.

Calculating ROI in HR

To calculate the ROI of human capital, divide the organization’s net revenue gross revenue after deducting operating expenses, salaries and benefits by the cost of salaries and benefits. To calculate the ROI of a particular program, you must first calculate the value of the specific program itself, then divide it by the costs of implementing the program. For example, if a training program to speed production of a factory line results in an increased amount of product, calculate the value of the additional product and divide that by the costs of providing the training and materials. In some cases, a general increase in productivity, for example you will need to isolate the portion of the increase that was because of an HR measure before calculating ROI. Conduct an analysis of groups that underwent a training class, versus groups that did not, to estimate the effect. Alternatively, use an expert to estimate the percentage increase that was because of the training.

Formula to Calculate Human Capital ROI

The formula to calculate the Human Capital ROI is very simple. Human Capital RIO is the Revenue minus non-human capital expenses divided by Human Capital Expenses.

Non-Human Capital Expenses = Operating Expenses – Human Capital Expenses

Human Capital Expenses = Fixed compensation(salaries) + Variable compensation + Benefits + Indirect cost

Revenue = The adjusted revenue after deducting the cost of capital, depreciation, etc

Importance of Calculating Human Capital ROI

Human Capital ROI helps to analyze which factors help or hinder the profitability and productivity of the organization. It can be either organizational and personal factors.

Furthermore, It also enables the organization to create or provide the right atmosphere to its employees. This will eventually result in relatively fast and more productivity.

MNCs measures HCROI on a short-term and long-term basis. This helps them to find which external or internal factors influence the productivity of their workforce.

It helps to know whether the right candidates have been hired or retained. It further helps to know whether or not the proper level of training and skills are developed in employees.

In addition to the above, it enables the organization to know that the environment provided for employees to flourish is right or not.

It will identify whether right leadership and managerial support are available to the employees. This enables them to accomplish and align with the company’s business objectives.

Knowledge of all the above things helps us implement proper initiatives that help us to improve the ROI.

Human resource planning is a process that identifies current and future human resources needs for an organization to achieve its goals. Human resource planning should serve as a link between human resource management and the overall strategic plan of an organization. Ageing workers population in most western countries and growing demands for qualified workers in developing economies have underscored the importance of effective human resource planning.

As defined by Bulla and Scott, human resource planning is ‘the process for ensuring that the human resource requirements of an organization are identified and plans are made for satisfying those requirements’. Reilly defined (workforce planning) as: ‘A process in which an organization attempts to estimate the demand for labour and evaluate the size, nature and sources of supply which will be required to meet the demand. ‘ Human resource planning includes creating an employer brand, retention strategy, absence management strategy, flexibility strategy, (talent management) strategy, (recruitment) and selection strategy.

Businesses typically look three to five years ahead when formulating a strategic plan, and the process results in a document that articulates the company’s vision, mission, big-picture goals and the broad strategies it will use to reach those goals. This planning document is intended to guide leadership in its decision-making.

A key part of strategic planning is assessing the company’s resources. It’s easy for any company to dream big and have stratospheric ambitions, but what the company can realistically achieve is limited by the number and type of resources it has at its disposal. For most businesses, those resources fall into three main categories:

Technology resources: This includes all the equipment, processes and infrastructure the business uses to create the products and services that it brings to market.

Financial resources: Finance comprises all the liquid resources the company can use to carry out its business operations namely cash in hand, short-term and long-term bank deposits, liquid financial investments like stocks and bonds, and approved bank loans.

Human resources: This resource comprises the people whose talents, skills and personal characteristics the business can use to accomplish its strategic goals. While technology and money are important assets, human resources are the most important, because technology and money need people to manage them.

Implementation Stages

1. Assessing the current HR capacity

Develop a skills catalog for your employees so that you have a clear understanding of what your staff currently holds. This employee catalog should include everything from volunteer activities to certifications, of all degrees not just topics pertaining to their particular position. These catalogs can be assessed to deem whether or not an employee is ready to add more responsibility, or to forecast the employee’s future development plans.

2. Forecasting HR requirements

This step includes projecting what the HR needs for the future will be based on the strategic goals of the organization. Keep in mind you will need to also accommodate for external challenges that can affect your organization.

3. Gap Analysis

During this step you will observe where your organization is currently, and where you want to be in the future. You will identify things such as, the employee count, and the skills evaluation and compare it to what will be needed to achieve your future goal. During this phase you should also review your current HR practices and identify what you are doing that is useful and what you can add, that will help you achieve your goal.

4. Developing HR strategies to support the strategies of the organization.

There are 5 HR strategies that you can follow to meet your organizational goals.

• Restructuring strategies: This includes reducing staff, regrouping tasks to create well-designed jobs, and reorganizing work groups to perform more efficiently.
• Training and development strategies: This includes providing the current staff with training and development opportunities to encompass new roles in the organization
• Recruitment strategies: This includes recruiting new hires that already have the skills the organization will need in the future.
• Outsourcing strategies: This includes outreaching to external individuals or organizations to complete certain tasks.
• Collaboration strategies: This includes collaborating with other organizations to learn from how others do things, allow employees to gain skills and knowledge not previously available in their own organization.

Theories

Strategic human resource management

Strategic human resource management is “critical importance of human resources to strategy, organizational capability to adapt to change and the goals of the organization”. In other words, this is a strategy that intends to adapt the goals of an organization and is built off of other theories such as the contingency theory as well as institutional theory which fit under the umbrella of organizational theory. These theories look at the universalize, contingency and configuration perspectives to see the effect of human resource practices in organizations.

The universalize perspective says that there are better human resource practices than others and those should be adopted within organization while contingency says that human resource practices need to align with other organization practices or the organizations mission, and configuration perspective is based on how to combine multiple aspects of human resource practices with effectiveness or performance. This can also be viewed as how human resource practices fit vertically or horizontally in an organization. This theory also involves looking at the value of human capital as well as social capital both in and outside of organizations and how this affects human resource practices. Human capital being knowledge and skills of individuals working for the organization and social capital is based on the character and value of relationships in and out of the organization. “Colbert suggests that SHRM should focus on the interactions and processes of the organization’s social system the intentions, choices and actions of people in the system and on HR systems as a coherent whole.”

Resource dependency theory

Resource dependence theory which is the theory that organizations are not self-sustaining there they must depend on outside resources to stay functioning. “Resources and dependence could help to explain how HR practices evolve from the interaction between nonprofits and their environment, how they deploy employee skills, behaviors and how HR systems are managed.”

Managerial Judgement:

Managerial judgement technique is very common technique of demand forecasting. This approach is applied by small as well as large scale organisations. This technique involves two types of approaches i.e. ‘bottom-up approach’ and ‘top-down approach’. Under the ‘bottom-up approach’, line mangers send their departmental requirement of human resources to top management.

Executive or Managerial Judgment method is the most suitable for smaller enterprises because they do not afford to have work study technique. Under this method the executives sit together and determine the future manpower requirements of the enterprise and submit the proposal to the top management for approval. This approach is known as ‘bottom up’ approach.

Sometimes the members of top management sit together and determine the needs on the advice of personnel department. The forecasts so prepared sent for review to the departmental heads and after their consent approved the need. This is known as ‘top down’ approach. The best way is the combination of the two approaches. Executives at both levels equipped with guidelines sit together and determine the human resources need of the organization.

Top management ultimately forecasts the human resource requirement for the overall organisation on the basis of proposals of departmental heads. Under the Top-down approach’, top management forecasts the human resource requirement for the entire organisation and various departments. This information is supplied to various departmental heads for their review and approval. However, a combination of both the approaches i.e. ‘Participative Approach’ should be applied for demand forecasting. Under this approach, top management and departmental heads meet and decide about the future human resource requirement. So, demand of human resources can be forecasted with unanimity under this approach.

Ratio Trends Analysis:

Under this method the ratios are calculated for the past data related to number of employees of each category i.e. production, sales and marketing levels, work load levels. Future production and sales levels, work load, activity levels are estimated with an allowance of changes in organization, methods and jobs. The future ratios are estimated. Then future human resources requirement is calculated on the basis of established ratios. This method is easy to understand. Value depends upon accuracy of data.

Estimated production for next year = 1,40,000 units

Estimated no. of workers needed

(on the basis of ratio-trend of 1: 200) will be = 700

Regression Analysis:

This is similar to ratio-trend analysis in that forecast is based on the relationship between sales volume and employee size. However, regression analysis is more statistically sophisticated. A firm first draws a diagram depicting the relationship between sales and workforce size. It then calculates regression line – a line that cuts right through the center of the points on the diagram. By observing the regression line, one can find out number of employees required at each volume of sales.

Regression analysis is used to forecast demand for human resources at some point of time in future by using factors such as sales, production services provided etc. This method is used when independent and dependent variables are functionally related to each other. Nowadays computers are used to solve regression equations for demand forecasting.

Work Study Techniques

It is also known as work load analysis. Under this method the stock of workload and the continuity of operations are determined. Accordingly the labour requirement is determined. The workload becomes the base for workforce analysis for the forthcoming years. Here due consideration is given to absenteeism and labour turnover. This method is also known as work study technique. Here working capacity of each employee is calculated in terms of man-hours. Man-hours required for each unit is calculated and then number of required employees is calculated.

Work-study techniques can be used when it is possible to apply work measurement to calculate length of operations and the amount of labor required. The starting point in a manufacturing company is the production budget, prepared in terms of volumes of saleable products for the company as a whole, or volumes of output for individual departments.

The budgets of productive hours are then compiled using standard hours for direct labor. The standard hours per unit of output are then multiplied by the planned volume of units to be produced to give the total number of planned hours for the period. This is then divided by the number of actual working hours for an individual operator to show the number of operators required.

The example is given below:

(a) Planned annual production = 2, 00,000 units

(b) Standard man-hours required for each unit = 2 Hours

(c) Planned man-hour needed for the year (a x b) = 4, 00,000 hrs.

(d) Planned annual contribution of an employee = 2000 hrs.

(e) No. of employees required ————- (c/d) = 4, 00,000/2000 = 200

This method is useful for long term forecasting.

Delphi Technique

Delphi technique is also very important technique used for estimating demand of human resources. This technique takes into consideration human resources requirements given by a group of experts i.e. mangers. The human resource experts collect the manpower needs, summarises the various responses and prepare a report. This process is continued until all experts agree on estimated human resources requirement.

Delphi Technique Named after the ancient Greek Oracle at the city of Delphi, the Delphi technique is a method of forecasting personnel needs. It solicits estimates of personnel needs from a group of experts, usually managers. The human resource planning (HRP) experts act as intermediaries, summarize the various responses and report the findings back to the experts.

The experts are surveyed again after they receive this feedback. Summaries and surveys are repeated until the experts’ opinions begin to agree. The agreement reached is the forecast of the personnel needs. The distinguishing feature of the Delphi technique is the absence of interaction among experts.