A favourite question asked by HR professionals is: How can I build a business case to justify spending money? Because it is inherently more difficult to measure the benefit of an investment in people, as opposed to an investment in a new production process, HR professionals face a particular challenge. Linking inputs (money spent) to outputs (measurable results) can be a daunting task. However, it can be done. An understanding of management's perspective, a simple cost/benefit model, and a little creativity is all that is needed. Let's talk about management perspective first, because this will likely have the biggest impact on your ability to access funding.

As you already know, everything in business is driven by numbers, which in turn are translated into metrics: Earnings Per Share (EPS), Return on Investment (ROI), Revenue per Employee, Share Price, and so on. You might remember from the July 2002 NumberSMART Newsletter© that the 1st Principle of Decision-Making says: Every business decision you make, without exception, has an impact on the bottom line. Therefore, you must show management how your decision to spend money, on whatever, will impact the bottom-line. Management likes to create, and understand, relationships between numbers. For example, if I spend $1 million on a new piece of equipment, per unit costs will be reduced by 15%, and the bottom-line will improve by 1.5%. It's relatively easy to relate the cost ($1 million) to the expected benefit (improved bottom-line of 1.5%). However, the traditional cost/benefit model is not as useful when trying to quantify "soft" benefits like improved employee moral or greater adaptability to change.

Now that we have an understanding of management's perspective, we can turn our attention to building a business case using a cost/benefit model.

Let's assume you have identified the need for a one-day Time Management seminar for ten employees in the SlowMo Department. You decide to calculate a Return on Investment (always a management favourite) for the seminar and develop the following assumptions:

The seminar is expected to cost $6,000 and employee productivity is expected to improve by one hour per week per employee, based on similar savings realized by other organizations.

Your analysis is based on an average annual salary of $40,950, including benefits. You assume a 1,820-hour work year (7-hour work-day multiplied by 5-day workweek multiplied by 52-week year). This translates into an average per hour labor cost of $22.50 per employee ($40,950 ¸ 1,820 hours).

Step 1 involves calculating the expected profit from the seminar using the following formula:

Profit = Productivity Improvement Savings minus (Cost of Seminar + Lost Productivity of Seminar Participants)

Profit = $11,250 - (6,000 + 1,575) = $3,675…

…where the Productivity Improvement Savings of $11,250 is calculated as $22.50 per hour labor cost multiplied by 50 weeks (allowing for two weeks vacation) multiplied by 10 participants…

…and the Lost Productivity of the Seminar Participants of $1,575 is calculated as $22.50 per hour labor cost multiplied by 7 hours (1-day long seminar) multiplied by 10 participants.

With an expected profit of $3,675, Step 2 involves calculating the Return on Investment using the following formula:

ROI = Profit ÷ Cost of Seminar

ROI = $3,675 ÷$6,000 = 61%.

We can say, with reasonable certainty, that the ROI from the Time Management seminar will be sixty-one percent. Note that our analysis ignores any productivity improvement savings that might be realized beyond the first year.

I mentioned earlier that creativity is a necessary element in building a business case. This is where your assumptions, and their reasonability, come into play. True, the productivity improvement savings from the seminar might only be forty-five minutes per week per employee. If that is the case, then you'll have to revise your estimated savings downward to $8,438 ($22.50 per hour labour cost multiplied by 50 weeks multiplied by .75 multiplied by 10 participants) and recalculate the ROI. The critical point is, the expected productivity improvement savings from the seminar could drop to only forty minutes per week per employee and the seminar would still be financially defensible. You have a margin of error of 33% (the difference between productivity improvement savings of one hour per week per employee and forty minutes per week per employee) built into your assumptions. This should give you, and management, a greater level of confidence in the numbers.

Armed with powerful financial ammunition that is reinforced by realistic assumptions, you are now ready to make your case for spending money. And for good measure you can mention that, based on a study conducted by Smith & McDonald (1995) of 437 publicly traded companies, those with effective performance management programs generated a Return on Equity (ROE) of 10.2% versus only 4.4% generated by companies with no, or ineffective, programs. And those same companies with effective performance management programs generated income of $5,700 per employee versus $1,900 per employee for the other group. Metrics are wonderful, aren't they?