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The Best Investment in 2024:
The ROI of a Well-Funded HR Function

A picture showing that for each dollar funding HR function you get a 100 dollar banknote.
Hacking HR Team

Posted on December 16, 2023

"People don’t leave jobs; they leave bad bosses.”

Well, that is not just a saying. It has a number on it. A significant number of people (some statistics say that it is up to 75%) who leave their jobs do so because they have a bad boss. Over 20% of employees who do not feel recognized by their bosses are actively looking for another job. For whatever reason, people leaving their jobs because they have a bad boss has a considerable cost for the business in lost output and recruitment expenses (and I am not even counting the effects on the actual person who left the job, the team, and the bad boss).

Funding HR gives the function the opportunity to craft strong leadership development programs, especially for direct managers and first-time people leaders, to create the right conditions for their teams and people to thrive and deliver results for the business.

“New employees leave their jobs by the end of the first semester.”

It is actually much worse. Some statistics show that one in every four employees leave during the first 90 days. Imagine spending days, weeks, if not months, trying to find great talent for your company, only to see them leave within the first 90 days. This is like a medusa, though: there are many reasons why employees would quit a new job within the first trimester. One of them is, without a doubt, bad onboarding.

Funding HR provides the resources to create an effective onboarding strategy that keeps new employees engaged, motivated, and excited about their new job, not only from day one but even before. Onboarding does not have to be expensive; it has to be effective. But, to be effective, it must be well-designed. Designing something well requires time. And underfunded HR functions do not have much of that valuable resource: time.

The ROI of HR

Measuring the return on investment (ROI) for a well-funded HR function can be complex, as it involves both tangible and intangible outcomes and measuring data during the entire lifecycle of an employee, which, in most cases, is never measured at all. However, there are several key metrics and methodologies that can be used to estimate the ROI of HR investments.

The ROI of HR investments can vary widely depending on the specific initiatives and the context in which they are implemented. Additionally, measuring HR ROI involves challenges such as assigning value to intangible outcomes like human and employee experience, positive holistic well-being, or job satisfaction which are critical for organizational success but difficult to quantify in financial terms.

While it's challenging to provide a universal figure for the ROI of a well-funded HR function due to the complexity and variability of HR initiatives, it is essential to understand that, whether via direct value and revenue generation with HR initiatives (for example, HR supporting the creation of psychologically safe teams where people ask questions, challenge assumptions and use their imagination that can turn challenges or problems into solutions), or cost savings (for example, reducing turnover – because of bad onboarding or bad bosses, or the multiple other ways of doing so), a well-funded HR is never a cost center for the business, but a value-creating one.

In fact, I would argue that it is HR that has the most potential to become the new center of revenue generation rather than sales, marketing or customer experience.

A Well-Funded HR Function Is a Necessity in 2024

“Change has never been this fast. And it will never be this slow again,” said someone. Expanding on that, there is no normalcy anymore. There’s change, sometimes planned, sometimes chaotic. There’s disruption and volatility. One day, a business may be on top of its game, the next day, it goes bankrupt. Maybe not by the day, but my point is this: society and the business landscape will continue to undergo dramatic transformations, for most of which leaders and organizations are utterly unprepared.

Rapid technological advancements of which Generative Artificial Intelligence will be just the tip of the iceberg (and what a tip, and what an iceberg), evolving economic conditions, and shifting social norms are reshaping how we operate. Globalization continues to blur geographic boundaries, enabling companies to access talent and markets worldwide and simultaneously be disrupted by a newcomer entering from a market that nobody else predicted before. Additionally, there is an increasing focus on sustainable and ethical business practices, driven by both consumer demand and regulatory changes.

HR Is a Strategic Business Imperative

In this fast-moving, sometimes chaotic, ever-changing environment, a well-funded Human Resources function is not a luxury but a necessity. A well-funded HR is a strategic business imperative and competitive advantage. While other companies cut down on HR’s budget only to see catastrophic results down the road, a business with a well-funded HR will turn what traditionally has been seen as a cost center into a powerful revenue-generating unit. More importantly, a well-funded HR is a technologically enabled, data-informed, business-oriented, people-centered function capable of delivering better results with higher productivity and performance and, of course, more accountable.

A well-funded HR is, without a doubt, a critical factor that determines a business's ability to adapt, grow, and thrive in 2024 and beyond. The return on investment (ROI) from a robust HR department transcends traditional metrics, driving long-term success and resilience.

The Correlation Between Effective HR and Business Success

But this is not just hearsay or wishful thinking. Studies and statistics underscore the direct correlation between effective (which needs to be well-funded) HR and business success. For instance, an older report by the Boston Consulting Group (2015) found that companies with strong HR practices saw revenue growth up to 3.5 times and profit margins 2.1 times higher than those with weaker practices. Additionally, Gallup's research consistently shows that organizations with high employee engagement, a direct outcome of effective HR, report improved productivity and profitability.

Are you feeling concerned about 2024 because of the prospects and ghosts lingering around (recession, layoffs, etc.)? Then, rather than going with easy and lazy things first: cutting down HR’s budget (because you were told or you assumed that HR is a “cost center” to be forced into “a year of efficiency”), double down on funding HR, supporting it to become more strategic, and making sure it is accountable for business success just as much or more than traditional revenue generating units (sales, marketing, customer service, etc.).

The Well-Funded HR Function

The importance of a well-funded HR function in modern businesses cannot be overstated. A robust HR function is instrumental in several key areas, including talent acquisition, employee engagement, and leadership development. The investment in HR is the way to improve the attraction and retention of top talent, which is critical in a competitive job market. A well-funded HR also plays a pivotal role in fostering a positive corporate culture, driving employee satisfaction and productivity. This, in turn, directly impacts the company's overall performance and profitability.

But, even more important, a well-funded HR function is crucial for navigating the complexities of today's dynamic work environment. This includes addressing challenges such as remote work management, diversity and inclusion, evolving regulatory requirements, leadership development, creating the conditions for a well (as in wellness and well-being) workplace, and supporting people to feel safe, which results in more innovation and experimentation.

With adequate funding, HR departments can leverage advanced technologies like AI and data analytics for more efficient and effective workforce management. This investment in HR is not merely a cost but a strategic move that yields significant returns, as evidenced by the correlation between effective HR management and enhanced business outcomes, as shown in studies like the ones I mentioned above.

The State-of-the-Art, Well-Funded HR

No business can do magic if it has unlimited funding. However, there is a lot that can be done with proper funding (by the way, I use the word “proper” here on purpose. Above, I do not mean to say to give HR – or any other function – an unlimited budget when I say “well-funded.” I meant the funds needed to be more effective and strategic, just as most people are probably demanding from it. That is what “proper” means. And as of now, almost every HR function in every organization I know and have researched is either poorly funded or significantly underfunded. Also, proper does not mean “expensive” or “shiny.” A lot of incredible initiatives or tools are not expensive, but they need time to be selected. And time is money. And money is what HR often does not have to get time).

These are just a few of the things HR can do if it has the proper funding. And it can get even better than that. What I listed below are just the "basics" that you get with proper funding. And it only gets better from there:

  1. Strategic HR Planning: With proper funding, HR can develop long-term strategies, like succession planning and workforce diversification, tailored to future business needs. Underfunded HR might resort to reactive, short-term planning, leading to misaligned workforce capabilities or complete unpreparedness of talent in the pipeline to learn the skills for when they take over.

  2. Advanced Talent Acquisition Systems: Adequate funding enables the use of sophisticated recruitment software and social media platforms, enhancing the quality of hires. In contrast, underfunded HR often relies on traditional, less efficient hiring methods.

  3. Comprehensive Onboarding Programs: Well-funded onboarding programs are immersive and help new employees integrate into the company culture effectively and quickly, even before day one. Limited funding often results in a basic, checklist-driven onboarding, which might overlook key aspects of employee engagement and integration.

  4. Employee Development and Training: With sufficient resources, HR can offer a variety of training programs, including leadership development and technical upskilling, particularly for direct managers and first-time people leaders (all of whom have the most significant impact on people and company culture). Underfunded HR departments often cut back on training, which can stagnate employee growth and development.

  5. Employee Well-being Programs: Adequate funding allows for extensive well-being initiatives like mental health support and flexible work arrangements, all of which have a direct line of connection with people’s performance and productivity. Underfunded HR might only offer basic support, which is insufficient for employee needs, especially in high-stress environments.

  6. Diversity and Inclusion Policies: Proper funding enables the development and enforcement of robust diversity programs, essential for an inclusive workplace. Without adequate funds, diversity initiatives may be superficial and fail to address deeper cultural issues.

  7. HR Analytics: With sufficient resources, HR can leverage analytics for strategic decision-making and workforce planning. Underfunded HR departments may lack the tools for effective data analysis, leading to less data-informed decisions.

  8. Legal Compliance and Risk Management: Adequate funding ensures that HR can stay updated with the latest employment laws and regulations, minimizing legal risks. Underfunded HR might miss critical legal updates, potentially exposing the company to compliance issues.

  9. Advanced HR Technology: Well-funded HR can invest in advanced technology systems, enhancing efficiency and data management. These systems can enable people and the organization to become a lot more effective and efficient. Underfunded HR might struggle with manual processes and outdated systems.

  10. Global Talent Management: Adequate resources allow for effective management of a global workforce, including cultural training and international labor law compliance. Underfunded HR often faces challenges in managing overseas employees effectively.

  11. Employee Recognition Programs: A well-resourced HR department can implement comprehensive recognition programs, boosting employee satisfaction and productivity. Underfunded HR may lack the means to properly acknowledge employee achievements.

  12. Workplace Safety and Health Initiatives: Adequate funding enables the implementation of extensive safety protocols and wellness programs. Limited funding often results in basic compliance, potentially compromising employee safety and health.

  13. Career Pathing: Proper resources allow HR to assist employees in planning their career paths within the company, fostering employee retention. Underfunded HR often lacks the capability to offer personalized career development support.

Moving Forward: How HR Leaders Can Sell the Idea of Properly Funding HR

I know HR people are overworked, overwhelmed, stressed, and burned out, and their functions are most definitely underfunded. Most HR leaders I know have done the "due diligence" I describe below without results. But, the business tide has changed, particularly since the start of the pandemic almost four years ago, and now is not the time to give up.

HR leaders must play a critical role in strongly and effectively advocating for HR's value to senior leaders and budget decision-makers. To effectively persuade the C-suite and board about the importance of a well-funded HR, HR leaders should:

  1. Build a Strong Business Case: Present data-informed arguments, market research, studies, etc., showing the direct impact of HR investments on organizational performance, employee productivity, and overall business success. This involves demonstrating how HR initiatives like advanced talent management, employee engagement, and strategic workforce planning directly contribute to the company's bottom line.

  2. Influence through Strategic Communication: HR leaders should engage in proactive communication with senior executives, highlighting how HR initiatives align with the company’s strategic goals. This includes presenting success stories, providing industry benchmarks, and showing competitive advantages gained through well-funded HR initiatives. In addition, effective communication has another amazing result: it gets other business leaders (outside of HR) excited about HR and, hopefully, turns them into champions of the cause for a well-funded HR.

  3. Ensure Accountability and Deliver Results: HR leaders must establish clear metrics to measure the impact of HR initiatives. This involves setting realistic goals, tracking progress, and being transparent about the outcomes. By consistently delivering results and showing how well-funded HR initiatives meet or exceed expectations, HR leaders can strengthen their case for continued or increased investment in HR functions.

HR leaders must take a proactive, data-informed, and results-oriented approach to demonstrate the tangible benefits of investing in HR in order to secure the necessary support and resources from top management. Remember that your company resources are not unlimited, and you will be fighting for budget with marketing, sales, customer success, IT, finance, legal, and many other functions, most of which have been doing for years.

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