challenging the hr community to think in terms of roi
TRANSCRIPT
better together ... we deliver
Challenging the HR Community to Think in Terms of ROI April 6, 2016 Dr. Brett Richard Corporate Manager, Organizational Effectiveness
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Influencing Senior Leaders 1
• Purpose of HR metrics is to influence senior leader decisions about talent and how it is organized and viewed in the organization
• HR’s role – get Sr. Leader(s) to buy-in to logic/analyses that underlie $ value of HR programs
• 3 Strategies: 1. Partner with key finance stakeholders 2. Make business case initiatives through ROI$, other data, research, and anecdotal evidence 3. Use internal surveying and focus groups where necessary and train managers on how to use HR
approaches • Help managers understand that individual solutions often work better than one-size-fits-all approaches
• Helps to demonstrate the importance of HR Programs and retaining talent – involve the managers
TACTICS
Use internal data that examines both the financial and nonfinancial effects of HR programs
Don’t rely on isolated facts
Use internal data to help outline what leaders/employees want and how they describe their needs
Communicate to key stakeholders the high costs of HR impact such as in employee performance (i.e. low and/or high), turnover and absenteeism
Use external data that describes trends in your organization’s industry
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Year 1 Year 2 People Costs (Wages, benefits, HR expenses)
$3,500,000 $3,900,000 * Invested $400,000 in training and development
Revenue $14,500,000 $21,000,000
People cost spent (cents) / $1 revenue .24 .18 * People Cost / Revenue
% Improvement in workforce productivity 25%
$ Value of increase productivity $1,260,000
People cost spent per $ of revenue
% Improvement in workforce productivity
Human Capital ROI = ((Revenue – (Operating Cost – People Cost)) / People Cost) – 1
HCROI Year 1 = ((14,500,000 – (9,500,000 – 3,500,000)) / 3,500,000) – 1 = 2.43 = 243% HCROI Year 2 = ((21,000,000 – (9,500,000 – 3,900,000)) / 3,900,000) – 1 = 3.94 = 394% For every $1 invested, the organization receives back the original $1 plus $3.94 in profit
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• Most admired…out of 64 companies
• Managed their people during the Great Recession, compared to their less-admired peers
• Less likely to have laid off any employees (10% vs 23%, respectively)
• Less likely to have frozen hiring or pay
• Buy a giant margin (21 points), they were more likely to have invested the money and the effort to brand themselves as employers, not just as marketers to customers
• They treat their people as assets, not expenses
• Most important lesson…they did not launch their enlightened human capital philosophies when the recession hit; they’d been following them for years. Once a recession starts, it’s too late
“…the world’s most admired companies invest in people and see them as assets to be developed, not simply as costs to be cut”
Most admired companies – Fortune magazine 4
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• Organizations across the US spent $164.2 billion on employee learning and development in 2013 2; only an estimated $15.5 billion (~9%) was spent on leadership development17
Leadership development & ROI
The need to invest in leader development and speak language of finance (i.e. ROI)
Why such little use of ROI methods?
It is difficult to translate the value of leadership development into common business jargon and financial metrics
Sr. Managers claim leadership is a critical
component of their company's growth
90%
Describe their company as having excellent leadership 8%
Training content focused on leadership
development of management &
supervisory roles
10.4%
Focused on executive leadership
4% Rarely or never using ROI as a means to evaluate program
success
Use ROI as a method of evaluation
Organizations that actually measured
ROI – ASTD
17.9%
24%
66%
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- 55%
There is a 337%-543% ROI from investing in LEADER DEVELOPMENT & LEADER DIFFUSION 2
-55%
85%
-19%
196%
0
200
400
% ROI
(Average)
24%
196%
Year 1
Year 3
Year 5
Year 1
Year 3
Year 5
Year 1
Year 3
Year 5
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[$] monetary value of leadership development 2
The diffusion effect of leadership on culture could affect monetary returns 12
Note: Return on Development Investment (RODI) is presented as average RODI; TT (Training Transfer)
Upper-Level Leaders (30)
+Mid-Level Leaders (100)
+Low-Level Leaders (1000)
RODI (100% TT) ($63,392) (9%)
$663,876 66%
$6,024,412 130%
RODI Year 1 (≤30% TT) ($442,751) (55%)
($315,951) (19%)
$734,247 24%
RODI Year 2 (≤30% TT) $323,995 60%
$989,926 82%
$6,171,923 122%
RODI Year 3 (≤30% TT) $439,114 80%
$1,134,195 95%
$6,088,853 123%
RODI Year 4 (≤30% TT) $594,654 112%
$1,573,358 133%
$6,091,001 126%
RODI Year 5 (≤30% TT) $788,456 146%
$3,381,528 155%
$6,188,490 123%
RODI 5-yr Cumulative (≤30% TT)
$1,702,405 $5,262,812 $25,081,004
337% 443% 534%
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example: Actual [$] monetary value of team development
• Team development program implemented in phases to a project team to enhance team integration
• Outcomes were measured and effect sizes calculated
• Number (N) = 98 • Effect duration (T) = 6 months (.5 yr) • Effect size (dt) = 2.29 • Salary x 40% (SDy) = $48,000 • Training Transfer (P) = 20% • Cost (C) = $450,000
RODI = $627,216 (139% return)* * No leader diffusion
• Assumptions: • Actual headcount, salaries and cost of training used • Richard, et al. (2014) – Average duration of training impact is estimated 6 months • Casico & Boudreau (2011) - $ value to organization of one standard deviation of
performance change is 40% salary • Baldwin & Ford (1993) – only 10-30% (vs. 100%) training is actual transferred to
workplace
RODI = (N T dt SDy P) – C
# RODI ($) RODI (%) Phase 1 98 $1,077,216 Phase 2 20 $110,400 Phase 3 16 $91,320 Phase 4 11 $61,690 Phase 5 6 $36,291 Phase 6 3 $19,460 Phase 7 1 $6,926
Benefits 155 $1,403,303 Cost 98 $450,000
RODI $953,303 212%
Leader diffusion Impact
98
118
134 145
151 154 155
60
80
100
120
140
160
0 6 12 18 24 30 36
# of
Lea
ders
Time (Months)
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Study 1
• Four portfolios of 575 publicly traded companies
• Invested 2x industry average in employee T&D
• RESULTS: Outperformed the S&P 500 by 4.6 percentage points over a 25-month period, and outperformed it in the year prior to the study by 17–35%. 15, 1
Study 2
• Sample of 30 banks
• Found that training expenditures remain a powerful predictor of subsequent stock prices, even through the market turbulence of 2008.
• RESULTS: Training in technical skills yielded an effect that was 3.5x higher than the effect for all types of training and 6x higher than that for general business skills. 16, 1
This supports, but does not prove, that training investments help
determine stock price performance; not the opposite.
[$] monetary value of development
Training & Stock Prices – Case Studies
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Safeway Co…kept healthcare cost flat vs. 40% avg. increase in US companies
Health, Wellness and Worksite Health Promotion 5 Best Performing Companies in Controlling Healthcare Costs
Key Action % High
Performing Companies
% Low Performing Companies
Detailed Action
Engage Leaders 86% vs 57% Secured Sr. Management involvement, a critical performance factor
Clearly articulate strategies 84% vs 43%
Use results measures to build action plans for performance improvement
Measure for Success 82%
81%
vs
vs
53%
74%
Measure EE attitudes and understanding of benefit programs Measure EE understanding and use of resources/tools
Optimize Investments 80% vs 29% Take steps to align subsidies & resources with EEs most significant needs
Understand Employee Populations 75% vs 46%
Measure EE health status & risks by population segment
Support Employee Health 74% vs 22% Actively help EEs understand & manage health & health risks
Engage Employees 65% vs 34% Provide healthcare communications, EE education, & access to health info year-round
Source: Towers Watson (2008)
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• Places heavy emphasis on attracting and retaining talent by focusing on:
• 7500 sqft on-site medical facility • Full-indemnity health plan • Free physical exams/mammography • Montessori day care • Fitness center, soccer/softball fields • Towels/laundry service for workout
clothes • Free to employees & their families
• Is SAS spending too much money to reap the benefits of a 3% turnover?
• If SAS benefits cost 50% of salary (industry benchmark 39%), it would be 11% higher than its industry competitors
• HOWEVER, after factoring in opportunity savings, the actual cost of SAS benefits is $8.7 million less than industry average.
SAS – 1,000 employees
Calculation Example: Turnover & Workplace Benefits 1
Variables SAS vs Industry
Benchmark
Annual Turnover 3% vs 20%
Annual Salary $60,000 $60,000 Cost of TO per programmer (1.5 x salary)
$90,000 $90,000
Number per 1,000 programmers who leave x 30 x 200
Total TO Cost (before benefits) ($2,700,000) vs ($18,000,000)
Cost of Benefits (Per 1000 employees)
($30,000,000) at 50% salary
($23,400,000) at 39% salary
Annual Opportunity Savings + $15,300,000 vs $0
Net Benefit Cost After Opportunity Savings ($14,700,000) vs ($23,400,000)
Net Savings b/w programs $8.7M savings
Annual Savings
+$15.3M
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SAS EMPLOYEE Benefits:
• High-quality child care at $410 a month (versus $1,500 per month outside the company) • 90% coverage of the health insurance premium • Unlimited sick days and a “no cost” medical center (4 physicians and 10 nurse practitioners) • Free 66,000-square-foot fitness center and natatorium • Lending library • Summer camp for children
SAS EMPLOYER Benefits: • Named by Fortune magazine as the #1 best company to work for in America in 2010 • Made the “100 Best” list every year since it was created in 1998 • Unbroken chain of profitability and growth every year in the 34 years since its founding • 2009 revenues of $2.31 billion, ranking as world’s largest privately owned software company • Industry’s lowest voluntary turnover (2%) • Employee Value Proposition: In 2009, 26,432 applicants applied for 119 jobs
Value of a solid HR Program - SAS
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• A review of 72 articles: • Health-promotion programs achieve an average ROI of :
• $3.48 per $1 invested when considering health-care costs alone • $5.82 when considering absenteeism • $4.30 when considering both health-care costs and absenteeism 7
• Citibank N.A. Health-Management Program • 38-month case study of 23,000 participants • Within 2 years
• ROI of between $4.56 and $4.73 per $1 invested. 8
ROI of Health Programs
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“U.S. employers lose an estimated $4 billion annually to absenteeism related to child care” 1, 9
Return on Investment (ROI) of Child Care
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Calculation example: Benefits of Child care 1, 9
• In 2010 Citigroup owned or participated in 12 child-care centers in the United States.
• Employees paid about half the cost to use facilities managed by Bright Horizons Family Solutions or at non-Citigroup back-up centers.
• In two follow-up studies, Citigroup found the following: 31 • 51% reduction in turnover among center users vs. non-center users
• 18% reduction in absenteeism
• 98% retention rate of top performers
Variables Costs Benefits # of lost days 6,900 6,900 Avg. Daily Salary $346.81 $346.81 Gross Savings / (Costs) ($2,393,015) $2,393,015 Cost of Child-care Center ($1,131,170)
Net Savings $1,261,845
ROI (Benefits – Cost) / Cost 111.6%
• Citigroup found that child-care breakdowns were the cause of 6,900 days of missed work by parents.
• By making child care available, these 6,900 lost days were not incurred.
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Benefits of Child care 1
• Canadian financial services giant CIBC invested in a childcare program for its employees in 2002
• Provided on-site service to 14 Canadian cities.
• Employees could take advantage of program for up to 20 days/year at no cost
SAVINGS?
• Saved more than 6,800 employee days since opened in 2002
• Estimated cost savings since 2002 ~ $1.6 million (in 2010 dollars) 11
• Chase Manhattan Bank (now JPMorgan Chase) analyzed (ROI) of its backup child-care program (that is, child care used in emergencies or when regular child care is unavailable).
• Child-care breakdowns were the cause of 6,900 days of missed work; childcare program kept these lost days from being incurred.
SAVINGS?
• Gross savings = $2,393,015; Annual cost of center = $1,131,170
• Net savings = $1,261,845; ROI of better than 110%. 10
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“…How to Reduce Risk & Realize More Value from Your HIPO Programs” 12
What’s all the HIPO Hype?
“In order to drive value from HIPO programs, best-in-class companies address the three critical factors for success: Identification, Benchmarking and Development.”
CEB research • High-potential employees (HIPOs) bring 91%
more value to the organization than non-HIPOs and exert 21% more effort than their peers.
• Most organizations are not realizing this value, with 73% of HIPO programs showing neither business outcomes nor ROI.
• Only 46% of organizations have a systematic process for identifying HIPOs
• Matching development opportunities to personal careers ↑ engagement by 35%
• Strong leaders can achieve: • 90% more revenue
• 2x more profit strength
• Fostering effective learning can ↑ performance by 14%
Image Source: ATD (2015) 14
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HIPO Return on Investment (ROI)
Non-HIPO Focus
HIPO Focus
# of Non-HIPOS 1,000 750
Avg. Daily Salarya x 100% $350 $350
# of HIPOS 0 250
Avg. Daily Salarya x 191% $0 $668.50
# of days per year 260 260
Total HIPO Value $0 $43,452,500
Total Non-HIPO Value $91,000,000 $68,250,000
Total Employee Value (100%) $91,000,000 $111,702,500
Adjusted Value (40% Rule) $54,600,000 $67,021,500
% Increase in monetary value from HIPO Focus 22.8%
Benefits HIPO Focus $54,600,000
Non-HIPO Focus $67,021,500
HIPO Benefit (40% Rule) $12,421,500
HIPO Development Costb $2,500,000
Net Opportunity Benefit $9,921,500
ROI (Benefits – Cost) / Cost 397%
a Average daily salary - $350 b HIPO Development Cost - $10,000/employee (250 employees)
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References 1. Cascio, W. F., & Boudreau, J. (2011). Investing in people: Financial impact of human resource initiatives (2nd ed.). Upper Saddle River, NJ: FT Press.
2. Richard, B., Holton, E. F. III., & Katsioloudes, V. (2014). The use of discrete computer simulation modeling to estimate return on leadership development investment. The Leadership Quarterly, 25 (5), 1054-1068.
3. Hewlett, S. A., L. Sherbin, and K. Sumberg, How Gen Y and Boomers Will Reshape Your Agenda, Harvard Business Review, 87 (July/August 2009): 3–9. See also Galinsky, E., K. Aumann, and J. T. Bond, The 2008 National Study of the Changing Workforce: Times Are Changing—Gender and Generation at Work and at Home (New York: Families and Work Institute, 2009); Aumann, K., and E. Galinsky, The 2008 National Study of the Changing Workforce: The State of Health of the American Workforce: Does Having an Effective Workplace Matter? (New York: Families and Work Institute, 2009). See also Minton-Eversole, T., Survey: In Hiring Game, Employers Attuned to Work/Life Balance Win, HR News (February 28, 2008). Downloaded from www.shrm.org on May 21, 2010.
4. Colvin, G., How Are Most Admired Companies Different? They Invest in People and Keep Them Employed—Even in a Downturn, Fortune (22 March 2010): 82.
5. Towers Watson (2008), Towers Perrin Health Care Cost Survey Shows Average Annual Per-Employee Cost of $9,660 in 2009—and the Health Care Affordability Gap Widens, Retrieved October 2015 from: http://www.reuters.com/article/2008/09/24/idUS118244+24-Sep-2008+BW20080924
6. Tam, P & Delaney, K (November 23, 2005). Google's Growth Helps Ignite Silicon Valley Hiring Frenzy: Tech Firm Battles Big Rivals To Nab Top Engineers; Bidding Wars Are Back, Wallstreet Journal. Retrieved October 2015 from http://www.wsj.com/articles/SB113271436430704916.
7. Aldana, S. G. (2001). Financial Impact of Health Promotion Programs: A Comprehensive Review of the Literature, American Journal of Health Promotion 15 (5), p. 295–320.
8. Ozminkowski, R. J., Goetzel, R. Z., Smith, M. W., Cantor, R. I., Shaughnessy, A., & Harrison, M. (2001), The Impact of the Citibank N.A. Health Management Program on Changes in Employee Health Risks over Time, Journal of Occupational and Environmental Medicine 42 (5), p: 502–511.
9. Gurschiek, K., Child Care “Investment” Creates Competitive Advantage, HR News, March 5, 2007, Retrieved October 2015 from http://www.shrm.org/publications/hrnews/pages/cms_020657.aspx.
10. O’Connell, B., No Baby Sitter? Emergency Child-Care to the Rescue, Compensation & Benefits Forum. Retrieved October 2015 from http://www.shrm.org/hrdisciplines/benefits/articles/pages/cms_012518.aspx.
11. Shellenbarger, S., If You’d Rather Work in Pajamas, Here Are Ways to Talk the Boss into Flex-Time, The Wall Street Journal (February 13, 2003), D1; and Conlin, M., J. Merritt, and L. Himelstein, Mommy Is Really Home from Work, BusinessWeek (November 25, 2002), 101–104
12. CEB (2015). Beyond the HIPO Hype: How to reduce risk and realize more value from your HIPO program. Retrieved October 2015 from https://www.cebglobal.com/shl/images/uploads/HIPO_2_0_eBook.pdf
13. ATD (2015). High Potentials Are Still Your Best Bet. Retrieved October 2015 from https://www.td.org/Publications/Magazines/TD/TD-Archive/2013/02/High-Potentials-Are-Still-Your-Best-Bet
14. PriceWaterhouseCoopers (2012). Talent riddle: Where are the workers who will power growth? Growing Your Business, 64, p. 6
15. Bassi, L. & McMurrer, D (2004). How’s Your Return on People? Harvard Business Review. Retrieved October 2015 from https://hbr.org/2004/03/hows-your-return-on-people.
16. Bassi, L. & McMurrer, D (2009). Training Investments As A Predictor of Banks’ Subsequent Stock Market Performance. Retrieved October 2015 from http://mcbassi.com/wp/resources/documents/McBassi-BankingWhitePaper-Feb09.pdf
17. ASTD (2013). ASTD 2013 State of the Industry Report. American Society for Training and Development.