Much debate has occurred on the issue of measuring the return on investment (ROI) in human resources. Rarely does a topic stir up emotions to the degree the ROI issue has. Some characterize ROI as inappropriate. Others passionately insist ROI as the answer to their accountability concerns. The truth lies somewhere in between these two extreme viewpoints. Understanding the ROI process and its inherent weaknesses and advantages makes it possible to take a rational approach to the issue and implement an appropriate mix of ROI strategies.
One thing is certain – ROI is not a fad. The concept of ROI has been used for centuries according to the 75th anniversary issue of Harvard Business Review (HBR) which traced the tools used to measure results in organisations to the 1920s.
In recent years, the application of the concept has been expanded to all types of programmes and initiatives including human resources, training & development, change initiatives, health & safety and technology. Thousands of organisations today, including many Fortune 500’s, are developing ROI calculations for many of these investments.
With the acceptance of ROI, much of the focus has now turned to best practices for ROI implementation.
Dr Jack Phillips and Dr Patti Phillips from the ROI Institute provide an overview of best practices in the return on investment (ROI) process and describe how application of these measurement practices can positively impact the HR function.
1. The ROI methodology is implemented as a process improvement tool and not a performance evaluation tool for the HR staff
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 performance. Consequently, many organizations recognize that ROI is a process improvement tool and communicate this posture early. The process shows not only the success of a particular project, program, or solution, but also provides detail into how the project can be revised to add additional value. Barriers and enablers to success are always identified.
2. The ROI methodology generates a micro-level scorecard with six types of data
As the table show, the data represents a scorecard of performance, representing both qualitative and quantitative data, often taken at different time frames and from various sources to generate a balanced, micro level scorecard for a particular program.
This approach expands upon Donald Kirkpatrick’s four-level framework for categorizing evaluation data (i.e. reaction, learning, behaviour, and results, as described in Evaluating Training Programs: The Four Levels,© 1998, Berrett- Koehler Publishers) to incorporate a fifth level of evaluation, which serves to capture the financial impact or return-on-investment (ROI) of a particular program.
This (ROI) is the ultimate level of evaluation, where the impact measures are converted to monetary benefits and compared with the costs. ROI is usually expressed as a percentage or benefit/cost ratio. The model also provides for a sixth data measure – Intangible Benefits – which are those benefits that have not been converted to monetary value. These entail such measures as increased morale, improved teamwork, or increased job satisfaction.
3. The ROI methodology data are being integrated to create a macro scorecard for the HR function
As more and more studies are conducted, data are rolled up to create a macro level scorecard, showing the value of the function. Individual micro scorecard evaluation data are integrated into the overall macro level scorecard. This approach requires a few similar questions to be asked each time. These are then integrated, typically by using technology, to create the HR macro level scorecard.
4. ROI impact studies are conducted very selectively, usually involving five to 10 percent of all programs and solutions
Programs that are usually targeted for levels four and five are those that are strategically focused, expensive, high profile, controversial and reflective of management’s interest. This does not mean that other programs are not evaluated. It is recommended that all programs be evaluated at level one and the vast majority at level two, but only a few select programs are taken to levels three, four and five. Most importantly, those involving the actual ROI calculation – taken to the fifth level – are evaluated at all five levels.
5. ROI evaluation targets are developed, showing the percent of programs evaluated at each level
Organizations are targeting the desired number of programs to evaluate at each level, expressed as a percent. 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 level one and conclude with five to 10 percent of programs at level five. The table below shows a typical profile of targets developed by a best practice organization.
6. 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 of business data. To develop a complete profile of the six types of results data generated from the ROI methodology, data can be collected at different times and gathered from different sources using a variety of methods, including:
- Follow-up surveys and questionnaires,
- On-the-job observation to capture application and use,
- Tests and assessments measuring the extent of learning,
- Interviews to measure reaction and implementation,
- Focus groups,
- Action plans, and
- Performance records monitoring to show improvement in various performance records and operational data.The challenge in data collection is selecting appropriate methods for given settings and specific programs, within time and budget constraints.
7. For a specific ROI evaluation, the effects of HR are isolated from other factors
HR professionals often overlook the step of isolating the effects of the particular HR program or solution. Although a difficult issue, best practice organizations realize there must be some method in place to show the direct contribution of the HR program to make a business linkage to a specific HR effort. Many best practice organizations are currently using a variety of techniques to tackle this issue with each impact study. These techniques include:
- Comparison groups – a pilot group of participants in an HR program is compared with a group not participating in the program,
- Trend lines – projected program values are compared with the actual data during program implementation and at the program’s conclusion, and
- Estimations by participants, stakeholders, and independent experts.While many factors influence performance data after a program is implemented, these specific techniques can pinpoint the degree of improvement directly related to the program. In reality, this step is critical to helping executives understand the relative contribution of HR. Otherwise, there’s a temptation to slash the budgets of major programs because there’s no clear connection between the program and the business value.
8. Business impact data are converted to monetary values
For some programs, intangible, non-monetary benefits have important value, such as improved public image, increased job satisfaction, increased organizational commitment, reduced stress, and improved teamwork. These days, it may not be enough to report HR program value simply in terms of intangible benefits or in terms of outcomes expressed as quality improvement, cycle time reduction, turnover reduction, or enhancement in customer loyalty. Defining the actual value of the improvement in monetary terms is essential for
ROI analysis because an ROI calculation compares the monetary value with the cost of the program. Best practice organizations are using a full array of approaches to develop monetary values.
9. The ROI methodology is being implemented for about three to five 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 agencies report that they can implement the ROI methodology for roughly three to five percent of the total budget, using appropriate evaluation targets discussed in number five. Available cost savings approaches include the following:
- Plan for evaluation early in the process
- Build evaluation into the training process
- Share the responsibilities for evaluation
- Require participants to conduct major steps
- Use shortcut methods for major steps
- Use sampling to select the most appropriate programs for ROI analysis
- Use estimates in the collection and analysis of data
- 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 one percent or less) to the three to five percent 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.
10. ROI forecasting is being implemented routinely
Senior executives are sometimes asking for a forecast of ROI before a project begins. Consequently, best practice organizations are routinely using ROI forecasting approaches to enhance the decision making process. The credibility of the process is greatly increased by the use of conservative adjustments and built-in steps to secure input from the best experts.
11. The ROI methodology is used as a tool to strengthen/improve the HR process
A significant payoff for using the ROI process over time is that it transforms the role of HR in the organization. Application of the process increases HR alignment with business needs, improves the efficiency of design, development, and delivery, and enhances the value of the HR function in the organization. Furthermore, it builds respect, support and commitment from internal groups, including senior executives and major program sponsors.
Collectively, these best practices are evolving as hundreds of organizations are using ROI each year. The best practices underscore the progress in the evolution of ROI application and use in both the public and private sector. Yet the best process, tool, technique, or model will only be successful if it is properly used and becomes a routine part of the HR function. Implementation issues include assigning evaluation roles and responsibilities, building the necessary skills, developing transition plans and goals around the process, and preparing the environment, individuals and support teams for this type of comprehensive analysis.
In line with our objective to offer best-in-class learning solutions for executives, London School of Business & Finance is proud to partner with The Business Evaluation Centre to offer “The Bottom Line on ROI”, based on the Phillips ROI Methodology developed by Dr Jack Phillips of the ROI Institute, for the first time in Singapore.
Discover the business impact and true dollar value of your projects, programmes and business initiatives now – speak to LSBF’s Education Consultants for more information and discounts. Call us at (+65) 6580 7000 | Email us at: executive@LSBF.edu.sg | Visit our website: http://tinyurl.com/BottomLineROI
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