Why is ROI important for HR professionals?
It’s often said, “You can’t manage what you don’t measure”. While almost a cliché, this statement is especially important for Human Resource professionals. Most HR departments typically measure such things as the time to hire, cost per hire, turnover, absenteeism, lost time due to injuries, etc. While important, limiting their measurements to these types of metrics fails to address HR’s necessary contribution to the organization’s business goals.
In order to earn the respect of senior management and improve support for the human resource function, HR professionals must be able to demonstrate their function, programs, and services are focused on three key metrics: cost reduction, cost avoidance, and increased revenue generation (increased productivity).
Last month I did a webinar for Detroit SHRM entitled, “So, You’re Thinking about Using Assessments! What’s the ROI?” What follows are excerpts of the key points.
Cost of a Hiring Mistake Worksheet
It never ceases to amaze me so many companies don’t know the cost of their hiring mistakes. So, years ago I created this “Cost of a Hiring Mistake Worksheet” in an Excel format to help them understand those costs. For each line item, you’re able to enter your cost numbers as they relate to any job in your organization. For this illustration I chose a mid-level professional position with an annual base salary of $60K and this person terminates (or is terminated) at the end of 3 months.
The first category is a listing of typical Pre-Employment Costs. Please remember, this is just an illustration and your numbers will be different and you may have additional items not on the worksheet.
- Advertising – ads/the time to create/place in multiple sources = $1,500
- Pre-Screening – the time to sort resumes/applications, schedule phone interviews, leave voice messages = $500
- Phone interviews – time to conduct and then schedule face to face interviews = $750
- Interview process – assessments, multiple interviews, team interviews, travel, recruiting fees, background checks, etc. = $2,500
The second category is a listing of typical Employment Costs. For this category we assumed this person operates at only 50% efficiency during the 3 months they’re employed with you. That means 50% of their salary was “wasted”; i.e., your company received no value for it – same with their benefits.
- Salary of $60K. $5K/month for 3 months @ 50% efficiency = $7,500
- Benefits (FICA, Workers Comp, Unemployment, Insurance, Vacation, Holiday, etc. @ 35% of salary = $2,625
The third category is a listing of typical Support Costs.
- Physical, Drug test, Onboarding, etc. = $2,000
- Uniform, Personal Equipment, Business cards, etc. = $200
- Supervisor’s time @ 5% of $70K annual salary = $875
- Training time of others, payroll, HR administration, accounting, relocation, etc. = $5,500
The fourth category is a listing of Intangible Costs. For this category, we didn’t list any costs; but, the costs are there none the less.
- Morale, Productivity, etc.
- Adverse effects on quality
- Damage to customer relations/sales
- Effect on Unemployment, Workers Compensation, Lawsuits, Lost Opportunities, etc.
When you add all the costs up, the total is $23,950 which is 39.9% of the annual salary. If you’ve seen studies on turnover for mid-level professionals, the cost of turnover as a percentage of their annual salary will range between 50% and 150%. So, for our purposes, we’ll use $24,000 and 40% (which are both very conservative estimates) in our subsequent calculations for cost reduction, cost avoidance, and increased revenue generation (increased productivity).
Hiring Process Calculation
I created the following “Hiring Process Calculator” in an Excel format. All the formulas are built in so all you need do is enter your cost numbers in the “yellow” sections. Since the words and numbers are small and not easily readable, I’ll break out sections of this calculator as I work through examples on Cost Reduction, Cost Avoidance, and Increased Productivity.
Cost Reduction
As before, our mythical company has a classification of “Mid-Level Professionals” (could be engineers or accountants or whatever) and there are 60 incumbents who on average make $60,000 annually. Historically the turnover for this organization has been 20% (12 openings per year) and their turnover cost is $24,000 per employee for a total of $288,000 annually.
Beginning today, your company is going to start using the PXT Select assessment (if you didn’t catch it, that’s my commercial) to do a better job of hiring the right people for this position. By doing so, within 2 years you’d expect to reduce annual turnover from 20% to 10% and there will only be 6 openings that year. This is a realistic expectation assuming there are no other related negative issues; e.g., low pay, poor working conditions, or “Attila the Hun” for a boss. In doing so, you’d expect to achieve a Cost Reduction in Turnover Costs of $144,000.
Cost Avoidance
When it comes to cost avoidance, let’s look in detail at the selection steps of your sample company. The assumptions are this organization has 25 applicants per opening and there currently are 12 openings per year for a total of 300 candidates. (Remember, the fields in yellow will be filled out by you.)
Currently,
- Somebody sorts through the resumes and 195 (65%) are scheduled for phone interviews.
- Of the 195 Phone Interviews, 98 (50%) will be scheduled for a face to face interview.
- Of the 98 Face to face interviews, 39 (40%) will be scheduled for a background check.
- Of the 39 getting a background check, 35 (90%) will be scheduled for a final interview.
- Of the 35 final interviews, 14 (40%) will get an offer.
- Of the 14 offers, 12 will accept.
Now we need to determine how much time and money is currently being spent on the hiring process; i.e., how long does it take to do these steps and by whom and at what cost? Our assumptions are:
- Pre-screen Applicants – 0.10 hour (6 minutes) is spent by an HR Specialist screening each of the resumes of the applicants. We’re assuming an annual salary of $36K
- Hold Phone Interview – 0.75 hour (45 minutes) is spent by an HR Specialist and this includes leaving voice messages, interviewing the candidates, and scheduling the face to face interview with the HR Manager and the Hiring Executive.
- Second Interview – 1.0 hour is spent by the HR Manager preparing for and interviewing each of the candidates. We’re assuming an annual salary of $65K.
- Conduct Background Checks – cost of $100 each.
- Hold Final Interview – 1.0 hour is spent by the Hiring Executive preparing for and interviewing each of the candidates. We’re assuming an annual salary of $90K.
- Making the offer – 0.2 hour (12 minutes) by the HR Manager
Currently you’re spending about $13,330 annually in salaries to sort through all the resumes, hold various types of interviews, and make job offers. As previously noted, our numbers may be conservative.
So, if you use the PXT Select assessment over the next two years and reduce your turnover by 50%, what cost avoidance do you achieve? Your turnover will be down to 10% for this classification of Mid-Level Professionals and you’ll only have 6 openings per year with the same number of applicants (25) per opening. Therefore, you’ll only have to deal with 150 resumes in order to hire the 6 people you need.
Following the same steps as outlined earlier, your annual cost for sorting through all the resumes, holding various types of interviews, and making job offers is now $6,753 and you’ll have achieved a cost reduction of $6,577 in man hours ($13,330 – $6,753).
Revenue Generation (Increased Productivity)
Using the same company, we’ll now take a look at productivity – and there are lots of ways to measure productivity. For our purposes, I chose a simple method; looking at productivity in terms of the value of one’s salary. I also chose to use the 80/20 Rule; that is, the top performers make up about 20% of any classification and produce more than the others. While there are articles which claim superior talent is to six or eight times more productive than average talent, we’ll assume the following:
- The top 20% deliver 1.5 times the value of their salary – 12 x $60K x 1.5 = $1,080,000
- The average 70% deliver the value of their salary – 42 x $60K x 1.0 = $2,520,000
- The bottom 10% deliver .75 times the value of their salary – 6 x $60K x .75 = $270,000
Given the above, the total “productivity” for these 60 employees is currently $3,870,000.
In the next 2 years as you hire better people (and steer the bottom performers into alternative careers where they’re a better fit), we’d anticipate seeing more of a 70/30 rule … and, that’s not counting the productivity of the department manager who doesn’t have to do so many interviews or spend his/her time dealing with marginal employees.
- The top 30% deliver 1.5 times the value of their salary – 18 x $60K x 1.5 = $1,620,000
- The average 70% deliver the value of their salary – 42 x $60K x 1.0 = $2,520,000
- The bottom 10% – well, they’re gone!
Given the above, the total “productivity” for these 60 employees is now $4,140,000. This represents an increase of $270,000 in productivity (6.98%) simply by using the PXT Select to hire people who perform more like your top performers.
What’s the ROI?
Now it’s time to add up your Cost Reductions, Cost Avoidance, and Revenue Increases:
Cost Reduction $ 144,000
Cost Avoidance $ 6,577
Productivity Increase $ 270,000
Total $ 420,577
That total ($420,577) is now divided by the annual cost of assessing (estimated at $12,500) and that gives you a Benefit to Cost Ratio (ROI) of $33.64 for every $1 spent on assessments. That is one heck of a return on investment; even if you’re skeptical and want to cut that ROI in half, that’s still one heck of an ROI.
So, are you serious about your Human Resource Department helping themselves and other departments achieve cost reductions, cost avoidances, and productivity increases?
If so, we’d like to help you. For those who call or email, we’ll provide a complementary PXT Select assessment for you and one member of your team.