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ROI and Sensitivity Analysis

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I’ve written before about how often HR does not speak the language of finance that executives need when presenting business case.  Often, HR’s projects are on the backburner or are not approved because HR simply can’t articulate to the same degree what all the possibilities are when they need money.  A simple ROI or TCO is often not enough.

ROI generally takes an analysis of costs and opportunities for savings based on a set of assumptions.  We’ll have “X” number of transactions on self service, we’ll reduce “Y” pieces of paper, and approvals will take “Z” less time.  However, how often does HR perform sensitivity analysis around X, Y and Z to see if small changes in any or all of those components will radically change the ROI?

Say for example, if the number of transactions on self service are drastically lower than assumed?  It’s possible that the savings are proportionally lower as well, and your ROI assumptions are just bad.  On the other hand, if the amount of paper you process is going to process does not change the ROI figures much, then this metric is less sensitive.  In other words, you know from sensitivity analysis which assumptions are the ones driving changes in ROI, and which ones are more fixed.  Those metrics that drive changes in your ROI are your higher risk items.  Your executives will want to know what happens if your assumptions are wrong, but they will also want to know what you’re doing to make sure your assumptions are indeed right.  In this case, driving processes to the self service site is an adoption and usability issue.  You can drive adoption through good change management.

Often, HR is stunned when walking into a CEO, CFO or COO’s office and getting challenged on their business case.  Understand that it’s their jobs to understand and challenge any numbers you put in front of them.  They simply can’t let you buy something for the business that is not proven.  Your ability to tell them that even if your assumptions are wrong by 30% (or whatever) you’ll still be able to break even in an acceptable timeframe for the investment.

Don’t be stunned by getting challenged, but also expect to be very prepared.  Often, the best course is to partner with some finance guys (build a relationship, and don’t be a dope about it).  These guys can not only do the financial analysis that takes us days (they do it in minutes), but they can also inform us what analysis is really needed.  As I go from company to company, what the CEO looks at is always different.  It’s always good to have the finance guys on your side helping you to prepare.

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2 responses to “ROI and Sensitivity Analysis”

  1. generally takes an analysis of costs and opportunities for savings based on a set of assumptions. We’ll have “X” number of transactions on self service, we’ll reduce “Y” pieces… Original post:ROI and Sensitivity Analysisby at Google Blog Search: roi Technorati tag: ROI

  2. Andy Scherer Avatar


    And while you’re cozying up with the finance folks, make sure that what you’re planning aligns to goals the business you support has established, and figure out a way to measure your program’s impact so you can demonstrate it’s value.

  3. Howard Gerver Avatar

    Let’s be real! At the end of the day, life is a bell curve. At one end, you have the people and organizations that “get it.” At the other end, you have the people and organizations that will “never get it.” And in the middle, well, there’s the middle.

    By default somewhere around 50% of the people and organizations will ” get it” and 50% will never “get it.” Unfortunately, that means half of all employers have or will become a victim of their own ignorance. Unfortunately, these are the entities that probably need it the most.

    So, your posting does not really surprise me. In fact, you could probably post the same entry once a month for the next 5 years, and I still wouldn’t be surprised to see it.

    What does surprise me is, some of what you’re describing also applies to the ones that get it. I’ve tried to rationalize this and I think it merely comes down to bandwidth, priorities and egos.

    Now with out-of-control gas prices and its impact on the economy, it’s increasingly important for everyone to simply raise their hand for help. The ultimate “end game” here is millions of jobs.

    Some of these jobs can be saved vis-a-vis rigorous ROI analyses. As one of my clients said, “our (HR) heads hurt when we have to think about numbers and dollars. We’re good at hiring and training people – not good at math.”

    Well guess, what? If it means taking a few extra Aspirin to get the math right, it’s OK. The right math might just save a few extra jobs. And that would be a good thing.