Utility Analysis

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EXECUTIVE SUMMARY
It is difficult for business leaders to open a newspaper or read a journal without seeing the warning that their only competitive advantage in the world economy is the knowledge embodied in the people they employ. Invest in your people, the gurus say, and your business will survive and profit. Yet when these leaders ask their Human Resource (HR) specialists to present them with proposals to increase the firm’s human capital wealth, these proposals are generally filled with vague claims of increased competitiveness and lower total costs. They frequently fail because these proposals lack a sound financial analysis on which the company can justify a decision. The single most important analysis an HR professional can provide a CFO is a utility analysis for the Human Resource interventions he or she advocates. The major reason for great concern about utility analysis is that this technique ties human resource interventions to the measuring unit of the business world—dollar value. With the Brogden utility estimation equation one can avoid the laborious effect size indices developed by academic researchers and present to management estimates of the dollar value contribution of human resource intervention. In this report we discuss several HR interventions, identify the primary measurable benefit that can accrue to the organization from each action, and discuss the ways to quantify these benefits in the field. Utility analysis is a quantitative method that estimates the dollar value of benefits generated by an intervention based on the improvement it produces in worker productivity. The ROI from various HR interventions such as personnel selection, recruitment tests, training and development and various others have been explained with the help of examples.

Introduction
The field of human resource management has been searching for ways to better assess the value of human capital development programs. The general argument is that if the impact that human resource programs have on the financial bottom line could be evaluated, the company's decision makers would be more willing to allocate resources to further develop these programs. With this idea in mind, researchers have devised several utility analysis techniques which can help translate traditional HR measures, such as validity coefficients and statistical distributions, into estimates of monetary profit. Utility analysis has become an established quantitative method of evaluating human resource programs. It can make a valuable contribution to judgments and decisions about investment in human resource management. Utility analysis provides managers information they can use to evaluate the financial impact of an intervention, including computing a return on their investment in implementing it. It was introduced as a method for evaluating the organizational benefits of using systematic procedures (e.g., proficiency tests) to improve the selection of personnel but extends naturally to evaluating any intervention that attempts to improve human performance. Utility analysis of human resource intervention has emerged as a focused topic of research in the 1980s. The major reason for great concern about utility analysis is that this technique ties human resource interventions to the measuring unit of the business world—dollar value. With the Brogden utility estimation equation (Brogden 1946, 1949), one can avoid the laborious effect size indices developed by academic researchers and present to management estimates of the dollar value contribution of human resource intervention. The classical model of utility analysis, called the BCG-utility model after its originators Brogden,Cronbach and Gleser

ΔU = N T SDy dt – C
The value of the selection program is measured in dollars and is represented by the symbol ΔU. N is the number of accepted applicants who remain with the organization for a time period T. SDy represents the standard deviation of job performance (in...
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