Return on Investment in Talent Management: Measures You Can Put to Work Right Now A Human Capital Institute Position Paper – September, 2004 Sponsored by By David Creelman Return on Investment in Talent Management 1 Return on Investment in Talent Management: Measures You Can Put to Work Right Now Key Points: 1. Attempts to put a dollar value on “human capital”, the way we would do for items like inventory, have not been successful. 2. There are good, proven, practical measures like “engagement” which offer valuable insights to investors, the CEO and the Board on whether human capital is in good shape. 3.
Measuring a precise ROI of talent management initiatives is dif? cult in general, but speci? c quantitative studies can provide the information needed for decision making. 4. Semi-quantitative assessments (a mix of quantitative and qualitative information) is typically what managers want to give them con? dence that an initiative is worthwhile. 5. Managers decide with the heart and the head. If the heart is unconvinced no ROI calculations will change their decision. 6. The issue of calculating a precise ROI can be avoided by determining which investments in talent will have the biggest impact on strategy execution.
The value of these investments is self-evident. which talent investments to make. This paper outlines the issues, theories and practices concerning assessing the return on investment (ROI) in talent. The subject is in a curious state. There is great interest in the ROI of talent management, which extends to an interest even in unproven and complicated approaches. At the same time, there are simple things that do help, which are often overlooked. There are two separate topics: assessing the value of a ? rm’s human capital, and assessing the ROI of a given talent management investment.
The ? rst is of interest to investors since it is an indication of how much the ? rm is worth, and what is of interest to investors is of interest to the Board and CEO. The second is of interest to managers who want to know if the money they are spending on recruiting, training, succession planning and other talent management initiatives is worthwhile. INTRODUCTION Organizations recognize that talent is important. However, most ? rms have little information on what return they get from investments in talent. Furthermore, most ? rms do not apply much rigor in deciding
Return on Investment in Talent Management 2 WHAT IS TALENT MANAGEMENT? In a paper on the ROI of talent management it behooves us to explain what we mean by the phrase “talent management. ” At its broadest, talent management sometimes seems to cover all the topics that have traditionally been classi? ed as human-resource issues. This is not helpful. Talent management is best seen not as a set of topics, but as a perspective or a mindset. A talent management perspective presumes talented individuals play a central role in the success of the ? rm.
All corporate issues are seen from the perspective of “How will this affect our critical talent? ” and “What role does talent play in this issue? ” Downsizing, from a ? nancial perspective, is an exercise in cost cutting. From a talent- management perspective it is about losing human capital. Bene? ts, in traditional HR, are about “being good to our employees. ” From a talent-management perspective, bene? ts are about attracting and retaining talent—or in the more modern lingo, “reinforcing our employment brand. ” Furthermore, HR is also deeply involved in the complexities of administering bene? s—an activity which would not be considered talent management. Just as the ? nance perspective is pervasive in organizations, and the customer perspective should be (but often is not) pervasive, so too talent management is one of the hats all managers must wear, or to pick a better metaphor, a pair of glasses with which to see the world. More prosaically, talent management is a set of tools and technologies that help organizations make good decisions about talent. When people start talking about human capital or saying, “talent is our greatest asset,” the obvious question is, How much is this asset worth?
Another question is, What indicators do we have that this asset is in good shape? In ? nance, the quick ratio ([cash + A/R]/ current liabilities) is a simple indicator of the health of a ? rm’s balance sheet. People wonder if there are not similar ratios or measures for human capital. In ? nance the value of a plant in Taipei is quanti? able. People may also wonder if there is some quantitative measure of the talent in the Taipei operation. HUMAN-RESOURCE ACCOUNTING There is a ? eld of study called humanresource accounting that is concerned with the question, How much is this asset worth?
There are academic papers on this topic such as in Eric Flamholtz’s book Human Resource Accounting : advances in concepts, methods, and applications (1985). One method that was developed to answer this question looked at replacement cost, where they simply ask, “If we ? red everyone and had to re-hire them, what would it cost us? ” That gives a minimum value of the human capital asset. THE VALUE OF THE HUMAN CAPITAL ASSET Most managers are concerned with the day-to-day talent management decisions, such as, “Is it worthwhile interviewing more candidates or should we just pick from the ones we’ve seen? ” However, the CEO, the board, and the ? ancial markets are interested in the big picture and are looking for some overall measures of the “talent asset. ” Return on Investment in Talent Management 3 Is that measure of value useful? It might be worth mentioning to a CEO looking to downsize because of a short-term dip in demand. Eliminating the humans, and hence the human capital, will lead to some speci? c quanti? able costs if they need to be re-hired. However, in general it’s not an interesting number, which is why this method has never attracted much attention. The state-of-the-art in human-resource accounting is Dr. Eric Flamholtz’s “Stochastic Rewards Valuation Model. The model develops concepts such as expected realizable value of an employee and an organization service state matrix—concepts that are best reviewed over a semester in graduate school, not in this paper. 1 However, we can grasp the essence of the Stochastic Rewards Valuation Model. It looks at the return an employee generates through their career (for example, from retail shop assistant to assistant manager to store manager) taking into account the probably of promotion and the probability of turnover. For example, a shop assistant will, on average, generate a certain return to the company.
The chances that they will be promoted to a more valuable position (or quit) can also be estimated. So with a little math the value an average employee will return over, say, a ten-year period can be estimated. This is the best the ? eld of human-resource accounting provides, but it is hard to imagine a ? rm using this except in unusual situations. It requires too much data that is not readily available. Human-resource accounting has not made the transition from academia to practice because, to date, it has not produced methods of everyday usefulness to ? rms.
Leading thinkers like Jac Fitz-Enz, Robert S. Kaplan and Hubert SaintOnge have all argued against trying to pull human capital out of the value chain as a separate thing. Kaplan says, “…No direct link exists between humanresource improvement and ? nancial performance. There are intervening steps. For example, improvements in people’s skills and motivation should lead to better processes…The next link occurs when these improved processes deliver more value to customers. The ? nal link is between customer satisfaction and customer retention and increased revenues. So ? ally we can see the sequence of linkages between improvements in people’s skills and motivation and improved ? nancial performance. ”2 Human capital works through, and is deeply intertwined with, all the other tangible and intangible assets of an organization. We are fooled by language when we use the term human capital. The term leads us to think that a ? rm’s value might be expressed as Plant + Equipment + Human Capital + Brand etc. Humans do generate value, but there is no discrete object one can put on a scale and weigh. “How much is human capital worth? ” is not a question anyone has good answers for.
We can do better by asking, “What indicators do we have to tell us if our human capital is in good shape? ” THE WRONG QUESTION The failure of human-resource accounting to devise practical tools is a warning organizations should heed. Trying to get a handle on “What is our human capital worth? ”, as if it were just another asset to be entered on the balance sheet, has not been productive. 1 For more detail, see Flamholtz E. G. , Bullen M. L. , and Hua, W, Measuring the ROI of Management Development: An Application of the Stochastic Rewards Valuation Model, Journal of Human Resource Costing and Accounting, Vol. , Spring 2003 2 David Creelman, Interview with Robert Kaplan, HR. com, April 2001. Return on Investment in Talent Management 4 IS OUR HUMAN CAPITAL IN GOOD SHAPE? No one has worked harder and longer on ? nding indicators of the health of human capital than Dr. Jac Fitz-Enz, founder of the Saratoga Institute. He says: “Over a period of ? ve years, we ? eld-tested various human-? nancial ratios that could eventually be used to provide a link between people and ? nancial results. The simplest measure is revenue per employee…. we tried combining revenue, operating expense, pro? , pay, and bene? ts with employee headcount and full-time equivalents. We split pay by level from non-exempt through supervisor/manager and up to the executive level. Each combination yielded a different aspect of the relationship of people, their costs, and the economic results of the enterprise…. it became clear there were relationships between many employee and operating variables. We could see that movement in pay programs, turnover rates, staf? ng strategies, and training investments in? uenced productivity, customer service and product quality.
Although we could not statistically demonstrate causality, there were obviously some connections that were more than coincidental. ”3 There is a wealth of measures ? rms could use. Simple measures of absenteeism and turnover are useful indicators of health. One bigpicture number Fitz-Enz has developed is HR ROI, which is de? ned as: HR ROI = (Revenue – [Expenses – Pay and Bene? ts])/Pay and Bene? ts This is a quick measure of the earnings generated by the investment in pay and bene? ts. So, for example, if Revenue = 1,000,000, Expenses = 800,000 and Pay and Bene? ts = 500,000, the HR ROI ecomes 700,000/500,000. That is a ratio of 1. 4 to 1, or $1. 40 in revenue for each $1. 00 invested in people, pay and bene? ts. Dr. Fitz-Enz says there is no typical HR ROI. It varies tremendously between industries. So, it is best used as an internal benchmark, or where data is available, as an industry benchmark. The Southern Company, a U. S. utility ? rm, uses HR ROI. However, Howard Winkler, director of HR Strategy says, “This is a very widely touted measure within HR circles but I’ll be really honest, when I sit down and talk to folks about HR ROI, I ? nd it’s not the easiest thing to explain.
It’s not the sort of thing I can explain in one breath. ”4 This honest but discouraging comment takes us to something of a watershed. Everyone agrees talent is important, but even a fairly simple ratio like HR ROI fails to capture management’s attention. To answer the question, Is our human capital in good shape? we need simple metrics, easily understood by management, that clearly have a causal impact on performance. More comprehensive and complex measures may come in time, however managers should focus on the things they can do now to help the CEO, board and ? nancial markets understand the health of their human capital.
INDICATORS THAT HAVE A CAUSAL RELATION TO PERFORMANCE There are a number of measures ? rms can use right away to indicate if their human capital is healthy. These measures have a straightforward relationship with performance. 3 Jac Fitz-Enz, The ROI of Human Capital, Amacom 2000. 4 Workforce Management webinar, “Human Resources Metrics: Out of the Ivory Tower and into Real Use,” June 22, 2004. Return on Investment in Talent Management 5 There are a number of well-known simple measures that should be of interest to senior managers with a talent mindset. These include absenteeism, turnover and retention.
These useful indicators tell us, “Are things getting better or getting worse? ” and “How do we compare to other ? rms? ” That absenteeism, turnover and retention have meaningful direct and indirect costs is not in doubt. A more powerful simple measure is engagement, which has been popularized by Gallup in their best seller First, Break All the Rules. Engagement is a type of employee attitude survey, but is particularly useful because it is demonstrably and even quantitatively related to performance. It’s possible to estimate the impact of a given change in engagement on the bottom line. Some ? ms, such as the TorontoDominion Bank, report engagement scores to the ? nancial markets. While absenteeism and turnover can easily be tracked monthly in large ? rms, engagement is typically measured only annually through an employee survey. Another approach, the one promoted by Robert Kaplan and David Norton, is to create a strategy map and then track the elements of human capital that are most important in driving success. For example, a ? rm might create a strategy map that contains this chain: HUMAN CAPIBILITY There is one potentially valuable but little known method of measuring talent, and that is Dr.
Elliott Jaques’ measure of “human capability”—a person’s ability to handle complexity. Jaques would ask a manager to make a careful argument then use his methodology to score the transcript Jaques also developed a method for determining the capability required for a given job. For anyone who accepts Jaques’ ideas, a measure of how many senior managers are “big enough” for their job would be of real interest. PRODUCT TRAINING INCREASED PRODUCT KNOWLEDGE MORE SALES In this case, a key human-capital measure would be an indicator of how successful product training was at increasing product knowledge.
This approach abandons the notion that we should be asking “What is the value of our human capital? ” or even “Is our human capital getting better or worse? ” Rather, it suggests concentrating on the elements of talent management that most impact strategy execution. This approach, capturing metrics that are part of a chain (e. g. increased product knowledge) leading to a strategic outcome (e. g. more sales) is of interest to the CEO and the board, but it’s not the sort of thing to be reported to the ? nancial markets. Yet another approach is to measure not human capital, but human capital practices.
There is considerable academic evidence that good practices drive bottom-line returns. 5 Stanford professor, Jeffrey Pfeffer, even puts a number on this. “Substantial gains, on the order of 40 per cent or so in most of the studies reviewed, can be obtained by implementing high performance management practices. ”6 The practices Pfeffer has found correlate with ? nancial success include job security, selective hiring of new personnel, extensive training, and reduced status distinctions. 5 Jeffery Pfeffer, The Human Equation, Harvard Business School, 1998. 6 Ibid.
Return on Investment in Talent Management 6 The consultancy Watson Wyatt has created a human-capital index that allows ? rms to judge their practices against what Watson Wyatt’s research has shown to be important. 7 Watson Wyatt found critical practices involve things such as effective use of rewards, creating a collegial, ? exible workplace, and excellence in recruiting. While ? rms could build there own measures of best practice based on the research from academics it is clearly easier just to engage a consulting ? rm that has already put together a methodology. A measure of how a ? ms human-capital practices compare against best practice should be of interest to CEOs, the board and investors. It is a reasonably simple, easy to understand piece of evidence as to whether talent is being well managed. A typical example of this problem faced Robert Yerex of Unicru, who had a client with call centers in many different locations. Some locations were giving 32 hours of training, and some were giving 40. Which number was right? Without some underlying theory and method, this question cannot be answered. Dr. John Boudreau and Pete Ramstad are two leaders in promoting areful thinking about the return on talent investments. The question they ask is, “Where would an investment in talent have the biggest impact on the execution of our strategy? ” The Boudreau/Ramstad question is an intriguing step beyond the usual query of “Will this investment provide a good return? ” Their question focuses our attention on the execution of strategy rather than making a number of disconnected investment decisions. 8 We will want to tackle the question of how much training to give call center workers, however, there may be other investments far more critical to the organization.
Deciding what is critical should be the priority. MEASURING HUMAN CAPITAL – THE BOTTOM LINE Today, ? rms should be capturing and reporting some simple measures of human capital such as turnover, some measure of engagement, any strategy map measures and some assessment of human-capital practices. These measures give a pretty good idea of how well a ? rm is doing in managing its human capital and if things are getting better or worse. There are no proven methods for putting a number on “the value of human capital” and perhaps there never will be.
However, the measures discussed above will in? uence the market value of the ? rm and give the CEO and the board evidence as to whether they are ful? lling their ? duciary responsibility in nurturing the human capital asset. THE ROI OF TALENT MANAGEMENT INITIATIVES There is a place for big-picture thinking that asks, “How is our talent asset doing? ” However, organizations also need to focus attention on improving the day-to-day management of talent decisions, the question being, Is this investment in talent worth making? Bruce Pfau, Ira Kay, The Human Capital Edge: 21 People Management Practices Your Company Must Implement (Or Avoid) To Maximize Shareholder Value, McGraw-Hill Trade, 2001 8 Boudreau and Ramstad have a detailed framework they call HC BRidge®, something that is not covered in any depth in this paper. For more information check out the resources available at www. hcbridge. com. Return on Investment in Talent Management 7 FOCUSING ATTENTION WHERE INVESTMENTS WILL HAVE THE GREATEST IMPACT Boudreau and Ramstad have a process for thinking through where to invest in talent.
They start by reviewing the situation in the industry, looking at competitive differentiators and working right down to the speci? cs of where an investment will make the most difference. Frankly, the speci? cs of this methodology are less important than the fact that the impact of talent on strategy is being systematically addressed. Many organizations have good existing processes and models for considering where the key pivot points in their strategy execution lie. What’s missing from these standard approaches is speci? cally tying in to the points where talent impacts strategy.
That’s what needs to be included. What is really important is that the question is being asked at all. “Given our strategy, where will we get the biggest ROI from talent? ”9 That very basic issue is something management rarely investigates in any disciplined way. The unit of analysis that Boudreau/Ramstad focus on is the “talent pool”—by which they mean a group of jobs such as product managers or sales support staff. Rather than asking about HR services (“Does our compensation program support the execution of strategy? ” or “Does our orientation program support the execution of strategy? ) they suggest that the ? rst question must be, “Which talent pool should we focus our HR services on? ” It’s important to recognize that Boudreau and Ramstad are not asking which talent pool is the most important in the execution of strategy. Rather, the key is where the investment in talent can have the biggest effect. In the launch of a new product the sales representatives may be the most important talent pool. However, in all likelihood management has already invested a lot in the selection, motivation and training of sales reps.
An additional investment in this talent pool may not have much impact. On the other hand, it is quite possible (and in one case the actual fact) that an investment in the sales support talent pool would have the biggest impact. Dr. David Ulrich and Norm Smallwood have a somewhat different approach to Boudreau and Ramstad. 10 They argue that ? rms should identify a few strategic capabilities, such as innovation, closely managing costs and teamwork, and then invest to make these capabilities world class. The essential point their approach shares with Boudreau and Ramstad is that it begins with strategy.
In both cases these thought leaders are saying, “Decide what the strategy is, then invest in the human resources initiatives that will support the execution of that strategy. ” ORDERS OF MAGNITUDE The emphasis on strategy execution as a starting point in tackling the ROI of talent management has a couple of very important bene? ts. One is that it captures the full attention of line management. You’ll recall that at Southern Company managers were reluctant to try to wrap their heads around the concept of HR ROI. In a case where it is clear that an investment in talent will drive the success of the strategy, there will be little dif? ulty getting senior management to put in the kind of time needed for good decisionmaking. 9 Or to be more technical, Boudreau says that the issue is “where we will get the biggest ROI from investments that enhance talent quality or availability. ” The key difference is that instead of focusing on whether a talent investment meets a minimum ROI standard, we search for the biggest bang for the buck. 10 Dave Ulrich, Norm Smallwood, Capitalizing on Capabilities, Harvard Business Review,Jun 1, 2004 Return on Investment in Talent Management 8 Another important outcome of this approach is that the payoffs should be suf? iently large so there is not much question as to whether there is an ROI. This is an important consideration because as we shall see, getting an accurate calculation of return on an investment in talent is usually dif? cult or impossible. Ideally, managers will be operating in the realm of orders of magnitude where an investment returns 10- or 50- or 100-fold because it is directly related to a critical element of the execution strategy. As powerful as the Boudreau/Ramstad approach is, it still hasn’t answered the question of how to determine the ROI of a speci? c talent initiative. Management still faces questions such as: > Does it make ense to spend $500 on an assessment test? > Should we buy talent-management software? > Is this training program worthwhile? These are real judgements that managers have to make. Unfortunately, ROI as taught in the business schools has serious limitations for answering these questions. retention of some employees (but not others), provide a forum where unrelated but critical business issues are unveiled, or provide a catalyst for employees to meet together, leading them to form a union. Furthermore, the value chain from an outcome (e. g. better phone manners) to revenue can be a long one. Predicting the series of cash ? ws is near impossible. Even after the fact it can be hard to tell if something worked because any output has many causes. Better assessment tests may have contributed to improved performance from programmers, but performance is also determined by teamwork, leadership, programming tools, culture and a host of other things. The good news for talent management professionals is that ROI doesn’t work well in most areas of business. Talking ROI is important; actually using the equation is not. A near universal practice in using ROI is to do the calculation then go back and change the estimated cash ? ws until a suitable answer is derived. Managers do this not because they are incompetent or dishonest, but because they don’t believe the textbook approach is giving them the right answer. This reality check can keep us from chasing holy grails. Thousands of managers have struggled with calculating ROI for training and other THE LIMITATIONS OF ALL ROI METHODOLOGIES The textbook answer to determining if an investment is worthwhile is to calculate the expected net present value (NPV) and from that determine an ROI. The fundamental idea of NPV is simple enough: Determine the cash that will ? w from a given investment—whether that be a new machine tool or a new assessment method—pick a discount rate (in essence, the minimum acceptable rate of return), and with some suitably clever math, you can calculate the NPV and ROI. 11 However, ROI is full of assumptions that derail its usefulness as a business method, particularly for more complex problems. The “input” of a talent management initiative is going to have many outcomes. For example, enhanced training of call center operators may improve short-term performance (for some calls), increase 11 A good primer on ROI calculations can be found at: http://www. cioview. om/resource_whitepapers_? nancial. asp Return on Investment in Talent Management 9 talent initiatives for decades. This is good evidence that it won’t work. What is needed is to talk ROI but use semi-quantitative methods. SEMI-QUANTITATIVE METHODS Serious business decisions are made using semi-quantitative methods. The idea is not to capture all the costs and bene? ts, much less calculate a present value. Rather, it is simply to try and get a handle on some key impacts in a quantitative way to support qualitative evidence. This may mean following Kaplan’s advice of focusing on intermediate variables in the value chain rather than cash ? ws. For example, a product-training program can be assessed by measuring how much knowledge the participants retained. This does not give an ROI, but it provides some quantitative data that can lead to an informed judgement as to whether the training makes sense—particularly so where there is a strategy map—so that managers have a qualitative sense of how important product knowledge is. Similarly, the kind of analysis Boudreau/ Ramstad recommend to understand talent decisions in terms of their impact on strategy execution leaves managers with a clear understanding of how initiatives will add value.
It’s not a perfect ROI estimate but this kind of systematic thinking clari? es how ROI is generated and what results to monitor. It may also mean trying to get a quantitative handle on one key output— something that will be enough to justify an investment. In the call center case study, a situation that is explored in more detail later in this paper, Dr. Yerex investigated the impact of training on retention. This was not an obvious thing to do. Normally one would look HEART AND HEAD
Pete Ramstad notes that when management looks at an initiative and says, “You need to calculate an ROI” they rarely mean you need to go off, collect a lot more data, and spend a day cranking numbers in a spreadsheet. What they mean is, “You haven’t convinced me. ” Harvard’s John Kotter argues persuasively in The Heart of Change that change starts with an appeal to the heart. Quantitative methods address only the second part of the decision-making process. Kotter tells the story of a purchasing manager who recognized that de-centralized and poorly controlled purchasing was costing the company a lot of money.
Quantitative methods convincingly showed that an investment in improved systems would pay off. However, this was insuf? cient to grab the attention of the busy management team. “Improving our purchasing systems” is hardly likely to be one of the CEOs most cherished initiatives. So the manager got samples of the hundreds of different gloves the company bought and put them in little plastic bags with a tag identifying the cost and supplier. Prior to a management meeting he covered the boardroom table with the gloves. As the managers entered they simply could not believe the company ordered that many different kinds of gloves.
Even more astonishing was that the same glove might be purchased from two or three different suppliers at radically different prices. This demonstration hit the heart. After that management was interested in the quantitative methods to justify an investment. Return on Investment in Talent Management 10 at how training led to improved performance. Nonetheless, in looking at how long it takes a call center employee to reach full competence (longer than expected), and the impact of longer training on retention, it became apparent that an investment in longer training pays off.
It’s not the ROI method they teach in business schools but it provides reasonable quantitative guidance in making a talentinvestment decision. The sophistication of approach will depend on the situation. In cases like call centers, when there may be many hundreds of employees and quite possibly comparable units in different locations, it is possible to work out some good numbers. In cases such as “Should we send our sales VP to a course at Harvard? ” the quantitative side will be hard to measure. However, in almost all cases, a semi-quantitative approach is better than a completely non-quantitative one.
Measuring the return on investment in soft-skills training is notoriously dif? cult because the bene? ts are qualitative, multi-faceted and spread out over time. However, a set of structured conversations can provide the evidence needed to make an informed decision. Fort Hill Company uses Internet-based follow-up for several weeks after a training program, getting participants to share answers to questions like, “Have you used any of the concepts or skills from the training program? If so, how? ” The feedback won’t allow for a return on investment calculation, but it will allow for a return on investment decision.
ASSESSMENT VERSUS MEASUREMENT Semi-quantitative methods include qualitative assessment, not just quantitative measurement. There is a pro-measurement school that argues, “If you can’t measure it, you can’t manage it. ” This is nonsense—unless it is merely a rebuke to those who refuse to look at any numbers at all. We manage all the time based on limited, ambiguous, qualitative information. Qualitative assessment is powerful and can play an important role in supporting good decisions on investments in talent.
There are two main qualitative methods, observation and conversation. Consider a case where you are concerned about the service in a restaurant. A metrics-based approach would insist on getting diners to ? ll out little cards rating service on a scale of 1 to 5. A more powerful way of assessing service is for an experienced restauranter to sit quietly in the corner and observe what is going on. It’s common to hear seasoned managers say, “I can walk into a plant and tell you in ? ve minutes if it’s well-run or not. ” The other powerful approach is conversation.
Talking to the staff and patrons will reveal a great deal about what is right, what is wrong and how to improve matters. INTERLUDE: SUMMATION OF THE ARGUMENT It’s worth taking a moment to recap the ideas. The textbook approach to making ROI decisions assumes we can get good information on the cash ? ows an investment will generate. This is rarely true, and this way of approaching the problem is a dead end. However, given the importance of talent, we do need to do some rigorous thinking. Return on Investment in Talent Management 11
There are two general approaches to making good decisions. The Boudreau/Ramstad approach focuses on asking what investments will have the biggest impact on the execution of strategy. For strategic investments the value is so high that the right decision is obvious. The second method, a semi-quantitative approach, simply looks to gather some good quantitative and qualitative data so managers can make an informed decision. Unlike ROI, which uses cash ? ow for all situations, the data collected in the semi-quantitative approach will vary from problem to problem. UNDERSTANDING THE BUSINESS
In business school we are taught methods that do not require any contextual knowledge. However, in almost all cases, practical evaluation of the ROI of a talent initiative will depend on a deep understanding of the business context. If one asks a question like, “Should we invest in a new assessment test for our programmers? ” there is no generic approach to getting a good answer. One needs to understand the business. Is the real payoff in reducing turnover, getting programmers who are faster coders, getting programmers who have the capability to be promoted to management, or getting people who can work in teams?
Expertise in “ROI methods” is not as important as a deep understanding of the business, which will tell us which investments are most strategic and where to look for a return. The critical variables to look at will not be the same for all programming teams, or all call centers or all sales forces. It is easy to become enamoured with a methodology, but as is shown in the case study below, a methodology is only useful when applied by people who know the business issues. Dr. Yerex started with a straightforward but fundamental idea: that the value of an employee varies with how long the individual has been with a ? m. He refers to this as the life cycle model. The changing value of an employee is especially dramatic in jobs with low retention (like call centers) since many employees may leave before the company has bene? ted from their climb up the learning curve to full effectiveness. In fact, for the ? rst few days or weeks the value of a new employee is actually negative due to the costs of hiring and training. An employee needs to stay a minimum number of days just to provide “breakeven” to their employer, after that the return to the employer increases signi? cantly with each extra day they stay.
The costs of extra training are easy to see, the direct cost of providing the training plus the indirect cost of time away from the job. The bene? ts are less easy to assess, and could include many positive outcomes including moving up the learning curve more quickly, providing better customer service, enhanced teamwork or improved retention. Exit interviews of employees who had left within the ? rst 90 days of employment had indicated that inadequate training was one reason for their leaving and turnover was a particular concern since customer satisfaction scores were down.
This information provided a point of focus for the ROI research—if extended THE CALL CENTER CASE STUDY Earlier we mentioned the question of “Should we give these call center employees 32 or 40 hours of training? ” These call centers employed over 500 people in ? fteen locations and were sophisticated operations with a signi? cant impact on the bottom line of the company. Dr. Robert Yerex of Unicru worked on this case12 and his approach illustrates many important ideas. 12 Robert P. Yerex, Human Capital Management: Establishing a Meaningful Framework, Unicu 2004.
Return on Investment in Talent Management 12 training really did lead to longer retention that in itself could justify the investment. The call centers were already collecting data on employee performance and length of stay, so it was possible to use the lifecycle framework to map how employees moved up the learning curve over time and calculate both when they hit breakeven and the value of each additional day they stayed. As Yerex points out the model simpli? es reality, for example each employee moves up the learning curve at their own rate.
However, the model is robust enough to provide useful quantitative insight into how the value of employees changes over time. At this point all that remained to be done was test what impact the extended training had on retention by comparing the difference in retention between employees who had received the extended training and those who hadn’t. The value of any improvement in retention could now be quanti? ed and compared to the cost of the training. By looking at these factors it was possible to show that the extra training did indeed pay off. There are some general lessons to draw from this study: ive people a few examples so they can understand the kind of thinking required and then see what works in their case. In any circumstances, models and metrics will never mean anything unless the people using them really understand the business. WHAT MANAGERS NEED TO KNOW ABOUT TALENT DECISIONS While line managers should have a good understanding of their business, they may not have a good grasp on talent investments. The HR department must help the line with both frameworks and speci? c data. There are many things HR can help the line ? gure out such as: gt; It was rooted in an understanding of the business including data from exit interviews (a good example of a tool that combines both quantitative and qualitative elements), performance measures and customer satisfaction scores. > It was driven by an important business need (falling customer satisfaction scores), not just a general interest in which of the two alternatives was better. > It drew on an understanding of how talent delivers value, in this case the lifecycle theory. (A theory that allowed them to make sense of performance metrics that have been collected, but not used. > It did not seek to capture all the bene? ts of training. It focused on the one area where an understanding of the business showed there would be a big return, in this case, retention. As Dr. Yerex points out, our goal should not be to create a universal method for calculating the ROI of talent decisions, but rather to > What is the value of retention? > Quantitatively, what is the difference between a high performer and an average performer? > What intangibles, such as coaching others, are important in the work? > What is the lifecycle return on an employee?
How long does it take them to get fully up to speed? Is there any difference between someone with 10 years’ experience and someone with 20 years of experience? > What is the value of a one-standard deviation change in engagement scores? > What is the strategy map as it relates to talent? What are the intermediate outputs we can assess? > What can we learn about talent from surveys, exit interviews, conversation and observation? Return on Investment in Talent Management 13 Answering, “How does one calculate the ROI of training? ” is impractical. However, answering “Should we provide teamwork training for our sales reps? is much more doable if managers understand the key drivers and HR is willing to help them through the issues. SUMMARY AND CONCLUSION In this discussion about the return on investment of talent management, several themes have informed the discussion. One theme is, “What is the question? ” In thinking about the question it is clear there are two distinct issues. One issue is a big-picture overview of an organization’s talent that addresses the concerns of the CEO, the board and the ? nancial markets. This issue is summed up in the questions, “How healthy is our talent asset? ”, “Is the talent asset getting stronger or weaker? and “What kind of impact does a change in our talent have on our market value? ” A second issue is the day-to-day decisions that are made around talent. This is the area of concern to managers, and responsibility for providing decision support (but not decisions) lies with human resources. The second issue is characterized by the questions, “Where will an investment in talent have the biggest impact on strategy execution? ”13 and “Is this investment in talent worth making? ” Another theme is the limitation of quantitative methods. At the board level you can ask a quantitative question like, “How much is our human capital worth? And while it’s a well-formed sentence, it has no good answer. When someone says, “We’d better look at the ROI,” they mean we had better do some serious thinking about this and use some semiquantitative methods. When a project is turned down because “We need an ROI,” it means “We’re not convinced. ” Semi-quantitative methods include an honest view of the costs and reasonable estimates of bene? ts bolstered by assessment (observation and conversation). If the project is strategic, then even back-of-the-envelope numbers should be enough to demonstrate that it is worth doing. Yet, there is a caveat.
Even outstanding semi-quantitative work is not enough to drive good decisions about talent. Management makes decisions with the heart, and tests them with the head. Any pitch to management on an important talent management initiative needs to deal with both. Having ventured into the discussion of heart and head segues nicely into the question of “What is talent management? ” Talent management could be seen as a series of topics, in particular, recruiting, assessment, and development. However, it is better seen as a frame of mind. A focus on talent management should not be about running an ef? cient recruiting department.
Rather, it is about valuing talent and thinking of all decisions in terms of how they impact talent. In this formulation it becomes clear that talent management is not an HR responsibility, it is the responsibility of anyone who makes talent decisions. This cycles back to the Boudreau/Ramstad idea that HR needs to provide frameworks for helping managers make better decisions about talent. HR has long understood its role in running the recruiting, training, and compensation programs— the guts of on—going talent management. Now they need to step-up to the plate and support the talent mindset across the ? rm. 3 A question proposed by John Boudreau and Pete Ramstad and is the foundation of Talentship. Return on Investment in Talent Management 14 The Boudreau/Ramstad approach provides a neat way to skirt around the limitations of quantitative methods in assessing the ROI of talent management. By focusing on those decisions that have the greatest impact on the execution of strategy, organizations can be more con? dent that the investment is a good one. Certainly, this approach does not solve the problem that managers are still faced with in answering questions like, “Is this particular training program worth it? To answer that type of question managers need to know a lot more about their talent than they currently do. They need a sense of the lifecycle, turnover costs, the value of retention, the difference between a high performer and an average one, between an engaged employee and an unengaged one, and so on. These numbers will vary from department to department and the role of HR is to help managers think through the important talent dimensions in their department. The goal is not to come up with a lot of numbers that will go into a computer model to make our talent decisions for us.
Rather, it is to get a semi-quantitative appreciation of talent so that we can make informed decisions. At the moment, organizations are in the odd position of believing that talent is critically important, yet having very little sense of the overall health of their talent or which talent investments are worthwhile. A talent mindset that continually looks at these questions is the best route to developing the understanding needed to get the most from talent. The role of HR is not “talent management” but to foster that mindset and support managers by providing frameworks and tools for making good decisions.
Return on Investment in Talent Management 15 About our Sponsor: Unicru Inc. is the leading provider of Total Workforce Acquisition solutions. During the average U. S. workday, Unicru processes and evaluates approximately one application per second. Running on onsite application centers and the Web, Unicru has processed more than 22 million job applications – and counting. On average, our customers see 10-30 percent decreases in employee turnover and over 50 percent reductions in hiring time. Clients include Blockbuster Inc. , Albertsons and The Sports Authority. Return on Investment in Talent Management 16