Chapter 7 focused on the macrolevel view of the value of human capital, highlighting various studies and research efforts that examine the relationship between investing in human capital and subsequent outcomes. This chapter takes a microlevel view, showing how detailed impact studies are conducted on specific human capital projects, initiatives, and solutions. This view, which in the last decade has been presented in the form of ROI studies, provides decision makers with detailed information about the success (or lack of success) of specific initiatives. This microlevel analysis helps drive decisions to implement future human capital projects. These studies can also improve ongoing projects and help set priorities based on which ones are adding the most value. When combined with the macrolevel analysis, ROI impact studies provide overwhelming evidence of the importance and value of human capital.
This chapter shows how the ROI methodology described in chapter 5 has evolved into a widely used method, briefly describes the processes used and the standards employed, and discusses best practices. It also offers a brief summary of the many applications of this methodology for human capital. The chapter provides an overview of ROI’s use as well as its success, barriers, and benefits.
Before examining the progress of ROI, a few global trends about measurement and evaluation should be examined. The following trends have been identified and are slowly evolving across private- and public-sector organizations and cultures in over forty countries.[1] Collectively, these trends have a significant impact on the way accountability is addressed. They include:
Evaluation is an integral part of the design, development, delivery, and implementation of human capital programs and projects.
A shift from a reactive approach to a more proactive approach is developing, with evaluation addressed early in the human capital cycle.
Measurement and evaluation processes are systematic and methodical, often built into the implementation process.
Technology significantly enhances measurement and evaluation and enables large amounts of data to be collected, processed, analyzed, and integrated across human capital programs and projects.
Organizations without comprehensive measurement and evaluation have reduced or eliminated significant parts of their HR program budgets.
Organizations with comprehensive measurement and evaluation have enhanced their HR department budgets.
The use of ROI is emerging as an essential part of the measurement and evaluation mix.
A comprehensive measurement and evaluation process, including ROI, can be implemented for about 3 to 5 percent of the direct HR department budget.
The ROI methodology described in this book had its beginnings in the 1970s when it was applied to the development of a return on investment for a cooperative education program at Lockheed-Martin.[2] Since then it has been updated, refined, and expanded in all types of situations, applications, and sectors. Figure 8-1 shows how the process has evolved within the various sectors. Applications began in the manufacturing sector, where the process was easily developed because it was a natural fit in the production environment. It migrated to the service sector, as many major service firms such as banks and telecommunications companies used the ROI process to show the value of various HR programs. Applications evolved into the healthcare arena as the industry sought ways to improve educational services, human resources, quality, risk management, and case management. Nonprofit applications began to emerge as these organizations looked for ways to reduce costs and generate efficiencies. Finally, applications in the public sector began to appear in a variety of government organizations. An outgrowth of public-sector applications spread to the use of the process in the educational field where it is now being applied. Public-sector implementation has intensified in recent years. All types of organizations and settings now apply the ROI methodology.
Perhaps one of the most visible signs of the acceptance of ROI methodology is the proliferation of ROI networks. Founded in 1996, the first ROI network was formed by a group of practitioners involved in implementing the ROI process. The purpose of the organization is to promote the science and practice of individual and organizational measurement and accountability. The network established three strategic goals:
To leverage the knowledge, skills, and experience of practitioners and sponsors.
To reinforce and support practitioner knowledge, skills, and experience.
To promote innovative ROI measurement and evaluation practices.
Through Web sites, list serves, newsletters, research grants, and conferences, the network routinely exchanged information about the ROI process. In 2002, the network was acquired by the American Society for Training and Development (www.astd.org). In addition to this global ROI network, other networks have been developed for specific countries, regions, states, cities, or even companies. For example, Canada has a very active ROI network sponsored by the Canadian Society for Training and Development; Puerto Rico enjoys one of the most active and supportive ROI networks where practitioners meet monthly to discuss challenges, concerns, and issues on ROI and exchange information. In the United States, some specific states have ROI networks; the state of Mississippi has an active network in which individuals exchange information on a routine basis. Some cities and large organizations have ROI networks. For example, Comcast, the largest cable company in the United States, has an ROI network of almost forty HR staff members who meet and exchange information about progress status as well as barriers to implementation. Networking is an excellent way to continue to develop this capability and share tools, techniques, and technology.
Measuring the return on investment is becoming a global issue. Organizations from all over the world are concerned about accountability and are exploring ways to measure the results of programs and solutions. Whether the economy is mature or developing, accountability is still a critical issue. Professional associations in various countries offer workshops, seminars, and conferences dedicated to the measurement issue. Some associations sponsor individual workshops on ROI. Formal ROI presentations have been made in over fifty countries with implementation organized and coordinated in at least thirty-five countries.
A few examples underscore the role of these organizations in implementing ROI in their respective countries. Skillnet, an organization partially funded by the Irish government, sponsors workshops on ROI for HR professionals, conducts ROI studies, and assists with ROI implementation. The organization is taking the lead in coordinating and introducing ROI to organizations in Ireland.
Japan Management Association (JMA), an association of medium to large business organizations in Japan, introduced the ROI process to its member organizations. JMA translated one of the major books on ROI, and sponsored workshops and other learning activities about the ROI process. Through a professional association, JMA is coordinating the implementation of the ROI methodology in Japan. Part of this implementation was the development of a special publication on the application of ROI in HR, featuring case studies from Texas Instruments, Verizon Communications, Apple Computers, Motorola, Cisco Systems, AT&T, and the U.S. Office of Personnel Management. The purpose of the publication was to show Japanese business and industry how other organizations are using the ROI process.
In New Zealand, Deloitte & Touche has implemented the ROI methodology in both public and private sectors. Driven by a partner in the local practice, many organizations are building on Deloitte’s advice and information. In Chile, a consulting firm (Mas Consultores) has implemented the ROI process with the translation of an ROI book, an advertising promotion campaign throughout the country, a variety of workshops and executive briefings, and a detailed certification for specialists in the country.
These examples illustrate how organizations around the globe use ROI as an important tool. The ROI methodology is a global issue that is being tackled in all types of cultures and settings.
The ROI methodology underscores the need for human capital functions to shift from an activity-based process to a results-based process. As depicted in table 8-1, a paradigm shift in recent years has produced a dramatic effect on human capital policy and practice. Organizations have moved from providing HR programs based on activity to focusing on bottom-line results. This shift is evident from the beginning to the end of the process. The activity-based approach characterized by the left side of table 8-1 describes many traditional HR functions in years past (unfortunately, some are still operating this way). These HR managers were satisfied offering all types of programs to any audience without much attempt to connect these programs to the organization or to measure any success, and certainly there was little or no communication or involvement with senior HR managers. Today’s results-based approach is needed to ensure that programs begin with the end in mind, with a clear, specific business alignment. The attention and focus must be on accountability throughout the process as all stakeholders are brought into the equation. A measurement of success must exist, and that success must be communicated to a variety of groups with the results summarized in an overall scorecard. The shift has often occurred because of the forces described in chapter 5. Some progressive HR departments have recognized the need for ROI and have been persistent in making progress on this issue.
Table 8-1. Paradigm shift in human capital policy and practices.
Activity Based | Results Based | ||
|---|---|---|---|
Characterized by: | Characterized by: | ||
 | no business need for the HR program | | HR program linked to specific business needs |
| no assessment of performance issues | | assessment of performance effectiveness |
| no specific measurable objectives | | specific objectives for behavior and business impact |
| no effort to prepare HR program participants to achieve results | | results expectations communicated to HR participants |
| no effort to prepare the work environment to support implementation | | environment prepared to support implementation |
| no efforts to build partnerships with key managers | | partnerships established with key managers and clients |
| no measurement of results or cost-benefit analysis | | measurement of results and cost-benefit analysis |
| planning and reporting is input-focused | | planning and reporting is output-focused |
There are good reasons why return on investment has gained acceptance. Although the viewpoints and explanations may vary, some things are clear. Human capital budgets continue to increase annually by organization, industry, and country. Many organizations and countries see human capital as an investment instead of a cost. Consequently, senior managers are willing to invest because they can anticipate a payoff for their investments. As expenditures grow, accountability becomes a critical issue. A growing budget creates a larger target for internal critics, often prompting the development of an ROI process.
Organizations have recently seen an increase in ROI applications because of the growing interest in improvement programs, such as total quality management, continuous process improvement, and Six Sigma, particularly in North America, Europe, and Asia. Unfortunately, many of these change efforts were unsuccessful and just passing fads. Today, organizations evaluate processes and outputs not previously measured, monitored, or reported. This focus places increased pressure on the human capital function to develop measures of program success by using ROI.
Restructuring and reengineering initiatives and the threat of outsourcing have caused HR executives to focus on bottom-line issues. Many processes have been reengineered to align programs more closely with business needs to obtain maximum efficiencies in the cycle. These change processes have brought increased attention to evaluation issues and have resulted in measuring the contribution of specific HR programs including ROI.
ROI is a familiar term and concept for business managers, particularly those with business administration and management degrees. These executives apply the ROI process to the purchase of equipment, building a new facility, or buying a new company. Consequently, they understand and appreciate ROI and are pleased to see the methodology applied to human capital.
ROI is now receiving increased interest in the executive suite. Top executives watch with frustration as their human capital budgets continue to grow without the appropriate accountability measures. For years, HR managers convinced top executives that human capital could not be measured, at least not as a monetary contribution. Many executives are now aware that it can and is being measured. Subsequently, they are demanding the same accountability from their human capital functions.
One thing is certain in the ROI debate: It is not a fad. The concept of ROI has been used for centuries. The seventy-fifth anniversary issue of Harvard Business Review (HBR) traced the tools used to measure results in organizations.[3] In early issues of HBR, during the 1920s, ROI was the emerging tool used to place a value on the payoff of investments. As long as there is a need for accountability of expenditures and the concept of an investment payoff is desired, ROI will be used to evaluate major investments in human capital improvement.
Today, hundreds of organizations routinely develop ROI calculations for human capital programs. The status of ROI has grown significantly and the rate of implementation has been phenomenal. The number of organizations and individuals involved with the process underscores the magnitude of ROI implementation. Table 8-2 presents a summary of the current status. With this much evidence of the growing interest, the ROI process is now becoming a standard tool for HR program evaluation.[4]
Table 8-2. Summary of current ROI status.
|
Although much progress has been made, the ROI process is not without its share of problems and concerns. The mere presence of ROI creates a dilemma for many organizations. When the concept is implemented, the management team usually anxiously awaits results only to be disappointed when they are not readily available. For an ROI process to be useful, it must balance many issues such as feasibility, simplicity, credibility, and reliability. More specifically, three major audiences must be pleased with the ROI process to accept and use it:
HR practitioners who design, develop, and implement programs
Senior managers, sponsors, and clients who initiate and support programs
Researchers and evaluators who need a credible process
For years, HR practitioners have assumed that ROI could not be measured with human capital projects. When they examined a typical process, they found long formulas, complicated equations, and complex models that made the ROI process appear confusing. With this perceived complexity, HR managers could only imagine the tremendous efforts required for data collection and analysis, and more important, the increased cost in making the process work. Because of these concerns, HR practitioners look for a simple and understandable process, with steps and strategies that are easily implemented. Also, they need a process that will not take excessive time to implement or consume undue precious staff time. Finally, practitioners need a process that is not cost prohibitive. With competition for financial resources, HR practitioners need a process that will require only a small portion of the HR budget. In summary, from the perspective of the HR practitioner, the ROI process must be user-friendly, time effective, and cost efficient.
Managers who must approve HR budgets, request HR programs, or live with the results of programs, have a strong interest in the development of ROI in human capital projects. They want a process that provides quantifiable results, using a method similar to the formula applied to other types of investments. Senior managers want to have it all come down to an ROI calculation reflected as a percentage. They also want a process that is simple and easy to understand. The assumptions used in the calculations must be conservative, the methodology used in the process should be credible and reflect their point of reference, background, and level of understanding. Senior executives do not want, or need, a string of formulas, charts, and complicated models. Instead, they need a process that they can explain to others, if necessary. More important, they need a process with which they can identify, one that is sound and realistic enough to earn their confidence.
Researchers and evaluators will only support a process that measures up to close examination. They usually insist that models, formulas, assumptions, and theories are sound and based on commonly accepted practices. They also want a process that produces accurate values and consistent outcomes. If estimates are necessary, researchers want a process that provides the most accuracy within the constraints of the situation, recognizing that adjustments need to be made when there is uncertainty in the process. The challenge is to develop acceptable requirements for an ROI process that will satisfy researchers and, at the same time, please practitioners and senior managers. Sound impossible? Maybe not.
To satisfy the needs of the three critical groups described above, the ROI process must meet several requirements. Eleven essential criteria for an effective ROI process follow.
The process must be simple, void of complex formulas, lengthy equations, and complicated methodologies. Most ROI attempts have failed because of this requirement. In an attempt to obtain statistical perfection and use too many theories, some ROI models have become too complex. Consequently, they have not been implemented.
The process must be economical and easily implemented. It should become a routine part of the human capital function without requiring significant additional resources. Sampling for ROI calculations and early planning for ROI can result in progress without adding new staff.
The assumptions, methodology, and techniques must be credible. Logical, methodical steps are needed to earn the respect of practitioners, senior managers, and researchers. This requires a practical approach for the process.
From a research perspective, the process must be theoretically sound and based on generally accepted practices. Unfortunately, this requirement can lead to an extensive, complicated process. Ideally, the process must strike a balance between maintaining a practical and sensible approach and a sound and theoretical basis for the process. This is perhaps one of the greatest challenges to those who have developed models for the ROI process.
The process must account for other factors that have influenced output variables. To gain accuracy and build credibility it is necessary to isolate the influence of the HR program; this is one of the most overlooked issues. The ROI process should pinpoint the contribution of the program when compared to the other influences.
The process must be appropriate with a variety of HR programs. Some models apply to only a small number of programs such as sales or productivity training. Ideally, the process must be applicable to all types of programs such as career development, organization development, and major change initiatives.
The process must have the flexibility to be applied on a preprogram basis as well as a postprogram basis. In some situations, an estimate of the ROI is required before the actual program is developed. Ideally, the process should be made to adjust to a range of potential time frames.
The process must be applicable with all types of data, including hard data, which are typically represented as output, quality, costs, and time; and soft data, which include job satisfaction, engagement, customer satisfaction, grievances, and complaints.
The process must include the costs of the program. The ultimate level of evaluation is to compare the benefits with costs. Although the term ROI is sometimes used loosely to express any benefit of a program, an acceptable ROI formula must include costs. Omitting or underestimating costs will only destroy the credibility of the ROI values.
The actual calculation must use an acceptable ROI formula. This is often the benefits/cost ratio (BCR) or the ROI calculation expressed as a percent. These formulas compare the actual expenditure for the program with the monetary benefits derived from the program. While other financial terms can be substituted, it is important to use a standard financial calculation in the ROI process.
Finally, the process must have a successful track record in a variety of applications. In far too many situations, models are created but never successfully applied. An effective ROI process should withstand the wear and tear of implementation and should achieve the expected success.
Considered essential, an ROI methodology should meet the vast majority, if not all, of the criteria. The bad news is that most ROI processes do not meet these criteria; the good news is that the process presented in this book meets all of them.
Impact studies have been conducted in every human capital area. As expected, more progress has been made in some areas than others.[5] For example, productivity improvement and gainsharing programs organized by human resources have shown tremendous success with the use of ROI. Reward systems and safety programs often show impact with ROI without much difficulty. In the learning and development area, many applications have shown increasing success. Other areas have not faired so well. For a variety of reasons, ROI progress has not been made in recruiting, compliance, diversity, and career management, but the need and interest is still there. Table 8-3 provides a summary of the progress and issues with ROI applications in the various human capital areas.
Table 8-3. ROI applications in human capital.
HR Function | Relative Use of ROI | Typical Programs for ROI Calculation | Comments |
|---|---|---|---|
| Low |
|
|
| Moderate |
|
|
| Low |
|
|
| Moderate |
|
|
| Moderate |
|
|
| Moderate |
|
|
| Low |
|
|
| Low |
|
|
| High |
|
|
| Moderate |
|
|
| High |
|
|
| Moderate |
|
|
| High |
|
|
| Moderate |
|
|
The use of ROI occurs in all the areas listed in table 8-3 with increased efforts to improve accountability. Perhaps no groupings receive more criticism and calls for accountability than those labeled “soft.” For example, career management, management succession, leadership development, and business coaching have been subjected to ROI accountability. ROI studies on leadership development are one of the most published areas in the last five years. Not because executives do not believe in leadership development, but because they need some sense of the contribution when a leadership development program is implemented from a vast array of possibilities.[6] To be successful with leadership ROI studies, program designers, and implementers have to shift their thinking from “attempting to place a monetary value on leadership” to “placing a monetary value on the outcomes of the leadership development effort.” This requires program owners to seek the consequences of using new leadership behaviors and competencies.
The experience with IBM underscores this important shift. IBM is making strides in showing the contribution of leadership development and they base their approach on three important principles:
The executives must own leadership development and demand accountability. This assures that leadership is supported from the top down and has active involvement throughout the process. Part of the involvement is to expect results and ensure that the results are there.
They invest in processes not products. Sometimes it is difficult to capture the value of an off-the-shelf program that may not be aligned with the organization’s interests, needs, values, or business metrics. The leadership at IBM instead focuses on the specific processes they need.
They measure what matters. Probably the most important issue at IBM is that they are moving away from activity analysis (canning programs, projects, hours, people) to measuring investments and comparing them with the connection to superior business results.[7]
At Nortel Networks the ROI methodology is used to show the impact of business coaching. Taking on one of its more strategic and critical programs, the Leadership Edge, the researchers show the actual connection between business coaching and the monetary impact.[8] The key to ensuring that coaching assignments deliver the desired results is to ensure the initial engagement focuses on business outcome. Too often, coaching assignments focus on behavior changes and ignore the consequences of those changes. In the initial engagement, the coach must address the “so what?” with specific measures. The person being coached must articulate the impact of behavior changes within his or her sphere of work and influence. When this is accomplished, it is much easier to track the actual consequences of the business coaching process, collecting the six types of data presented in chapter 5.
An important issue that often surfaces when considering ROI applications is the understanding of specific measures that are often driven by specific HR programs. While there are no standard answers, table 8-4 represents an attempt to summarize the typical payoff measures for specific human capital programs. The measures are quite broad for some programs. For example, a reward systems project can pay off in a variety of measures such as improved productivity, enhanced sales and revenues, improved quality, cycle-time reduction, or even direct cost savings. Essentially, it should drive the measure that the reward is designed to influence. In other programs, the influenced measures are quite narrow. For example, in labor management cooperation programs, the payoffs are typically in reduced grievances, less work stoppages, and improved employee satisfaction. Orientation programs typically pay off in measures of early turnover (turnover in the first ninety days of employment), initial job performance, and productivity.
Table 8-4. Typical measures in ROI applications.
ROI APPLICATIONS | |
|---|---|
Program/Project | Key Impact Measurements |
Absenteeism control/reduction | Absenteeism, customer satisfaction, job satisfaction |
Business coaching | Productivity/output, quality, time savings, efficiency, costs, employee satisfaction, customer satisfaction |
Career development/career management | Turnover, promotions, recruiting expense, employee satisfaction |
Communications | Errors, stress, conflicts, productivity, employee satisfaction |
Compensation plans | Costs, productivity, quality, employee satisfaction |
Compliance programs | Penalties/fines, charges, settlements, losses |
Diversity | Turnover, absenteeism, complaints, charges, settlements, losses |
E-Learning | Cost savings, productivity improvement, quality improvement, cycle times, error reductions, employee satisfaction |
Employee benefits plans | Costs, time savings, employee satisfaction |
Employee relations program | Turnover, absenteeism, employee satisfaction, engagement |
Gainsharing plans | Production costs, productivity, turnover |
Labor-Management cooperation programs | Work stoppage, grievances, absenteeism, employee satisfaction |
Leadership development | Productivity/output, quality, efficiency, cost/time savings, employee satisfaction, engagement |
Marketing and advertising | Sales, market share, customer loyalty, cost of sales, wallet share, customer satisfaction |
Meeting planning | Sales, productivity/output, quality, time savings, employee satisfaction, customer satisfaction |
Orientation, On-Boarding (revised) | Early turnover, training time, productivity |
Personal productivity/time management | Time savings, productivity, stress reduction, employee satisfaction |
Project management | Time savings, quality improvement, budgets |
Recruiting source (new) | Costs, yield, early turnover |
Retention management | Turnover, engagement, employee satisfaction |
Safety incentive plan | Accident frequency rates, accident severity rates, first aid treatments |
Selection tool (new) | Early turnover, training time, productivity |
Self-directed teams | Productivity/output, quality, customer satisfaction, turnover, absenteeism, employee satisfaction |
Sexual harassment prevention | Complaints, turnover, employee satisfaction |
Six Sigma | Defects, rework, response time, cycle time, costs |
Skill-Based pay | Labor costs, turnover, absenteeism |
Strategy/Policy | Productivity/output, sales, market share, customer service, quality/service levels, cycle times, cost savings, employee satisfaction |
Stress management | Medical costs, turnover, absenteeism, job satisfaction |
Technical training (job-related) | Productivity, sales, quality, time, costs, customer service, turnover, absenteeism, employee satisfaction |
Technology implementation | Cycle times, error rates, productivity, efficiency, customer satisfaction |
Wellness/Fitness | Turnover, medical costs, accidents, absenteeism |
The table also illustrates the vast number of applications of this methodology and the even larger set of measures that can be driven or influenced. In most of these situations it becomes a reasonable task to assign monetary values to these measures as the benefits are compared to the monetary value of a particular program to develop the ROI. Table 8-5 on pages 162—163 presents this data from the perspective of matching the payoff measures to specific human capital initiatives, listing the measures in the organization that are usually influenced with specific HR initiatives. The measures that are influenced depend on the objectives and the design of the program or project.
A word of caution is needed. Presenting specific measures linked to a program may give the impression that these are the only measures influenced. In practice, a particular HR program can have a variety of outcomes and that can make the ROI process difficult. Tables 8-4 and 8-5 show the most likely measures that arise out of the studies that the author has reviewed. In the course of a decade, the author has been involved with over five hundred of these studies, and there are some common threads among particular projects and programs.
The good news is that human capital programs and projects are driving business measures. The monetary value is based on what is being changed in the various business units, divisions, regions, and individual workplaces. These are the measures that matter to senior executives. The difficulty often comes in ensuring that the connection to the program exists. This is accomplished through a variety of techniques to isolate the effects of the program on the particular business measures and was discussed in chapter 5.
The impressive success of ROI has been widely documented in the literature. Over one hundred case studies have been published in books, trade magazines, and journals. The American Society for Training and Development has published four casebooks on ROI studies; the Society for Human Resource Management has published two. These published case studies usually follow the ROI methodology described in chapter 5 and this chapter. Table 8-6 on page 164 lists a small sample of the studies published along with the appropriate references. The ROI methodology is one of the most documented and validated processes developed for and applied to the area of human capital.
Table 8-6. Sample of published ROI studies.
Key Impact Measures: | ROI | |
|---|---|---|
Performance Management (Restaurant Chain) | A variety of measures, such as productivity, quality, time, costs, turnover, and absenteeism | 298%[1] |
Process Improvement Team (Apple Computer) | Productivity and labor efficiency | 182%[1] |
Skill-Based Pay (Construction Materials Firm) | Labor costs, turnover, absenteeism | 805%[2] |
Sexual Harassment Prevention (Healthcare Chain) | Complaints, turnover, absenteeism, job satisfaction | 1052%[2] |
Safety Incentive Plan (Steel Company) | Accident frequency rate, accident severity rates | 379%[2] |
Diversity (Nextel Communications) | Retention, employee satisfaction | 163%[6] |
Retention Improvement (Financial Services) | Turnover, staffing levels, employee satisfaction | 258%[3] |
Absenteeism Control/Reduction Program (Major City) | Absenteeism, customer satisfaction | 882%[2] |
Stress Management Program (Electric Utility) | Medical costs, turnover, absenteeism | 320%[2] |
Executive Leadership Development (Financial) | Team projects, individual projects, retention | 62%[2] |
E-Learning (Petroleum) | Sales | 206%[2] |
Internal Graduate Degree Program (Federal Agency) | Retention, individual graduate projects | 153%[4] |
Executive Coaching (Hotel Chain) | Several measures, including retention, productivity, cost control, and customer satisfaction | 221%[5] |
Competency Development (Veterans Health Administration) | Time savings, improve work quality, faster response | 159%[4] |
First-Level Leadership Development (Auto Rental Company) | Various measures—at least two per manager | 105%[7] |
References | ||
[1] Patricia P. Phillips, ed., In Action: Measuring Return on Investment, Vol. 3 (Alexandria, VA: American Society for Training and Development, 2001). [2] Jack J. Phillips, Ron D. Stone, Patricia P. Phillips, The Human Resources Scorecard: Measuring Return on Investment (Woburn: MA: Butterworth-Heinemann, 2001). [6] Lynn Schmidt, In Action: Implementing Training Scorecards (Alexandria, VA: American Society for Training and Development, 2003). [3] Patricia P. Phillips, ed., In Action: Retaining Your Best Employees (Alexandria, VA: American Society for Training and Development, 2002). [4] Patricia P. Phillips, ed., In Action: Measuring ROI in the Public Sector (Alexandria, VA: American Society for Training and Development, 2002). [5] Darelyn J. Mitch, ed., In Action: Measuring Return on Investment, Vol. 4 (Alexandria, VA: American Society for Training and Development, 2005). [7] Jack J. Phillips and Lynn Schmidt, The Leadership Scorecard (Woburn, MA: Butterworth-Heinemann, 2004). | ||
For any process to be credible, it must have standards. Studies must be consistent as they are developed from one application to another within an organization and also across organizations. The ROI methodology described in this chapter has been developed and refined around conservative standards known as Guiding Principles (presented as table 5-4 in chapter 5). The principles provide conservative adjustments so that if an error exists in the study, it is discounted (or removed from the analysis) as a monetary benefit. Also, when comparing costs to specific benefits, the costs are fully loaded to include all costs, both direct and indirect. These principles serve to increase the credibility, but more importantly, they obtain buy-in with senior management staff who often view the results of the programs.
With the evolution of the ROI methodology and its various applications, best practices have surfaced.
An explanation of these best practices follows:
The ROI methodology is implemented as a process-improvement tool, not a performance-evaluation tool. HR staff acceptance is critical for the implementation of this process. No individual or group is willing to create a tool that will ultimately be used to evaluate his or her individual performance. Consequently, many organizations recognize that ROI is a process-improvement tool and communicate this position early. The ROI methodology shows not only the success of a particular HR project, program, or solution, but also provides detailed information about how the project can be revised to increase value. Barriers and enablers to success are always identified.
The ROI methodology generates a microlevel scorecard with six types of data. The data represents a scorecard of performance, representing both qualitative and quantitative data, often taken at different time frames and from various sources. The methodology generates a balanced, microlevel view of success for that particular program.
ROI methodology data are being integrated to create a macrolevel scorecard for the human capital function. As more and more studies are conducted, data are rolled up to create a macrolevel scorecard, showing the value of the human capital function. As shown in figure 8-2, the individual microlevel scorecard evaluation data are integrated into the overall macrolevel scorecard. This approach requires similar data collection tools and measures across projects, using technology to create the HR macrolevel scorecard. In essence, as each HR program is evaluated and selected, data are integrated. Additional information on developing an HR scorecard is presented in chapter 10.
ROI impact studies are conducted selectively, usually involving 5 to 10 percent of all HR projects, programs, and solutions. Usually, the HR programs that are targeted for business impact and ROI analysis are those that are strategically focused, expensive, high profile, controversial, and certainly those that have generated management’s interest. This does not mean that other HR programs are not evaluated. It is recommended that all programs be evaluated for reaction and the vast majority for learning, but only a few select programs are taken to higher levels. More important, those involving the actual ROI calculation are evaluated at all five levels.
ROI evaluation targets are developed, showing the percent of programs evaluated at each level. Organizations target the desired number of programs to evaluate at each level, expressed as a percent. Figure 8-3 shows a typical profile of a best-practice organization, targeting a percent of programs at each level. Target levels are developed reflecting the resources available and the feasibility of evaluation at each level. Targets usually begin at 100 percent of programs at the first level (reaction) and include 5 to 10 percent of programs at the fifth level (ROI).
A variety of data collection methods are used in ROI analysis. ROI evaluation is not restricted to a particular type of data collection method such as monitoring business data. Instead, questionnaires, built-in action plans, focus groups, and observations are used in developing the complete profile of six types of data in the ROI methodology.
For a specific ROI evaluation, the effects of HR are isolated from other factors. Although isolating the effects of HR is a difficult issue, best-practice organizations realize that to make a business linkage to a specific HR effort, there must be some method in place to show the direct contribution of the HR program. Using a variety of techniques ranging from control group analysis to expert estimation, best-practice organizations tackle this difficult issue with each impact study. Some argue that this is too difficult or impossible. In reality, it must be done for executives to understand the relative contribution of HR. Otherwise, there is a temptation to slash the budgets of major HR programs because there is no clear connection between the program and the business value.
Business impact data are converted to monetary values. These days, it may not be enough to show the actual outcome from an HR program expressed in numbers such as quality improvement, cycle-time reduction, turnover reduction, or enhancement in customer loyalty or job satisfaction. The actual value in monetary terms is needed. Best-practice organizations tackle this with a full array of approaches to develop the monetary value. This is absolutely essential because an ROI calculation compares the monetary value with the cost of the HR program.
The ROI methodology is implemented for about 3 to 5 percent of the HR budget. One of the common fears of ROI implementation is the excessive cost in both time and direct funds. Best-practice firms report that they can implement the ROI methodology for roughly 3 to 5 percent of the total direct HR development budget, using targets set in figure 8-3.
By using a variety of cost savings approaches, cost and time commitments are kept to a minimum. Some of the most common cost savings approaches are:
Plan for evaluation early in the process.
Build evaluation into the HR process.
Share the responsibilities for evaluation.
Require participants to conduct major steps.
Use short-cut methods for major steps.
Use sampling to select the most appropriate HR programs for ROI analysis.
Develop internal capability to implement the ROI process.
Utilize Web-based software to reduce time.
Streamline the reporting process.
When implementing ROI, many organizations have migrated from a very low level of investment (around 1 percent or less) to the desired level by a process of gradual budget enhancements. These enhancements sometimes come directly from the cost savings generated from the use of the ROI methodology.
ROI forecasting is implemented routinely. Senior executives sometimes ask for a forecast of ROI before a human capital project is developed and implemented. Consequently, ROI forecasting is used routinely in best practice organizations to enhance the decision-making process. Recognizing the shortcomings of forecasting, conservative adjustments are made and steps taken to ensure that the best expert inputs are secured to develop the forecast.
The ROI methodology is used as a tool to strengthen/improve the human capital process. One of the important payoffs of the use of ROI over a period of time is that it transforms the role of HR in the organization. The ROI methodology focuses increased attention on alignment with business needs, improves the efficiency of design, development, and implementation, and enhances the value of human capital in the organization. More important, it builds respect, support, and commitment from a variety of groups, including senior executives and major program sponsors.
It is important to understand that the implementation of the ROI methodology is a gradual, deliberate, and planned approach to change the perceptions of these important groups. IBM’s practice with this process is outlined in figure 8-4. As the figure illustrates, certain types of measures are required for all programs, others are reserved for particular types, but selected initiatives, and only a few are actually taken to the ROI level. The key issue is that these represent a variety of data important to the key groups in the organization—the sponsors, clients, and key supporters.[9]
Source: IBM. From Stephen Gates, “Linking People Measures to Strategy,” Research Report R-1342-03-RR (New York: The Conference Board, 2003), p. 11.
Figure 8-4. Gradual implementation in IBM.
Collectively, these best practices are evolving as hundreds of organizations use ROI each year. This underscores the progress in the use and application of ROI.
Although progress has been made in the implementation of ROI, significant barriers inhibit the implementation of the concept. Some of these barriers were briefly presented in chapter 5 as disadvantages. Many of these are realistic, while others are based on false perceptions.
The ROI process adds cost and time to the evaluation process of programs, although the additional amount is usually not excessive. It is possible that this barrier stops many ROI implementations early in the process. A comprehensive ROI process can be implemented within most human capital budgets (because it represents about 3 to 5 percent of the total HR department budget). The additional investment in ROI can perhaps be offset by the additional results achieved from these programs and the elimination of unproductive or unprofitable programs.
Many human resources staff members do not understand ROI, nor do they have the basic skills necessary to apply the process within their scope of responsibilities. Measurement and evaluation is generally not a prerequisite for their job. The typical HR program focuses more on reaction and satisfaction than on results. HR staff members attempt to measure results by measuring reaction to the program. Consequently, a tremendous barrier to implementation is the change needed for the overall orientation, attitude, and skills of the HR staff.
Many of the current HR programs do not adequately analyze and assess need. Some of these programs have been implemented for the wrong reasons: at management’s request or in an effort to chase a popular fad or trend in the industry. If the program is not needed, or is not aligned with the business, the benefits from the program will be minimal. An ROI calculation for an unnecessary program will likely yield a negative value. This is a realistic barrier for many applications.
Fear prevents HR departments from pursuing ROI, whether it is a fear of failure or fear of the unknown. Analysts, developers, consultants, and program administrators may be apprehensive about the consequence of a negative ROI. Lack of results may expose weaknesses or deficiencies in design or execution. They fear that the results will be used against them as a performance-evaluation tool, not understanding that it can work in their favor as a process-improvement tool. Also, the ROI process stirs up the traditional fear of change. This fear, often based on unrealistic assumptions and a lack of knowledge of the process, becomes a realistic barrier to many ROI implementations.
A successful ROI implementation requires planning and a disciplined approach to keep the process on track. Implementation schedules, evaluation targets, ROI analysis plans, measurement and evaluation policies, and follow-up schedules are required. The HR staff may not have enough discipline and determination to stay on course. This becomes a barrier, particularly when there are no immediate pressures to measure the ROI in human capital. If the current senior management group does not require ROI, the HR staff may not allocate time for planning and coordination. Other pressures and priorities also often eat into the time necessary for ROI implementation. Only carefully planned implementation will be successful.
Many HR staff members have false assumptions about the ROI process, which keeps them from attempting ROI. Typical assumptions are as follows:
The impact of an HR program cannot be accurately calculated.
Managers do not want to see the results of human capital projects expressed in monetary values.
If the CEO does not ask for the ROI, he or she is not expecting it.
“I have a professional, competent HR staff. Therefore, I do not have to justify the effectiveness of our HR programs.”
The human capital function is a complex, but necessary part of the business. Therefore, it should not be subjected to an accountability process.
These false assumptions form real barriers that impede the progress of ROI implementation.
Although the benefits of adopting the ROI process may appear to be obvious, several distinct and important benefits can be derived from the implementation of ROI in an organization. A few of these were briefly summarized in chapter 5 as advantages.
Routine use of the ROI methodology is the most accurate, credible, and widely used process to show the impact of an HR program or project. The ROI will determine if the benefits of an HR program or project, expressed in monetary values, have outweighed the costs. It will show the contribution to the organization and reveal if it was, indeed, an acceptable investment.
Calculating ROI in various areas with different programs and projects will determine which HR programs contribute the most to the organization, allowing priorities to be established. Successful HR programs can be expanded into other areas—if the same need is there—ahead of other HR programs; inefficient programs can be redesigned and redeployed. Ineffective programs can be discontinued.
The ROI methodology is a results-based process that focuses on the results of all HR programs, even for those not targeted for an ROI calculation. The process requires analysts, facilitators, consultants, participants, and support groups to concentrate on measurable objectives, that is, what the program is attempting to accomplish. Thus, this methodology has the added benefit of improving the effectiveness of all programs.
Developing ROI information is one of the best ways to earn the respect of the senior management team and the sponsor (key stakeholder). Senior executives have a never-ending desire to see ROI. They appreciate the efforts to connect human capital to business impact and show the actual monetary value. It increases their comfort level with human capital investment and makes their decisions much easier. Sponsors who support, approve, or initiate human capital programs see the use of ROI as a breath of fresh air.
The ROI methodology, when applied consistently and comprehensively, can convince the management group that human capital is an investment and not an expense. Armed with the data, they recognize the value of human capital and build confidence about their decisions to invest in it. Key managers will see HR programs as making a viable contribution to their objectives, thus increasing the respect for the function. This is an important step in building a partnership with management and increasing management support.
These key benefits, inherent with almost any type of process improvement, make the use of the ROI methodology an attractive challenge for the human capital function.
This chapter presents the microlevel analysis to show the contribution of human capital programs. At this level, the analysis focuses on the contribution of a specific program, project, initiative, or solution in the human capital arena. The process described is the ROI methodology, which has been developed and refined over a twenty-year period and has been applied to a variety of human capital areas. In the last decade, thousands of individual studies have been developed, showing the contribution of specific programs. These impact studies provide decision makers with the data needed to determine specific contributions and give insight into which programs, projects, or solutions are worthy of additional investment. Together, with the macrolevel of analysis presented in chapter 7, ROI impact studies provide some overwhelming evidence of the value of human capital in organizations today.