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05 May 2016

Three Ways to Measure ROI of a Performance Management System

Most organizations and human resources professionals already understand the value of automating their employee performance management process. But more often than not, it’s a struggle to prove the business benefits of an investment in an employee performance management solution (EPM) to executive management.

HR Tech Fest 2015 partners Silkroad explores three areas that Performance Management Systems can add value to your HR department, and provides step-by-step formulas for you to use to prove the ROI to your executive management team.

You can download the complete eBook here.

1. Reduce Employee Turnover

Experts estimate that it can cost up to twice an employee’s salary to find and train a replacement! So ensuring that employee turnover stays low is going to save the company a large chunk of money. One of the best ways to lower turnover is to ensure your employees understand how they are contributing to the company’s goals. Also, no discussion of turnover would be complete without mentioning that hiring the right people from the start is also an important strategy in keeping retention high and turnover low.

How to calculate ROI of employee turnover cost

Turnover Cost =

Termination Costs + Cost per Hire + Vacancy Cost + Learning Curve Loss +

Example:

Turnover Cost (for a given month) =

Termination Cost $2,500 + Hiring Costs $38,000 + Vacancy Costs $2,000 + Learning Curve Loss $1,100 = TOTAL $43,600

Termination costs are all of the expenses associated with an employee exiting the company including unemployment, severance, legal fees, exit interviews, going-away gifts and parties, etc.

Cost per hire reflects the expenses associated with bringing the new (replacement) employee onboard. This includes recruiting expenses, referral fees, interviewing time and salaries, orientation and onboarding training, etc.

Vacancy costs are any expenses incurred while the job is vacant. It might include overtime to cover shifts, temporary staffing, freelancer or consultant fees, etc.

Learning curve loss is the productivity loss that happens while the new employee is still getting acclimated. Every organization has a unique employee learning curve. An example would be 25% of average monthly salary and benefits for the first 90 days.


For more insights like these, join us at the annual HR Innovation & Tech Fest, the fastest growing and most engaged HR community in Australia.


2. Increase Human Resources Productivity

One of the cornerstones of increasing productivity is focusing on the process of effective performance management, which requires goal setting and alignment, frequent reviews and touch points, and giving employees more ownership over the process.

None of the above can be accomplished without a system that gives HR, managers, and employees a clear line of sight into reviews, performance, goals, and development plans.

HR typically owns the administration of performance management, therefore, they provide maximum value when they can manage the process both effectively and efficiently. One indicator of providing value is being able to respond to management and employee requests in a timely fashion.

How to calculate ROI of HR productivity

Response Time = Completed Date – Received Date

Example:

TA request is received on February 7 and completed on February 10. Response time is 3 days.

You can use response time to benchmark the time it takes to complete the process before and after implementing an EPM to show the time savings. In addition, HR can calculate the average salary plus benefits expense to monetize the savings.

 

3. Improve Employee Coaching

Time savings is probably the easiest calculation to generate. It’s a no-brainer then, that effective automated process can save HR and employees a significant amount of time and therefore is a good measure of ROI.

An employee performance management system focuses the organisation on improving employee coaching to create a more engaged workforce. The goal is to reduce paper administration so managers can spend their time building relationships with employees.

Dr. Ken Blanchard, author of “The One Minute Manager”, says the most effective working relationships are when a manager schedules a 15-30 minute meeting once every two weeks with each of their direct reports. Here’s how to measure counselling topic time:

How to calculate ROI of improved employee coaching

Ken Blanchard, author of “The One Minute Manager”, says the most effective working relationships are when a manager schedules a 15-30 minute meeting once every two weeks with each of their direct reports. Here’s how to measure counseling topic time:

Coaching Topic Time = Total Session Time per Topic / Number of Sessions per Topic

This will not only tell you how much time is being spent coaching, but the topics that are being discussed. It can help the organization identify performance trends that need to be addressed at a macro level.

This is an excerpt from Silkroad’s free eBook “Calculating the ROI of an Employee Performance Management Solution”. You can download the full eBook here.

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