Convincing key business decision-makers — owners, senior executives and boards — to invest in human resources (HR) software can be a challenge. Businesses usually have long lists of revenue-generating initiatives they would prefer to invest in before considering an overhead investment like HR software. So, calculating the return on investment (ROI) of HR software in ways that demonstrate how that investment advances the company’s strategic goals is crucial to presenting a successful business case for the purchase.

Benefits of HR Software

Any HR software ROI calculation must start with the premise that the benefits of the software will be felt by all employees throughout the organization, not only by HR staff. Because HR software is designed specifically to improve the diverse processes that HR professionals engage in every day, HR teams may gain the greatest productivity per person. But managing people is part of every manager’s role throughout the company. When HR software makes those managers’ tasks more efficient through automated processes and faster access to high-quality information, their time is freed up to focus on their strategic business tasks.

In other words, HR software is not only about managing HR but about how the entire company manages all of its employees.

The following sections outline 11 important benefits of HR software. They represent a useful way to think through your HR software ROI calculation, though in any real-world company many of them will dovetail and/or overlap with each other. In the end, they’re all derived from automation that leads to greater employee efficiency.

  1. Improved Productivity

    HR software can improve productivity across your entire organization by, for example, automating administrative work, improving communication and collaboration and providing employee self-service. It can also standardize HR processes from department to department, reduce manual approval tasks and times, increase employee engagement and facilitate regulatory compliance.

    Consider the department manager who must write ten midyear and year-end employee evaluations. That manager may spend two or more hours on each evaluation if they’re starting from a blank MS Word document. But that time could be reduced to a half hour or hour if they’re working in an HR system with evaluation forms that are automatically populated with each employee’s demographic information, individual goals and a self-evaluation written by the employee. If that manager happens to be the head of sales, then your ROI calculation can position the improved productivity not merely as time savings but as the potential to generate revenue.

    If the HR software you’re evaluating includes an employee self-service portal, consider its productivity impact in the context of core HR administrative tasks, such as maintaining employee records, tracking vacation days and time off, inputting information to payroll systems and answering employees’ questions about company policies and benefits. The productivity boost for HR staff will be significant.

  2. Reduced Turnover

    One of any organization’s greatest expenses is employee turnover. Finding, recruiting, onboarding, training and preparing employees for advancement is a time-consuming investment in the future vitality of your organization. When employees leave, organizations lose all that investment in the employee, plus the job experience and institutional knowledge they take with them. In hard-dollar terms, various estimates of the cost to replace a departing employee range from a low of $1,500 for an hourly worker to double the annual salary of a senior executive. All sources agree that turnover is expensive, not even counting intangible costs like lower morale among remaining employees when turnover is high.

    According to Susan Stein, an HR consultant with over two decades’ experience in HR and the former EMEA head of compensation and HR systems at Morgan Stanley, HR software can reduce turnover by increasing employee engagement and making it easier for employees to interact with the organization at every level and at every stage of the employee life cycle. For younger employees, who view good technology as table stakes, manual paperwork creates a negative impression. They prefer the employee self-service portal, where they can personally verify that their information is accurate and can find answers to relevant policy and benefits questions as they arise.

    Thinking further, HR software that facilitates efficiently prepared employee performance evaluations can help reduce turnover by improving employee engagement. Stein offers the hypothetical example of a performance evaluation in which a manager and employee have a conversation about what training the employee might need to enhance their skills, all of which is documented in the software’s performance evaluation section. That helps keep the employee engaged because it shows the manager cares about them, gives the employee an opportunity to learn something new and is likely to help them improve their performance — all of which could lead to a higher raise.

    “Without these links from evaluation to result, which can be automated by HR software, the employee may feel unsupported by management. That’s the biggest reason why people leave,” says Stein. This is the kind of ROI thinking she has applied to HR software proposals throughout her career. “You just have to get the board to believe that causal chain,” she adds.

  3. Improved Business Practices

    The right HR software improves a company by standardizing and automating HR-related business practices across the organization. Take compliance reporting related to labor regulations, which is among the most important practices for any business. Having an HR system with an integrated database as a “single source of truth” is extremely beneficial for compliance reporting, according to Stein. If a company’s main source of labor data is its payroll system, but that organization is in an industry that requires certain roles to have ongoing learning to maintain their credentials (e.g., medicine, finance or law), then the necessary reports must be cobbled together from disparate data sources. “Having all your payroll and training information in one HR system not only saves time but makes the reporting more accurate,” Stein says.

    Another example comes from the tax breaks offered by some cities, states and countries to companies that hire a certain percentage of underrepresented employees. Payroll providers may not track or support diversity indicators in the payroll system, but HR software usually provides the flexibility to integrate such additional data fields, enabling the company to have an easier time generating reports that earn those tax breaks.

    If a company’s HR software is part of an integrated enterprise resource planning (ERP) system, the potential intangible benefits from integrated data go further. For example, when a company’s order management and HR software are integrated in the context of an ERP system, delivered products can be associated with the salesperson who sold them and automatically trigger bonuses at predefined thresholds.

  4. Improved Time-Off Management

    Even though it is most organizations’ policy to track personal time off (PTO), accurately accounting for PTO is difficult unless there is a reporting platform that consists of more than a chain of emails and a spreadsheet. HR software improves PTO management by automating the PTO requests, approvals, tracking and reporting. HR software that includes employee self-service options encourages employees to communicate early and often about their PTO needs. Such HR self-service functions ease the burden on HR — and managers throughout the company — to manually track and manage PTO requests, and they have been shown to increase employee satisfaction.

  5. Saved Time

    Time savings is present to varying degrees in all the benefits discussed in this article. For HR staff, manual administrative and operational tasks can take up so much time it is often hard to focus on much else. For non-HR managers and employees, HR administrative tasks intrude on their already busy schedules. From easing the task load of HR staff through automation to making regulatory compliance and business reporting easier, HR software streamlines operations — which means time saved. Administrative tasks that can be automated by HR software include recruiting, compensation management, time tracking, data entry and payroll.

    A company’s annual salary-increase exercise provides a good illustration. Without HR software in place, this process usually starts with an HR manager preparing a spreadsheet of salary details for a department’s existing staff and sending it to the department manager. The department manager must then track down information for each staffer, including their performance evaluation, improvement goals and related interactions, and synthesize it all to make a series of pay-raise decisions. The process is time-consuming for both the HR manager and the department manager and comes with risks regarding data confidentiality. But HR software can be configured so that all the relevant information for a department is in one place and at the fingertips of the department manager, and only that manager, dramatically reducing the time needed for the task and related confidentiality risks.

    Employees benefit, as well. It may save mere minutes for an individual employee to check insurance status or enter a time-off request through a self-service portal, for example, but collectively, across an organization, that time adds up.

  6. Improved Processes

    One of the great strengths of HR software is automating HR processes. HR software can reduce time and effort spent on workflows across an organization, significantly reducing friction and frustration. Take recruiting, hiring and onboarding new employees as key examples. With HR software, these steps become digital, enhancing the new-employee experience while relieving department managers and HR staff of time-consuming paper-based application tracking and review.

    Managers often feel like they don’t have time to recruit because it is frustrating and takes up so much time. “Anything HR software can do to make that process less time-consuming for managers is really important and can drive ROI,” she says. A strong recruitment module accomplishes this objective with features like a well-designed applicant-screening process and automated appointment scheduling.

    Automation also cuts onboarding time in half for some organizations, with features, for example, like electronic document signing. At the same time, such features increase new-employee engagement and retention. And the same thinking can be applied to all forms of interaction between company and employee, from maintaining employee records to processing expense reports. A good experience with HR software in the hiring process helps new hires to feel the organization is well-run, which increases confidence in their decision to join the company. An efficient and comprehensive onboarding process also increases productivity by enabling new employees to get to work faster.

  7. Wider Candidate Reach

    By automating recruitment activities like job advertisement placements and applicant screening, HR software gives organizations the ability to identify and sift through a much larger pool of candidates than would be possible by doing the same tasks manually. In other words, it allows HR staff to process applications faster so they can qualify more candidates in less time — saving money and improving the hiring experience for qualifying candidates.

    HR software with a strong recruitment function does this, for example, by enabling recruitment managers to run and track different ads tailored to different candidate types on multiple jobs boards simultaneously. Then, as data from past recruitment experiences accumulates, it can be used to target specific channels that have delivered quality candidates in the past. Optimizing sourcing channels increases the chances of finding the right applicant quickly by increasing the number of qualified applicants, instead of just the total number of candidates. And good applicant-screening software will bring to the surface the types of experiences and skill sets you’re looking for, quickly identifying the best candidates.

  8. Accurate Reporting

    HR software can increase the accuracy of employee information, from attendance and performance to benefits and compliance data, by automating both the data-collection and the report-generation processes. Such automation reduces the possibility of human error that leads to inconsistencies, especially compared to managing HR data in spreadsheets (which is how most companies start out). Spreadsheets present inherent risks, including version control, security and access — any one person can do a bad sort, causing crucial data to be lost or corrupted. HR software mitigates those risks by offering strong access controls.

    And, by having all employee information stored in one unified database, reports can be generated more easily. Some HR software can also provide real-time analytics and data visualization, which helps HR and department managers identify trends and patterns in the data that may not be immediately apparent. “HR dashboards that show metrics from all over the business, whether it’s diversity, turnover, absenteeism or salary changes, are fantastic tools to help businesses make better decisions,” says Stein.

    Answering strategically important business questions, such as how much it costs to hire a new employee or what the turnover rate is in customer service, is made substantially easier and more accurate when all employee and job candidate data live in one place. Accurate data, combined with good analytical tools, enables managers to confidently seek answers to tougher questions. For example, they might be able to ask whether a relationship exists between department managers’ performance evaluations and turnover in their departments — for instance: Is turnover lower in departments with higher-rated managers?

  9. Improved Forecasting

    HR software can provide a wealth of data and insights that informs business decisions, helping a company plan better. Take workforce planning. Employees are, of course, crucial to the achievement of any business’s strategic goals, making workforce planning one of the most important HR activities. Workforce planning allows business leaders to forecast future workforce costs and head count and gives them the ability to identify gaps in skills, create succession plans, develop budgets and prioritize recruitment efforts.

    Answering head-count planning questions about how many and what type of new employees you will need to do such things as expand a service line or enter a new territory can all be accurately mapped out using current and historical data from your HR system. Improved workforce forecasting means your organization will have the right mix of skills and talent in place to take on future challenges, regardless of market conditions. Additionally, by analyzing trends in the job market, HR software can help a company adapt to changing business conditions.

  10. Reduced Lost Opportunities

    When key personnel move on because they see better career opportunities elsewhere, organizations incur opportunity costs. Institutional knowledge and domain expertise are lost. Productivity is reduced. Projects may have to be put on hold or canceled outright. Overall employee morale may suffer. Valuable customer relationships are altered or lost. HR software can help a company take proactive steps to address issues that may lead to similar lost opportunities in the following ways:

    • By automating the recruiting and hiring process, HR software empowers companies to hire the best candidates quickly, which reduces the risk of losing top talent to competitors.
    • By providing data and insights on employee turnover and engagement, HR software lets companies identify and address issues that may lead to employee dissatisfaction, which reduces lost opportunities due to high employee turnover.
    • By tracking employee performance and progress, companies can address performance issues sooner, which can prevent lost opportunities due to poor performance.
    • By identifying skill gaps and providing training and development opportunities, HR software helps reduce opportunities lost due to a lack of qualified personnel.
    • By helping a company stay compliant with legal and regulatory requirements, HR software reduces lost opportunities due to noncompliance issues.

  11. Other Intangibles

    Many of the benefits HR software brings to organizations are intangible, in the sense that it’s difficult or impossible to objectively measure how they directly contribute to ROI. It’s hard, for example, to draw a one-to-one correlation between employee recognition programs and increased business performance or between the responsiveness of HR staff and employee longevity and loyalty. Anecdotally, of course, if HR is unresponsive to employee needs, it will show up in grumbling at the proverbial water cooler and, potentially, in reduced engagement and higher turnover.

    Employee self-service is one such intangible. This feature frees HR staff from answering routine inquiries while giving employees access to their personal and professional information on demand. This empowerment is hard to quantify, but, through the use of portals, reminders, personalized texts and emails, HR software makes employee communication easier, more efficient, more frequent and more effective. In the new world of hybrid work, where face-to-face meetings are less frequent, better communication is needed to keep far-flung employees engaged and feeling like they are important to the organization.

How to Calculate the ROI of Your HR Software

The formula for calculating the ROI of any investment, including an HR software rollout, is deceptively simple: It’s the net return on investment divided by the cost of investment multiplied by 100 (to express the result as a percentage). It gets trickier, though, when you break down “net return on investment” into its constituent parts — current value of the investment and cost of the investment — because much of that value may come from intangible benefits that are hard to quantify objectively.

HR ROI Formula

For calculating the ROI of HR software, this is the best formula to use:

ROI = (Current Value of Investment – Cost of Investment) / Cost of Investment x 100

But the calculation is a challenging one because of the long list of intangible benefits that HR software brings to the table. Here’s how to meet the challenge:

  • Identify the benefits of the HR software, such as increased efficiency, improved compliance, better decision-making, greater employee engagement and streamlined communication.
  • Assign a monetary value to the benefits for the period under consideration. For example, if the software helps reduce administrative tasks, and you wish to determine the ROI for the first three years, estimate the time and cost savings that would accrue for three years. If the new software enables staff reductions, include the savings from that head count as a benefit. If time will be saved by revenue-generating employees across the business, consider that potential, as well. Some of these benefits are hard to quantify, but it’s still important to take them into account.
  • Identify costs associated with the new HR software, such as the per-user fees (for cloud software, which is the most common), any customization or implementation costs and ongoing internal IT personnel and vendor support, all for the same three-year period. Be sure to account for the three-year cost, if any, of maintaining the old HR system that will be replaced by subtracting it from the cost of the new system.
  • Subtract the net costs of the new software investment from the value of its benefits to arrive at the net value of the new HR software.
  • Divide that result by the net costs and multiply the quotient by 100.

This formula provides a snapshot of your ROI, up to the date of calculation; it’s not a total cost of ownership (TCO) calculation.

A simple ROI calculation might look something like this: An organization is installing new HR software. The software’s per-user and ongoing support costs work out to $25,000 per year after an initial outlay of $100,000 for implementation and configuration. The organization’s analysis of the value of all the benefits that the software brings averages $75,000 per year. After three years, the calculation would look like this:

ROI = [($225,000 – $175,000) / $175,000] x 100 = 0.2857 x 100 = 28.6%

5 HR Metrics That Prove Software ROI

Demonstrating the ROI of new HR software requires measuring key HR metrics and tracking them over time. While there are many that you could track, the following five are crucial metrics that can prove (or disprove) the value being derived from your HR system:

Absenteeism:

Absenteeism represents unplanned employee absences. Illness, family emergencies, car problems happen and can lead to an employee missing work unexpectedly. But so can low engagement and outright employee dissatisfaction. To get a clear picture of absenteeism rate and its impact on productivity, HR systems can track it individually, by business unit and/or organization-wide. The absenteeism rate formula is:

Absenteeism rate = (Number of unexpected absences in days in a given period / total number of workdays in the same period) x 100.

Turnover:

Overall turnover rate is among the most important employee retention metrics. It’s defined as the total number of employees who leave the organization — voluntarily or involuntarily. A high turnover rate is costly, affects productivity and makes it difficult to attract top talent. It also can indicate management or company culture problems. The turnover rate formula is:

Turnover rate = (Number of separations in a given period / average number of employees in the same period) x 100

Recruitment:

Recruitment metrics measure recruiting proficiency. KPIs include how long the hiring process takes, the cost to fill a position and sourcing channel effectiveness. The most effective recruitment KPIs are performance-based and link back to overall recruitment objectives. Here are calculations for three crucial recruitment KPIs:

Time to hire = Days elapsed between date the job was posted or candidate was contacted for recruitment and the day an offer is accepted

Cost-per-hire = Total recruiting cost / # of hires

Sourcing channel efficiency = Number of qualified candidates from a specific source – the average number of applicants from all sources

Employee satisfaction:

It makes sense that engaged employees stay in their jobs longer than those who are discontent. That’s why employee satisfaction is such an important KPI to track. You can measure this KPI through surveys. One very simple and popular survey approach, borrowed from marketing, is net promoter score (NPS). In an NPS survey, employees are asked: “On a scale of 1 to 10, how likely are you to recommend a friend or family member come to work for us?” To calculate NPS, you subtract the percentage of “detractors” (employees who answered with a 6 or lower) from the percentage of “promoters” (those who answered 9 or 10). The formula looks like this:

Net promoter score = Percentage of promoters – percentage of detractors

Human capital:

This is a simple, big-picture, crucial metric: The human capital KPI computes the value of all employees compared to total revenue. Start by adding up all staffing costs, including salaries, benefits, retirement contributions, etc., over a set time period, then subtract the result from total revenue over the same period. Divide that figure by the staffing-costs number and multiply by 100. This gives the ROI for every dollar the company spent on employees. The human capital KPI can be a good reflection of business viability. If staffing costs exceed profit gained, then there is an imbalance that must be addressed. The formula is:

Human capital KPI = (Total revenue – total staffing cost) / total staffing cost x 100

Why Measure HR Software ROI?

Measuring ROI for any business endeavor allows organizations to make informed decisions about where and when to deploy their finite resources. If ROI is not tracked, it becomes hard to know if past business and technology decisions are having a net positive or net negative effect on business outcomes. But HR software deals with any company’s most important assets — its people. As such, evaluating the ROI of HR software measures far more than the value of a simple software investment; it measures the impact on the entire organization of the whole host of tangible and intangible benefits that are discussed throughout this article.

Increase Workforce Performance With NetSuite

Businesses looking to improve their HR management processes and gain greater visibility into their HR data could find a valuable tool for the job in NetSuite’s ERP system and, more particularly, its SuitePeople Human Resource Management System (HRMS). NetSuite’s cloud-based software is an integrated system that allows businesses to manage multiple aspects of their operations, including HR, in one solution, helping companies streamline processes and improve efficiency. NetSuite automates many HR processes, such as time- and attendance-tracking, employee self-service and performance management, thus saving time and reducing the need for manual data entry. And it can be accessed from anywhere with an internet connection, which is especially useful for businesses with remote employees and/or multiple locations. NetSuite’s scalability means that, as a business expands, it can add more features and modules to support its changing needs, and its customizability allows businesses to tailor the software to meet their specific HR needs.

HR software is an investment in a business’s workforce. As such, measuring the ROI of that investment is crucial, not only for justifying the purchase but for finding insights that enable the organization to optimize its operations, too. Measuring HR software ROI on an ongoing basis can help organizations identify areas where the software is not providing expected value and make adjustments to improve its performance. Overall, measuring ROI can help organizations optimize their use of HR technology and ensure that they are getting the most value from their investment — both in the software and in their entire workforce.

Simplify
HR and Payroll

Free Product Tour

Human Capital Management ROI FAQs

How much does an HR information system (HRIS) actually cost?

The cost of an HRIS varies greatly, depending on factors such as the size of the organization, the level of customization required and the specific features and functionality included in the system. On average, the cost of an HRIS can range from a few thousand dollars for a basic system to several hundred thousand dollars for a more advanced system with additional features and integrations. It is important to note that the cost of an HRIS includes not just the cost of the software but also the cost of implementation, training and ongoing maintenance. A potentially expensive part of implementation would be data cleansing and migration, if the organization has a lot of historical data that must be included in the new system. Beyond those direct costs are potential indirect costs, such as internal IT labor.

What should be considered about ROI before implementing a new HRIS

Before implementing new HR software, it’s important to consider all the potential costs you might incur over the life of the system and compare that to all the potential value the system might generate for the organization. On the cost side, implementation and software subscriptions costs will have to be accounted for, as will any end-of-life costs as old systems (including hardware) are retired or repurposed. HR staff, department managers and employees will have to be trained. Other long-term costs to consider include data storage expenses and vendor support. In the first year, there are usually data transfer costs as data is moved from old systems to the new one. Customization and configuration services, project management and training all add additional expense. On the value side are all the benefits the new HRIS will bring, including improved productivity for HR staff, department managers and, potentially, the entire workforce; time saved in a multitude of HR administrative tasks; reduced turnover; better security for confidential employee data; and many other intangible benefits, like better alignment between employee recruitment and the organization’s long-term strategic goals.

What is ROI in HRIS?

ROI, or return on investment, is a financial metric that measures the profitability of an investment or business initiative. In the context of HRIS, ROI is a measure of how much value the system is providing to the organization relative to the cost of the system. It can be calculated by dividing the benefits generated by the HRIS (e.g., cost savings, improved efficiency and increased employee engagement) by the total cost of the system (including the cost of the software, implementation, training and ongoing maintenance).

What is a good software ROI?

A “good” ROI for software can vary, depending on the specific industry and the type of software. However, according to some studies and reports, a typical three-year ROI for HR software for a 1,000-person company can range from 30% to 150%.