Realistic ROI

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At some point all of us are asked to determine or evaluate the return-on-investment (ROI) of an initiative or project. In its simplest form, ROI answers the question Benefit – Cost = ? Here are some things that you should consider when doing this type of analysis:

Costs

• Direct Costs. If you are buying something there is a direct cost. Include travel here as well.

• Indirect Costs. This is the time that you and your staff are putting into the initiative or project.   Don’t be too worried about putting a dollar value on this (for reasons discussed below).

• Costs Over Time. Are there any ongoing costs of the program, such instance licensing fees? Is  it reasonable to expect they will stay the same?

Benefits

• Measurable Revenue Realized. When computing this (such as how much more sales are being generated as a result of hiring better salespeople) be conservative. Also consider what other factors may have led to the change.

• Measurable Non-Revenue Outcomes. These are outcomes which are clearly desired, but may not be directly tied to revenue. A good example is improved customer satisfaction. When using this type of measure it’s important NOT to put an arbitrary dollar figure on it. If it’s valuable let it speak for itself.

• Time Savings. This is an indirect benefit that is tricky to include in an ROI calculation because if these savings are coming from salaried people they are still paid the same, so there’s no real cost savings (although you may be spending time on more valuable activities).

• True Cost Savings. This would include lower headcounts or the elimination of a direct cost, such as reduction in cost per hire or reduction in training days.

If you are estimating the ROI of a future initiative you would go through a similar process. However, you also need to estimate the anticipated benefits. Research this well so that you can present a realistic (and conservative) number that you can defend. For training programs this means estimating how much people are likely to improve. For selection systems this means estimating the statistical correlation between the test(s) and performance and the anticipated performance of those who are hired.

For more information on ROI of HR, pre-employment testing, skills assessment, and talent management, please contact Warren at 310 670-4175 or [email protected]

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