Unfortunately, especially during times of crisis, short-term commercial costs often outweigh longer term business imperatives. When budgets are tight, organisations tend to invest in activities that will deliver immediate benefit and pause investments with a longer payback period.
Learning and development often fall into the latter bucket, as we often will not see the benefit of training or development for months or even years. Additionally, many of the benefits, such as increased productivity or retention, are hidden until these metrics become an issue.
In designing the Peeplcoach ROLD Calculator, we have incorporated the following principles and assumptions to provide human resources and learning and development practitioners an easy-to-use and readily digestible model to share with business leaders, executive teams and boards.
Some cost assumptions to be considered when calculating ROI
1. Every employee should be expected to deliver more value than their cost. For example, if the cost of employing a team member is $100,000 then it would be reasonable to expect a return on this investment. At worst, this could be a multiple of one. That is, an individual with a salary of $100,000 delivers exactly $100,000 of value. While this multiple will vary depending on the role, industry and organisation, it is fair to estimate a return of at least two times an employee’s salary.
COST: Estimate the cost to the organisation of lost profit and value when employees are disengaged, resign and then need to be replaced.
2. The cost of replacing an employee is estimated to be anywhere from 30% of annual remuneration to 300%. This includes direct costs such as recruitment, advertising and onboarding costs. However, these costs are often insignificant compared to the cost of a poor hire, especially if termination is ultimately required. At minimum it could cost an organisation $30,000 to replace an employee with a remuneration of $100,000.
COST: Calculate the true cost of the recruitment process and hiring mistakes. Profit from retention drops directly to the bottom line.
3. Manager productivity is often a hidden cost. After all, when new hires are taken on, the manager must continue to do their day job while somehow fitting in additional recruitment and onboarding processes. While the cost might be hidden, it is real.
COST: Estimate the percentage of lost productivity e.g. 5%, 10% or 25%. What is this loss of productivity costing the organisation or team?
4. Research has shown that leadership development, especially executive coaching, delivers significant productivity gains to organisations – up to a 35% increase in leadership performance, 18% lift in profit and 33% lift in business deliverables (Source 7).
BENEFIT: Calculate the benefit of increased productivity to the team or organisation. For example, if you could lift productivity by 10%, resulting in increased revenue or profit or decreasing head count costs, what impact would that have on the profit line? If you could spend $3,000 on development to deliver $30,000 of value and improvement, this is a 900% return on investment!
5. Lack of engagement is costing organisations billions of dollars in lost productivity. In fact, lost productivity is costing Australian businesses a total of $54 billion per year (Source 3). Staff attrition and turnover, poor culture, low morale, lack of development and career planning, and poor leaders all contribute to this multi-billion-dollar issue.
COST: Estimate what you think poor leadership and turnover is costing your organisation. Are your employees 60%, 80% or 95% productive, and how is this lost productivity affecting you?
6. The number one reason people leave organisations is still their leader. What is poor leadership costing you?
BENEFIT: If you invested to develop one leader and they were able to retain and develop their teams, what would this deliver to the organisation in terms of increased profit?
- Worldwide: 13% of Employees are Engaged
- 8 Employee Engagement Statistics You Need to Know in 2022
- How to Calculate the Cost of Employee Disengagement
- The Cost of Poor Leadership
- The Cost of Poor Leadership on Your Revenue and Culture
- 2016 ICF Global Coaching Study
- The Benefits of Team and Individual Coaching
- Chief Executive Women ASX200 Senior Executive Census, 2020
- Workplace Gender Equality Agency, 2021