One very powerful way HR can justify the purchase of employee performance management and talent management software is to estimate the return on investment of such a purchase.
Return on investment, or ROI is the ratio of money gained or lost on an investment relative to the amount of money invested. Simply put, this involves calculating the cost of the way things are done today, estimating the cost of doing things using the new solution and calculating the difference, then dividing that by the cost of the purchase. Typically, you would do the calculations for each year over a three year period.
It may sound a bit complicated to non-financial professionals, but it's not really that hard. Let's walk through the basics.
Step 1: Calculate the costs of your current performance management process
An easy way to get this info is to poll a representative number of employees and managers and ask them to estimate how much time they spend preparing and conducting a single employee performance appraisal in a given year. When you get your answers back, figure out the average time spent by managers and the average time spent by employees.
Then multiply each of these averages by your total number of employees and the average salary for managers and employees. For example, if your managers spend an average of 3 hours on each employee performance review, the average hourly rate for a manager is $40, and your company has 350 employees, then your total cost would be 3 x40 x 350 or $42000. If your employees spend an average of 2 hours, and the average employee wage is $25 per hour, then the cost of appraisals for employees is 2 x 25 x 350 or $17500.
You will do some double counting because every manager is also someone's employee and therefore goes through the process twice — don't worry about this, you actually need to double count in this instance.
You should also factor in staff growth to estimate these costs year over year. You then need to calculate how much time your HR staff spends administering and managing the process and the total cost of that. Factor in any other separate labor costs, like copying, printing, assembling, mailing, etc. that aren't already covered by these groups.
A couple of simple spreadsheets like these should help:
|Average hrs spent||Average hourly rate||Total # of staff||Total cost|
|Total current labor costs|
|Current method||Year 1||Year 2||Year 3|
There are also physical costs to calculate: paper used, printer or copier toner, envelopes, file folder, etc. For these physical costs, you can estimate a conservative 2–3 percent increase in costs in each of the next five years. You should be as exhaustive as you can, but don't worry about being 100 percent accurate. Make sure you don't inflate your numbers just to make a point; when calculating ROI, it's better to be conservative.
|Other physical costs|
|Total current physical costs|
|Current method||Year 1||Year 2||Year 3|
Step 2: Estimate what a new talent management system would cost
We say "estimate" because many vendors don't give you all the details you need right upfront, and its hard to anticipate some future needs. The typical cost includes:
- the cost of the licenses
- hosting costs, whether you host the application or the vendor does
- initial implementation and training costs
- any maintenance or consulting costs that you may incur each year
You should also estimate your staff growth year over year as that will impact the number of licenses you need to purchase in subsequent years. If training is not included in your upfront costs, don't forget to add that in. You may also want to allocate some money for future refresher training. The easiest way to calculate all this is with a spreadsheet that maps the anticipate cost of each item in a 3 year period. You can create a simple spreadsheet that looks like this:
|Year 1||Year 2||Year 3|
You also need to estimate what your labor costs will be with the new automated application. Your vendor will likely have some estimates on time savings for you. You may want to be a bit more conservative than them in your estimates. For example, if they claim you'll cut the time it takes to do an appraisal in half, you might want to reduce your current time spent by only 30 percent in the first year when things are new to everyone and 45 percent in subsequent years. That way, you're not getting a "best case scenario".
Step 3: Calculate your ROI
To figure out your final ROI for each of the next three years, calculate the difference between your estimated old costs and your new costs in each year to calculate the savings, then divide by that by the cost of the new solution.
Other things to consider
You may also want to factor in some other costs and savings, which are a bit harder to quantify. In addition to time and cost savings, an automated employee performance and talent management system can help you improve:
- the quality and consistency of feedback employees receive, resulting in improved performance
- goal and workforce alignment, resulting in better corporate results
- employee development planning, making it more comprehensive and effective, and resulting in improved performance
- employee satisfaction
- employee retention
If any of these areas present challenges to your organization today, or if you have key corporate goals that address any of them, you might want to try to estimate the savings related to improvements. For example, increasing employee retention can save you in recruiting and onboarding costs. Studies indicate that turnover can cost a company anywhere from 25 to 150 percent of an employee's annual salary. Reducing turnover by even a few employees a year can amount to significant savings.
Let us help you calculate your ROI
Feeling intimidated by numbers and spreadsheets? Ask us for our handy ROI calculator. It takes the pain out of your calculations. We can have the results calculated for you in about 3 business days.
Read how others have measured their return on investment
At South Bend Medical Foundation, they anticipated achieving a 200 percent return on their investment in Halogen Performance in just three years. They've seen huge savings in time, better engagement with the process, and better employee performance.
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