“So how can we measure the return on investment (ROI) of this solution?” My client asked as I was wrapping up the exploratory meeting for a leadership programme.
This question is a favourite among our clients - and also one that we consultants don’t look forward to. Approximately two out of five clients will bring it up after we have presented the solution, because they want to know what the investment will yield in dollars and cents.
As the global economy gets more volatile, businesses are now more risk-averse. Decisions fluctuate up and down the reporting lines, and the weight of accountability has now gotten heavier on individuals. That is why HR Directors will continue to pose that question; because they need to account for the investment to be made.
Customer Lifetime Value
You would probably be familiar with the concept of Customer Lifetime Value (CLTV). Forbes has even gone as far as to claim that it’s "the only metric that matters” for a business. How so? Well, CLTV is a measure of the amount of profit that can be expected from a customer over the entire duration of their business with you, and this statistic can inform you about a number of things:
- Customers who will be with you for the long run; and those who won’t
- Customers who will be loyal to your product or service and will spend resources on your business, and those who might jump to another brand anytime
While the concept of lifetime value isn’t very new in the market, it is used primarily within a customer perspective. However, a thought hit me as I was mulling over this piece of knowledge: How has lifetime value been used in organisations with regards to employees? Surely someone must have noticed the parallel between customer loyalty and employee loyalty!
Employee Lifetime Value
I had my answer when I came across the Employee Lifetime Value (ELTV), which is defined as the net value that an employee brings to the organisation over time, from the beginning to the end of his/her tenure. Maia Josebachvili, VP of Marketing and Strategy at Greenhouse Software, is a prominent advocate of this measurement. And hopefully, by the end of this article, you will be too.
The core philosophy of ELTV looks at the value an organisation receives for investing in people, and not merely the “return" derived through financial measurements. In businesses worldwide, customers have long been perceived as a source of profit and value, whilst employees have generally been seen as a cost to the organisation. This perception feeds the need for ROI measurements whenever investments are made to develop employees, because costs have to be justified through its relative gains.
Yet, according to the FORUM for People Performance Management and Measurement, while ROI metrics might be useful for measuring short-term return on investment in employees, ELTV is able to determine long-term financial flows to an organisation. The key lies in properly defining the time increment such that it is long enough to represent employee performance over a sustained period of time, yet short enough to provide a meaningful outcome measure for a specific investment, such as a learning programme.
Adopting the mindset of ELTV shifts the focus to employee-generated value, which in reality comes in many forms. Take for example a non-frontline employee who is passionate about his/her role, and who goes beyond his/her job scope to serve customers so well, that they become advocates for your product or service. Another employee may implement cost-saving measures in operations, production, procurement, or many other areas of work, thereby contributing value to the business as well. Thus, a holistic appraisal of ELTV cannot be supplemented or limited by quantifiable numbers.
How is ELTV measured?
According to Maia Josebachvili, VP of Marketing and Strategy at Greenhouse Software, it is the responsibility of the people team to maximise ELTV by developing and executing programmes that impact the inputs driving ELTV. If deriving precise values is impossible, an alternative is to compare the relative output of having some investment with that of not investing at all. A visual of Maia’s ELTV measurement is as follows:
- A better on-boarding programme will decrease on-boarding time by 30%
- A better hire will outperform his/her peers by 20%
- Great management and development will improve an employee’s performance by 20% in a year
- Great culture with good management will increase an employee's tenure by a year
Maia goes on to point out that even small improvements in the inputs can have a dramatic impact on ELTV. Therefore, in the same manner as CLTV, HR leaders should be looking at ELTV and asking:
- Which employees will be with us for the long run? What can I do for those who will not, to possibly retain them and extend their tenure?
- Which employees will be loyal to our organisation, product, and brand? What can I do to strengthen my employer branding and employee value proposition?
What does Organisational Development (OD) say about people investment?
From an OD perspective, programmes should be embedded in every aspect of the employee experience, from operational on-boarding and hiring processes to strategic areas such as culture development and maintenance.
In the on-boarding stage for example, PACE provides blended-learning support through our mobile app, which allows employees to have access to critical on boarding information, processes and manuals that help them get inducted in a shorter time. Leadership and culture development, along with performance management, continue to be core solutions to workplace issues. Which is why here at PACE, we seek to help leaders and HR stakeholders see the value of investing in these solutions. As the ELTV model demonstrates, it is not sufficient to only cater to one aspect of the employee lifecycle.
In summary, we need to start thinking about measuring ROI differently and design ways to measure the return on people investment, before we lose truly valuable employees.
Want to know how your company is doing in terms of people investment? Our Real Organisational Health Check™ can provide you with a FREE assessment!
