President's Message: Determining Return on Investment (ROI) - A Continuing and Growing Need to Support HR Programs and Policies

David A. Dye, Ph.D.

Some time ago, a colleague of mine said he did not believe that transforming our office to a more team-based environment would be beneficial. When I asked why, he said that he was not convinced that the change would help us to make better decisions, that it would probably take us longer to perform our work, and that our products and services would not be of any higher quality. He said that even if these improvements could be realized, significant costs would be involved -- putting in place new selection and appraisal methods to evaluate the new teamwork skills, training current employees who were lacking the right skills, and expending considerable time and effort to change the way that work gets done in the office. Basically, he was not convinced that the benefits would outweigh the costs.

While my story may be an overly simplified example, I believe it reinforces a point that is increasingly important in today's organizations. We must continue to demonstrate and communicate the value and impact of our HR and assessment programs. Compared to our colleagues, we should expect that the customers and stakeholders of our programs, who are relatively less knowledgeable, need and demand even more convincing evidence and support.

Return on Investment (ROI) Is Not A New Idea

It has become increasingly popular to talk about how HR professionals need to demonstrate the bottom-line impact that they have on their organizations. Certainly, Dave Ulrich, author of Human Resource Champions and The Next Agenda for Adding Value and Delivering Results (Harvard Business Press, 1997) has had a strong influence by helping HR professionals to become better business partners in their organizations. Determining the return on investment for HR programs is certainly nothing new; however, HR organizations continue to be under pressure to show their worth.

When I consider how assessment professionals have communicated the worth of employee selection programs, I think of the utility literature. A recent article by Frank Schmidt and John Hunter summarizes the theoretical and practical implications of over 85 years of research in personnel selection (Psychological Bulletin, 1998). The article presents the same theme that has been stated for some time - as employers use more valid selection procedures, they will realize considerable savings in productivity through improved employee performance and output.

After reading the article and considering the new demands that are being placed on HR programs to demonstrate their value, I found myself asking the following questions:

How convincing are arguments like those made by utility models to the less sophisticated that are the customers and stakeholders of our programs?
What impact do models like utility research have on users of our programs?
Are there other more dynamic ways to communicate the worth of our programs?

The Time is Right for More Holistic and Dynamic Approaches for Determining Return on Investment

I would argue that is not enough to merely calculate the predictive and economic value of our programs and tell our customers about the benefits. Rather, in the new organization, part of our success in demonstrating the worth of our programs and ensuring their implementation is to involve the customers and stakeholders in the process. I recommend that we consider more holistic and multi-faceted approaches to demonstrate the impact of our programs and policies.

The following Cost Benefit Analysis (CBA) methodology is a composite of some of the best practices found in government and industry and has been used successfully by my colleagues in HR and other arenas. The approach is tailored to effectively evaluate specific investment needs and is provided as a way to provide users with the information necessary to make a wide-variety of investment related decisions. The following steps of the CBA process represent what is typically included.

CBA methodology chart

There are several features that make this type of approach attractive in today's environment.

1. It requires a complete understanding of the recommended program and the current operating environment. Because almost every investment affects numerous parts of the organization, it has the potential for understanding the long-term value of the investment.

2. It allows for users to develop a series of potential alternatives. These solutions eventually become the investment alternatives and typically arise from extensive group brainstorming sessions. Targets for improvement can be set that help to calculate the expected benefits and measure the return on investment over time.

3. It allows for comparing the costs and benefits of each alternative and determining a return on investment for the program. The CBA assumes there are varying levels of benefits for each alternative in addition to varying costs. However, many benefits of certain investments are qualitative in nature and may not lead directly to dollar savings. Improvements in customer service and quality are certainly recognized as benefits, but may not easily be included in the dollar-valued benefits stream or return on investment measures.

4. It provides users and stakeholders with the ability to compare and recommend an alternative. After the economic impact of each alternative has been established, the alternatives can be compared to one another and to the status quo. Included in this comparison should be a thorough look at the intangible benefits and increases in effectiveness that cannot be dollar valued.

5. It encourages that the benefits and costs associated with the investment be tracked over time and compared to the estimates in the original CBA. Not only does this help to build a knowledge base for future analysis, it allows the organization to track the return over time and identify if the investment begins to stray from the expected results.

6. It provides for continuous learning and allows for applying the lessons to the next investment analysis. The key is determining which type of investment analysis works best for your organization and building on each successive application.

I welcome your ideas and input on how we can more fully communicate and implement the worth of our programs and policies. The time is right for us as assessment professionals to find more creative and interactive ways of educating and demonstrating the value of our programs and services to those who use and benefit from them.