How do you measure ROI on time and money spent on human resources and cultural? For business people this can be very difficult and for most they see no ROI. Too many business owners view human resources as a known cost with an unknown return. Not knowing the financial impact as a measured ROI means most business owners tend to under invest in HR.
Recruiting software giant Greenhouse has come up with a method to measure HR initiatives called Employee Lifetime Value (ELTV). As illustrated in the chart below, ELTV measures the value an employee brings to an organization, from his or her first day to the last day.
As you can see when an employee is hired, they have a negative output, because time and money is spent to recruit and hire. As onboarding starts and continues, employees eventually move into a positive output. For some companies this can happen very slowly. As you continue to grow, train and develop that employee their output increases. Eventually the employee may decide its time to move on and output will decrease until finally they leave.
ELTV has four areas of input that will either increase or decrease an employee’s lifetime value. Hiring, Onboarding, Developing and Culture. An increase in output does not rely solely on how long an employee works for you. Effective processes for those four areas will improve ELTV output. The better Recruitment and Onboarding you have the earlier you will achieve a positive output. The better Development and Culture process you have the longer you will have a positive output.
Maia Josebachvili from Greenhouse shared some research from a case study on sales people. The focus was on sales people as it’s easier to calculate revenue with that role, but it applies to any position or employee.
In the case study there are two breakdowns, companies who invest very little or have average HR practices versus companies who invest in and create above average HR practises. Below are the results that show higher investment in HR leads to an increased ELTV output.
- Hiring – The salesperson is a better initial hire; they outsell peers by 20%
- Onboarding – A better onboarding program decreases the sale person ramp time by 30%
- Development – Better management and development practices improve the salesperson’s performance by 20% in a year
- Culture – Better culture and management practices add a year to the salesperson’s tenure.
Josebachvili said these numbers are conservative and are probably a lot hirer. In one case, a company investing in HR had salespeople making an extra $1.3 million over three years. A small monthly investment in practises such as recruiting, onboard and improving culture can make a big difference in revenue. See the chart below to compare
In looking at these measurements you can get a better sense of ROI. Those unknown returns now have a measurable return. Investing an extra $1,000 a month in HR can bring a return that is 10, 20 or even 30 times higher.
The key is start measuring and start investing to see what works. Start small but focus on those four areas Hiring, Onboarding, Development and Culture. Start measuring areas such as; average employee life cycle, revenue, employee offer acceptance, etc. Investment is essential for success just make sure you are measuring your success.