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Lecture Outline
CHAPTER 7: Cost Justifying Human Resource Information Systems
Investments
CHAPTER OBJECTIVES
After completing this chapter, you should be able to do the following:
❖ Explain why a CBA (cost–benefit analysis) is critical for a successful HRIS project
❖ Explain the differences between cost reduction and organizational enhancement as
strategies for HRIS investments
INTRODUCTION
➢ An HRIS provides the primary infrastructure used to deliver HR programs, ensure
➢ HRIS functionality, the number of programs or functions—such as recruiting,
compensation, and job analysis—that are operational using the specific HRIS
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➢ Statistics measuring the success of HRIS projects are not very encouraging. The
failure of systems implementation have been well documented (Browne and
➢ In the 1990s, CBA played only a limited role in HRIS investment decisions. The
pending obsolescence of noncompliant systems in Y2K (Year 2000) fueled
widespread implementation of new HRIS technology. The result was one of the
➢ Many decision makers, some of whom are still waiting to see returns from past IT
purchases in terms of successes and failures, are wary of new HRIS investments. Without
Note to Instructor: It is important that students understand what composes a
Justification Strategies for HRIS Investments
There have been two approaches to justify the acquisition or upgrading of an
HRIS:
1. Risk Avoidance Approach Justification: firms use a risk avoidance approach to
Evolution of HRIS Justification
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Due to the Y2K implementation “scare,” HRIS implementations in the past decade have shifted
many organizations from administratively intense paper-and-pencil HR processes to electronic
transaction processing supported by integrated computer systems.
The next wave of HRIS functionality is unlikely to generate comparable reductions in costs,
making investment decisions based on further cost reductions more difficult to justify.
However, as is argued in this chapter, the use of an organizational enhancement approach may
provide a more powerful strategy in determining the CBA for investment in a new HRIS.
HRIS Cost–Benefit Analysis
The following points should be emphasized for this section of this chapter:
➢ A CBA is simply what its name indicates—a comparison of the projected costs and
benefits associated with an HRIS investment.
➢ This comparison means the cost–benefit ratio for the current HRIS must be calculated
first. Then, the cost–benefit ratio is estimated for the projected HRIS. The size of the gap
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Here are further points to discuss with the students:
➢ Organizations differ in the specific financial measures they use to evaluate investments.
Organizations may use ROI, internal rate of return (IRR), payback period, or other
Estimating the Timing of Benefits and Costs
The next step of the CBA analysis is to determine when in time each benefit and cost will be
incurred during the entire HRIS project. Organizations use this information to estimate the cash
outflows and inflows associated with investments.
Estimating Indirect Benefit Magnitude
One of the most difficult tasks in HRIS CBA is estimating the value of the indirect benefits. The
difficulty of converting indirect benefit estimates to a dollar metric has limited their role in HR
technology investment decisions.
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For example, if a 1% reduction in annual turnover for a company’s sales force will result in a
savings of $15,000, then it is a simple matter to multiply the expected difference in percentages
between the current and expected rate to get the magnitude of the benefit.
Since these benefits are not reported in a dollar metric, current CBAs typically do not include
these items in the numeric analysis but will often address them in the narrative discussion
supporting the investment
In many instances, time-saving applications are incorrectly projected to result in reductions in
employee head count or FTEs—a direct savings in payroll expenses.
More often, though, the deployment of new HRIS functionality results in a new structuring of
work that enables the elimination of parts of jobs rather than whole jobs. As a result, the benefit
is indirect—a saving of time that can be deployed in other activities rather than a direct saving of
the costs of salary and benefits.
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functionality. Being able to identify the indirect effects and understand how they are expected to
affect costs and revenues is critical to understanding how to justify HRIS investments. An
Implementation Costs
Once benefits have been estimated, the analysis can proceed to estimating the costs of
implementation. In contrast to estimating benefits, cost estimation is often easier to complete
because cost information is readily available and already offered in a dollar metric. In most
Indirect costs comprise those areas of cost that cannot be known specifically up front but may
arise in the process of implementing the system. These include the impact of the implementation
on the organization, such as lost productivity while the organization completes implementation.
It is important to be thorough in attempting to identify all of the sources of cost. If your analysis
recognizes some benefit without incorporating an offsetting change in cost, you likely have
missed a source of cost in your analysis.
The total costs of implementation will depend on the current state of information system
development in the organization.
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Methods for Estimating the Value of Indirect Benefits
These methods require more effort and some assumptions. They require estimating the strength
(1) average employee contribution (AEC)
The average contribution approach argues that the AEC in an organization is equal to total gross
profit divided by the number of employees, or full-time equivalents (FTE). AEC is not a metric
that most organizations track, although a measure of average daily gross margin (i.e., Revenue −
(2) individual employee differences (variance) in work outcomes
Average contribution estimates, though, provide little guidance in estimating differences in
contribution between employees holding the same or similar jobs. These variance differences are
produced by a large number of individuals holding equivalent positions. Not all settings allow
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BENCHMARKING
Benchmark data on the magnitude of indirect benefits achieved in other firms can be used. The
advantage of benchmarking is that it allows an organization to build on the experiences of
others. These data can provide evidence that a specific outcome can occur, as well as evidence of
its potential magnitude.
Chapter 7 contains a reference to HR metrics that can be used in benchmarking (SHRM, 2010).
Organizations can also conduct their own benchmarking studies to gather specific data from
targeted firms, data that may not be readily available from third-party sources.
Benchmarking is preferred over direct estimation for larger, more costly projects for which
investment risks are greater. Benchmarking is also useful when organizations have limited
experience with the targeted functionality of the HRIS project or when there is no access to local
data.
INTERNAL ASSESSMENT
Internal assessment involves the use of a firm’s own internal metrics or other forms of the
firm’s specific data as the basis for estimates. Use of this method requires that the organization
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AVOIDING COMMON PROBLEMS IN COST JUSTIFICATION
It is not uncommon for HRIS CBA to include an extensive analysis of costs matched with a
single source of benefits—typically, an estimate of direct cost reductions. Recognizing only
direct cost reductions is problematic for two reasons
➢ First, it ignores HR’s more strategic role in improving organizational effectiveness.
Incorrectly recognizing time saved as a direct cost reduction creates the wrong expectation
among decision makers. This false expectation can lead to the incorrect perception that an
investment did not succeed—no reduction in payroll expenses occurred—when, in fact, the
benefits to the organization actually occurred in other forms.
Time saved, though, may not always have value. Consider a situation in which an individual
engages in an activity that requires 5 minutes every day, but the application of new HRIS
functionality is estimated to cut this time from 5 minutes to 1 minute. What is the value of the 4
minutes saved each day?
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PACKAGING THE COST–BENEFIT ANALYSIS TO PRESENT TO DECISION
MAKERS
When you have completed your analysis, you should have (1) data that identify each benefit and
cost component examined; (2) estimates of the dollar magnitude of each, including upper and
lower bounds; (3) estimates of when the organization will incur each cost and receive each
benefit; and (4) documentation justifying each decision you made in developing these values.
There are several advantages in including all of the cost and benefit components that influence
the likely outcomes of the investment decision. First, this offers the most complete, best estimate
of the value of the investment, thereby giving decision makers the best information to make an
appropriate investment decision. Second, it provides the decision maker with a fuller
CHAPTER SUMMARY
The central focus of this chapter has been estimating and understanding the cost-effectiveness
dynamics of new investments in HRIS by completing a cost–benefit analysis (CBA). The
calculation of a CBA has become critical for any new investment by an organization, as CBAs
are closely linked with strategic goals such as profitability and survival of an organization.
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This chapter also addressed the importance of adopting an appropriate perspective to CBA
before any numbers are analyzed, as well as providing guidelines for successful HRIS CBA. An
Both AEC and variance analysis were covered as methods to assess the indirect benefits of an
HRIS investment. It was argued that, when possible, both AEC and variance estimates in
developing a CBA should be used. However, both approaches to estimation of indirect benefits,