Proving return on investment is the secret to getting sign-off from management to launch a campaign, put people on a programme, attend a course or pay for a new piece of capital equipment. Management loves justifiable expenditure when it has black ink at the end of it.
A recent survey in New Zealand Management demonstrated that less than 20% of New Zealand organisations measure any tangible business impact from HR programmes. This fact alone illustrates why so many companies cut HR spending when an economy downturn threatens which is exactly the opposite of what should take place. When there is less business for an organisation to go after, that's when the staff need to be more skilled and at the top of their game to compete and secure that business.
Most people agree you need to make some form of investment in order to gain some ground. However, some organisations feel that the reason for spending their budgets is to make people feel good or to boost morale and that's it. It is true that higher morale may have a positive effect on the business, but without measuring that impact, budgets will not necessarily be repeated next time round.
We can separate the measurable return into hard and soft measures. Hard measures can be accurately determined in such areas as increased productivity, increases in sales and reductions in staff turnover. This can also be applied to direct outcomes from an investment such as a piece of capital equipment. Something that can be seen and touched!
Predictions can be provided in HR areas which enable companies to engage in HR spending or campaigns. Soft measures can include areas such as morale, improved teamwork, increased customer satisfaction and better communications between departments.
It is these soft measures that are often difficult to put a monetary value or return on. However, there are ways to measure it - for example, the tricky area of staff morale: highly motivated staff will be less likely to take a day off work sick when they are feeling 50/50. Conversely, a person lacking in morale at work will not need much of an excuse not to show up. Instantly, you can begin to count the benefit of reducing the amount of sick days ordinarily taken by your staff by improving morale.
To help work this out you may need to do some research into what some of these intangible areas are actually costing the business. Some areas to begin looking at are the actual cost of a sick day (loss of productivity or stress on other staff, temp if required, loss of business to name a few). When these figures are truly reported, some of the actual figures can be quite frightening. Once understood they can be used in an ROI equation to gain ‘buy-in' for an investment. If a sick day is costing the business $200 per day (which is very conservative!) and you have 50 staff who each take off five days per year, that is going to cost the business around $50,000 per annum.
You might have difficulty justifying an investment of $10,000 to make people feel good and fix a morale problem. But understanding and using an ROI model, you can put forward a business case for the cost of the issue (sick days) and the solution (reduction in false sick days) and what it means to the business (ROI). If sick days are reduced to two per person per annum, the ROI would be 200% on the investment.
Now you have the attention of the financial people in your office!
In order to determine the success of any investment, you have to measure the output - even if part of the cost of the investment is in the measures. In addition to understanding that concept, the ability to measure along the way, right from the start is essential. Measures at the end of a programme may be too late as the investment is already spent. Measures along the way will help correct the direction if necessary. Measures before the start and a prediction of ROI will more than likely help you get the sign off you wouldn't normally get.
Adding accountability to a provider's vocabulary will help determine the worthiness of the investment. Before engaging in any expenditure to run a campaign or an HR initiative with your suppliers, look at what is expected in return. Take time to evaluate these parameters:
- What goals are there for the programme?
- Can you pinpoint expectations?
- How will it be measured?
- What will define its success?
- What ROI is predicted?
Having answers in these areas will help to keep focus and provide reason and accountability for making the investment. If you struggle with some of these, then simply put the accountability onto your suppliers. After all, if they want your business, they should be able to assist you by coming up with an ROI figure for you as to why you should use their product or service.
It has often been said that companies who invest in their people will see their people invest in their customers who in turn will reinvest in the company. Putting measures in place will help to prove this fact and provide ongoing justification for expenditure by showing a positive return on investment.