The Dreaded Question: What’s The ROI?

You know the story. Employee engagement is low. Staff turnover is high. Leadership is lacking. At best, the company culture can be described as uninspiring. Everyone knows something must be done. A major human capital intervention is needed.
But you know what is going to happen.
A proposal will be pitched to the Exco. They will balk at the budget required. One way or another the dreaded question will be asked: “What’s the ROI?”.
It IS the right question! Any Exco would be mad not to ask it. But it crushes any hopes of progress. Why? Because many HR practitioners don’t have business acumen at their fingertips. Making a tangible and measurable business case is complex for the more human and ‘softer’ aspects of the business.
So the response from Exco is, “Let’s look at it again in the next financial year.”
So where do you begin?
How do you change this story?
How do you build a strong business case that gets a YES?

 

The Formula For Business Success

In order to run a profiable business there is a constant need to increase income while minimising expenses. This is widely accepted as being the primary objective for the management function of a company.

On the surface it is a simple formula: Profitability = Income – Expenses.

How To Get More Budget For Human Capital Interventions

However, large portions of income and expenses are rooted in the optimal functioning of the people in the company. It’s no secret that many businesses rise or fall because of their people. The human capital. The talent.

The results of optimally functioning talent are obvious. High-functioning employees maximise profits. Low-functioning employees hinder them.

It’s no secret though that the dominant factors causing employees to be high or low functioning are the psycho-social factors present within their work environments.These are the employee and organisational development factors that facilitate optimal human functioning in the workplace.

Improving these factors optimises employee and organisational functioning and ultimately improves the bottom line. Unfortunately, many of these crucial employee-organisational factors are considered intangible or immeasurable. Therefore, they are left largely unaccounted for.

Human issues are difficult to quantify. While the formula that drives business success is simple, when it comes to calculating the truly human aspects underlying the formula, it gets tricky.

When asked that dreaded question “What is the ROI?”, many stutter and give responses that are not compelling enough to secure the required budget. Rarely are the calculations of business formulas simple.

It may be because the wrong language is being spoken.

Those in human resources and talent departments often speak the language of warm and fluffy, when the boardroom needs tangible and measurable.

If the business case is measurable and tangible, the response to whether the budget should be spent is often a resounding yes.

A strong business case needs to be made. And when it is, the response is typically positive.

A current example in South Africa makes this obvious.

 

Human Load Shedding

During the electricity crisis in South Africa, how did most senior management teams in various organisations respond?

They said YES to spending millions on generators to keep the lights on. The tangible and measurable downside of having the lights go out led to an easy decision to spend. This money went towards whatever it took to keep the business going.

If you didn’t know, load shedding is “the deliberate shutdown of electric power in a part or parts of a power-distribution system, generally to prevent the failure of the entire system when the demand strains the capacity of the system.”2

The reality of being without electricity is very tangible and measurable. So, the ROI is obvious for those who control the budgeting.

This is a business decision, made to keep the company going, despite huge financial implications. Loss of power is very real and tangible and the potential for losses incurred without electricity can be effectively measured and calculated.

But what about the figurative lights?

These are the more-difficult-to-see lights in employees’ minds that keep them engaged and performing. The lights that keep them switched on and productive in the company.

Many companies struggle with human load shedding. Employees who are at work, but not working. Avoidant, disengaged, misaligned, conflicted, stressed, unhappy, and burnt-out.

Cut off the electric power in a company, and watch management do whatever it takes, spend whatever it costs, to get the lights back on. But when the psychological power of the workforce is switched off, there are protracted discussions and interrogations around ROI and why spending on intervention is worth it.

What is going on here?

Our guess is that HR practitioners are not making the problems tangible and measurable enough. A tangible and measurable business case for human interventions is needed.

Five Key Elements To Make A Compelling Business Case

There are a number of key elements needed to make a strong business case. Together they lead to the same kind of response businesses have towards load shedding. A response that results in a “we have to do this, now” reaction with a “this saved our business” outcome.

1. Use the Business Formula

Profit = Income – Expenses

Every time a business case for any intervention is made, it should align with this formula. HR, however, is not responsible for all of the income, nor for all of the expenses. HR is also not responsible for calculating profit margins, revenue streams, electricity usage, fuel consumption, and procurement decisions.

The equation from HR’s perspective involves the human factors impacting on productivity and wasted costs of human capital in the organisation.

How To Get More Budget For Human Capital Interventions

When creating a business case, the aim should be to maximise profit by increasing productivity, while reducing these HR costs (i.e. minimising the spend on human capital that yields no return). Ultimately, this is how HR adds to profits.

2. Use Sobering Costs

Picture this. A consulting psychologist is called into an international logistics company. The company provides the distribution for all the spare parts for a major automotive brand. The HR Manager wants to do a leadership development and culture shift programme to develop supervisors throughout the South African division. There are some major problems with the culture in the organisation and the supervisory layer holds much of the opportunity for scaling the change process.

The company is primarily run by the CEO and the FD, both of whom are successful because of their focus on keeping costs low. As expected, they are pushing against any kind of spend on “soft and fluffy” interventions. The initial quote submitted by the consultant is laughed at.

After months of debate around reduction of the spend on the intervention as well as the time taken to implement; the consultant is given the opportunity to sit down with the CEO and FD to discuss the situation directly.

After a few questions around the business formula, the consultant calculates the cost of any major variable cost factor – fuel usage. From drivers inefficiently planning the delivery routes, to keeping the diesel engines idle for too long, fuel usage is persistently sucking profits out of the business. They had tried for years to change these behaviours among the drivers, but with no successful intervention.

Together, they calculated the potential save on fuel per week, which is possible if employee behaviours changed. By providing tangible ways to calculate waste, losses, and potential savings, the consultant is able to change the tone of the conversation.

They sign the deal and the fuel reduction is achieved.

This is a real scenario, and there are many more just like it, happening across organisations everyday.

3. Focus On Core Factors

Many HR managers major in minor things. They focus their efforts and resources on secondary and sometimes symptomatic things. It may be because the sheer volume of factors that form the scope of HR function is too overwhelming, so they focus on whatever is shouting the loudest.

Take a quick look at the list of employee-organisational factors facing HR below:

How To Get More Budget For Human Capital Interventions

This is by no means an exhaustive list. It is just a sample of factors relating to the psycho-social factors driving employee and organisational performance. It gives an idea of the breadth and depth of the factors involved in creating healthy organisational environments where people thrive and are switched on.

It is not possible to tackle all of these at once, so where should you start?

Few would argue with an approach that focuses on the factors that have the most significant, far-reaching impact. The major factors, that, without a proper solution, will consistently yield low to zero ROI. This is especially relevant for interventions for the minor factors.

“Learn how to separate the majors and the minors. A lot of people don’t do well simply because they major in minor things.” – Jim Rohn

Three dominant factors have emerged in Organisational Psychology literature as the root causes of employee-organisational issues: Workplace Incivility, Psychological Stress, and Leadership.

Workplace Incivility

Workplace Incivility has been uncovered in approximately the last ten years as being a psychological cancer for human performance in organisations.3

Workplace Incivility is low-intensity, deviant workplace behaviour, with an ambiguous intent to harm.4 In a word, it is ‘rudeness’.5

The low intensity behaviours are small, subtle and slight, not necessarily people shouting, swearing, or being violent towards each other. They are deviant because they are not in line with typical cultural or organisational norms. The “ambiguous intent to harm” is the killer. The recipient does not know whether or not it is malicious, or intended to harm.

Some examples of Workplace Incivility include emailing or texting during meetings, talking during presentations, ignoring greetings, taking credit for other’s efforts, showing little interest in other people’s opinions, passing blame, patronising others, withholding information, and not CC’ing someone in on emails.

Its devastating effects are astounding.

In data collected from over 9000 people, the catastrophic impact of Workplace Incivility showed significant destruction to their and the organisation’s functioning.6

How To Get More Budget For Human Capital Interventions

What is more alarming is that it affects both victims and witnesses. One experiment measured the cognitive functioning of one group on numerous tasks after experiencing Workplace Incivility and another group, on similar tasks after witnessing this Workplace Incivility.7

How To Get More Budget For Human Capital Interventions

The research demonstrated that it is at the root of a plethora of psycho-social problems. Yet, many companies are not even aware of it. Put simply, companies are losing profits and people, but much of it is going undetected.8

To make Workplace Incivility tangible and measurable, the following statistics should be fairly simple to calculate in relation to company specific context.9

To calculate the cost of Workplace incivility on your organisation, click here.

Psychological Stress

Everyone knows that too much stress is a bad thing. But has the radical impact of a stressed-out workforce on the bottom line been considered? Tons of research has uncovered the “lights out” effect of stress on employees.

The impact is staggering.

Psychological Stress accounts for 40% of absenteeism10 and 49% of all work days lost due to health issues, are directly related to this kind of stress.11

If absenteeism is not enough, Psychological Stress is directly related to 12% of presenteeism.12 This is when employees are at work but the “lights are off”. And stress has been shown to predict roughly 23% of the variance in employee productivity.13

Global studies show that 80% of people experience some kind of problematic symptoms relating to Psychological Stress.14 One in three people in the global population struggle with some kind of anxiety-related disorder.15

What’s more, the growing addiction to technological devices seems to double the amount of stress experienced by 86% of people globally.16

Another major survey showed 89.7% of a group had experienced some traumatic incident, which would be considered a viable trigger for post traumatic stress disorder.17

Life is hectic.

Globally, 42% of the population reports lying awake at night due to Psychological Stress.18 Psychological Stress has major detrimental effects on the performance of employees, yet it is often discussed in abstract terms.

There a few well-established statistics that can assist in calculating the cost of workplace stress.19 Four of them are summarised below:

To calculate the cost of Psychological Stress on your organisation, click here.

Leadership

You may be tired of hearing that leadership is at the core of psycho-social functioning in companies. But it remains a dominant priority because the impact of leadership (in)capacity on employee performance is pervasive.

It is said, “people leave managers, not companies.”20 Research tends to agree.

A study that was conducted on two million employees throughout 700 companies, showed that the length of time an employee remained at a company was determined by their relationship with their immediate superior.21 Moreover, 43% of employees leave due to bad management.22

Leadership also directly impacts the bottom line. One study found a 15% of the variance in the companies revenue is linked to the emotional intelligence of the leader.23 Numerous studies also show developing the EQ of specific managers, increases profitability of their area of responsibility by an average of 2%, compared to those who are not developed.24

A practical illustration of this was found in a workplace behaviour analysis, where supervisors demonstrating refined EQ competencies, reduced post-time accidents by up to 50% with a significant reduction in formal grievances.25

Psychological research data from an international company found that leaders who had high levels of EQ outperformed their targets by more than 15%. At the same time, leaders who had low levels of EQ were found to have missed their targets by the same margin.26 That is a potential variance of 30%.

Below is a summary of the pervasive impact Leadership has on the bottom line:

To calculate the cost of poor leadership on your organisation, click here.

4. Three Vital Calculation Components

Picture this scene. HR is presenting a business case for an intervention. It is slick, well-prepped, includes a 12-page document, a great executive summary, and crisp slides to boot. But the CEO and CFO are not buying it.

The person that just presented on the need for new electricity generators got a YES, but the HR Director, well they received a “maybe in the next financial year”.

Often, this is because the calculations used by HR practitioners lack sufficient rigour.

Financial and statistical modeling may be of little interest to HR practitioners, but there are certain necessary calculations that must be taken into account to accurately and effectively measure ROI.

It is easy to lean on the professionals for this. These are statistical formulas that can be used in the business world with specific organisational metrics to give data relating to return on spend.

RODI Formula

The Return on Development Intervention (RODI) is a formula developed by statisticians in conjunction with leadership development experts, to assess the financial return on a leadership development intervention.27

Effect Size

Calculating the impact of a psycho-social or employee-organisational intervention is delicate. The impact is never going to be the same for every attendee across the company.

Some people change radically.
Others don’t.
Others may be marginally impacted.

To account for the impact on employees, calculating the average shift, will not work. This is indicated in the graph below (in terms of productivity):

The metric that provides a more accurate calculation is called the effect size. It uses the parameters of a normal distribution curve to calculate the shift, while accounting for varied responses to the intervention. It looks more like this:

The formulas underlying this effect size gets a little confusing. Check them out below:

Standard Deviation In Financial Terms

A primary challenge in the utility analysis of training interventions is the estimation of the SDy, which is the standard deviation of job performance in financial terms.28 Therefore, while numerous studies have shown that SDy can range from 40% – 70% of annual salary, data suggests 40% of annual salary can be used as a conservative estimate of SDy, which is now the widely-accepted standard.29

Using these statistical elements will produce a more accurate (not to mention impressive) assessment of the ROI of the employee-organisational intervention. These aspects will create a much more compelling picture for budget that is required.

For a programme that automates the above calculations, click here.

5. Speak In Excel

Present the tangibility and measurability in a language that the boardroom understands. Microsoft Excel.

At some point, the tangibility and measurability of the psycho-social aspects of the company must be translated into a spreadsheet, in order to speak the language of the financial department.

By translating the cost-to-company calculations into a profit and loss type of output, it may make more sense to those who spend their lunch time playing with formulas on Excel.

The job of any finance department is to interrogate every line item. Once satisfied with it, they need to move on to make sure the totals are exact. You may think that presenting one final number is compelling, but often times it is simply unbelievable and thought to be “hot air”.

Below is an example of how the cost factors of some of the core factors mentioned previously can be presented in Excel. These figures are taken from a real-case scenario where all inputs are specific to an organisation.

Below is an idea of how to present the figures for the possible ROI of an EQ development intervention. Marginal or conservative EQ development is considered a 5% shift in EQ for attendees.30

Take a look at the bottom line (and for the moment, let’s consider that the figures above are all correct). What senior management team, in their right mind, would not sign off on an intervention that was going to yield a 567% return on investment?

Suddenly, you are in the realm of selling generators during load shedding.

 

The Human Impact Audit

Pressure on business is increasing. The need to make prudent decisions that provide return on investment is critical. The only way HR practitioners can stay relevant is to speak the language of the business when motivating for employee-organisational interventions.

Putting all of the above keys into practice uses valuable time. And it might be way outside comfort zones.

But there is a tool that has been developed by professionals that can do the heavy lifting for you.

The Human Impact Audit (HIA) automates the creation of a business case. By simply plugging in organisational metrics, a financial business case is created, which is tailored to an company with the research, motivation, calculations, rationale and assumptions at the click of a button.

Watch this webinar to further understand the process.

The calculation logic used for each factor of the HIA has been designed to accurately portray organisational specific values, remove overlapping aspects of interrelated factors, and align with a marginally effective intervention.

Using the elements above will help you to make huge statement in the the next boardroom pitch. The HIA can do the heavy lifting for you. It might just, finally, get you a resounding YES from the Exco for the long awaited budget you’ve been wanting for that desperately needed intervention. And they are going to thank you for it.

Click here to complete your very own report.

Reference List:
1. Goleman, Daniel. Working with Emotional Intelligence. New York: Bantam Books, 1998.

2. Dictionary.com. “Load Shedding.” Accessed 15 October 2019. https://www.dictionary.com/browse/load-shedding

3.  Porath, Christine, and Christine Pearson. “The price of incivility.” Harvard business review 91, no. 1-2 (2013): 115-121.

4. Ibid.

5. Cortina, Lilia M., Dana Kabat-Farr, Emily A. Leskinen, Marisela Huerta, and Vicki J. Magley. “Selective incivility as modern discrimination in organizations: Evidence and impact.” Journal of Management 39, no. 6 (2013): 1579-1605.

6. Porath, Christine L., and Christine M. Pearson. “The cost of bad behavior.” Organizational dynamics (2010).

7. Lewis, Patricia Smokler, and Ann Malecha. “The impact of workplace incivility on the work environment, manager skill, and productivity.” JONA: The Journal of Nursing Administration 41, no. 1 (2011): 41-47.

8. See note 6 above.

9.  See notes 3, 6 and 7 above.

10. Chandola, Tarani. “Stress at work.” In The British Academy, London. 2010.

11. Health and Safety Executive. “Work-related stress, depression or anxiety statistics in Great Britain 2017.” (2017): 11.

12. Collins, Doris B., and Elwood F. Holton III. “The effectiveness of managerial leadership development programs: A meta‐analysis of studies from 1982 to 2001.” Human resource development quarterly 15, no. 2 (2004): 217-248.

13. Donald, Ian, Paul Taylor, Sheena Johnson, Cary Cooper, Susan Cartwright, and Susannah Robertson. “Work environments, stress, and productivity: An examination using ASSET.” International Journal of Stress Management 12, no. 4 (2005): 409.

14. American Psychological Association. “Stress in America: Coping with change.” Stress in America™ Survey (2017).

15. Herman, Allen A., Dan J. Stein, Soraya Seedat, Steven G. Heeringa, Hashim Moomal, and David R. Williams. “The South African Stress and Health (SASH) study: 12-month and lifetime prevalence of common mental disorders.” South African Medical Journal 99, no. 5 (2009).

16. See note 14 above.

17. Kilpatrick, Dean G., Heidi S. Resnick, Melissa E. Milanak, Mark W. Miller, Katherine M. Keyes, and Matthew J. Friedman. “National estimates of exposure to traumatic events and PTSD prevalence using DSM‐IV and DSM‐5 criteria.” Journal of traumatic stress 26, no. 5 (2013): 537-547.

18. Anderson, Norman B., Cynthia D. Belar, Steven J. Breckler, Katherine C. Nordal, David W. Ballard, Lynn F. Bufka, Luana Bossolo, Sophie Bethune, Angel Brownawell, and Katelynn Wiggins. “Stress in America: Paying with our health.” American Psychological Association (2015): 1-19.

19. See note 11, 13, 14, 15 and 18 above.

20. Buckingham, Marcus. First, Break All the Rules: What the World’s Greatest Managers Do Differently. New York: Simon & Schuster, 1999.

21. Zipkin, Amy. “The wisdom of thoughtfulness.” New York Times 31 (2000): C1.

22. See note 1 above..

23. Bradberry, Travis. Emotional Intelligence and leader job performance. Unpublished Manuscript, 2002.

24. Heffernan, Troy, Grant O’Neill, Antonio Travaglione, and Mark Morrison. “Relationship Marketing, Emotional Intelligence and Performance.” In Australian and New Zealand Marketing Academy (ANZMAC) Conference, pp. 20-27. The University of Western Australia, 2005. ; Salicru, S. “Emotional intelligence and the Business Advantage.” In CPA Congress on, vol. 20. 2005. ; Deeter-Schmelz, Dawn R., and Jane Z. Sojka. “Developing effective salespeople: Exploring the link between emotional intelligence and sales performance.” The International Journal of Organizational Analysis 11, no. 3 (2003): 211-220. ; Higgs, Malcolm. “A study of the relationship between emotional intelligence and performance in UK call centres.” Journal of Managerial Psychology 19, no. 4 (2004): 442-454.

25. Pescuric, Alice, and William C. Byham. “The new look of behavior modeling.” Training & Development 50, no. 7 (1996): 24-31.

26. McClelland, David C. “Identifying competencies with behavioral-event interviews.” Psychological Science 9, no. 5 (1998): 331-339.

27. McClelland, David C. “Identifying competencies with behavioral-event interviews.” Psychological Science 9, no. 5 (1998): 331-339.

28. Edwards, Jack E., James T. Frederick, and Michael J. Burke. “Efficacy of modified {crepid} SDys on the basis of archival organizational data.” Journal of Applied Psychology 73, no. 3 (1988): 529.

29. Hunter, John E., and Frank L. Schmidt. “Fitting people to jobs: The impact of personnel selection on national productivity.” Human performance and productivity 1 (1982): 233-284.

30. Note: Mygrow achieves an average of 8% shift through a similar period.

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