How to understand the ROI of investing in People
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We often hear that people are a company's most important asset, but it's historically been very hard to quantify that, or understand the ROI of it. In this presentation, I walk through a framework for understanding the Employee Lifetime Value (ELTV) and show a case study that demonstrates the ROI of being great at People practices.
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How to understand the ROI of investing in People
- 1. How to understand the ROI of investing in People Using Employee Lifetime Value to articulate ROI Maia Josebachvili VP of Strategy & People @MaiaJo_
- 2. I’m currently the VP of Strategy & People at Greenhouse. I don’t come from a traditional HR background, though. My journey here has been a bit unconventional. PREVIOUS JOBS I’VE HAD: - Engineer - Derivatives trader on Wall Street - CEO & Founder of Urban Escapes (sold to LivingSocial) - Sr. Director at LivingSocial Hi, I’m Maia. Before we dive in, I want to share a few things about my background that informed my take on this topic.
- 3. In my previous roles as a CEO, a P&L owner, and a derivatives trader, I always considered return on investment (ROI) to help me determine where to best allocate my time and resources. So when I took the VP of People role at Greenhouse, the first thing I wanted to understand was how to measure the ROI of investing in People. Why did I start thinking about this?
- 4. It turns out that calculating the ROI of derivatives is easy compared to calculating the ROI of investing in people
- 5. Too many variables Too subjective Difficult to assign value to people W H Y I S I T S O H A R D ?
- 6. Let’s look at how other departments articulate their ROI
- 7. YEAR 2 100K YEAR 1 50K Marketing can demonstrate ROI in terms of an increase in the number of leads.
- 8. T E A M 1 T E A M 2 Engineering can articulate ROI in terms of delivering an equally excellent product with half the team of an another company
- 9. What’s the equivalent for articulating the ROI of investing in People?
- 11. ELTV is best understood in the context of the employee lifecycle. In the next few slides, we’ll look at a simplified version of the employee journey to see how it maps to ELTV.
- 12. TIME -6 -4 -2 0 2 4 6 8OU TPUT T H E E M P L O Y E E L I F E C Y C L E Start W hen an employee starts, their output is negative because a company has invested recruiting and interviewing resources in bringing the person on.
- 13. TIME -6 -4 -2 0 2 4 6 8OU TPUT T H E E M P L O Y E E L I F E C Y C L E Start Fully contributing As the employee onboards, they bring more and more to the organization. Once they are ramped up, they reach the point of being a fully contributing member of the team.
- 14. TIME -6 -4 -2 0 2 4 6 8OU TPUT T H E E M P L O Y E E L I F E C Y C L E Start Fully contributing Decision to leave After a while, the employee plateaus in their growth and eventually makes the decision to leave the company.
- 15. TIME -6 -4 -2 0 2 4 6 8OU TPUT T H E E M P L O Y E E L I F E C Y C L E Start Fully contributing Decision to leave Last day After some time, the employee reaches their last day, at which point their output goes to zero.
- 16. TIME -6 -4 -2 0 2 4 6 8OU TPUT T H E E M P L O Y E E L I F E C Y C L E Start Fully contributing Decision to leave Last day ELTV The area under the curve is the combined output of the employee over time, otherwise known as the Employee Lifetime Value.
- 17. Increasing ELTV is really just about growing the area under the curve. Let’s see what that looks like…
- 18. TIME -6 -4 -2 0 2 4 6 8OU TPUT R A I S I N G T H E B A R How quickly they ramp
- 19. TIME -6 -4 -2 0 2 4 6 8OU TPUT R A I S I N G T H E B A R How high someone can go How quickly they ramp
- 20. TIME -6 -4 -2 0 2 4 6 8OU TPUT R A I S I N G T H E B A R How high someone can go How much higher they go over time How quickly they ramp
- 21. TIME -6 -4 -2 0 2 4 6 8OU TPUT R A I S I N G T H E B A R How high someone can go How much higher they go over time How long they stay How quickly they ramp
- 22. TIME -6 -4 -2 0 2 4 6 8OU TPUT I N C R E A S I N G E L T V How high someone can go How much higher they go over time How long they stay How quickly they ramp The green shaded area represents the increase in ELTV.
- 23. TIME -6 -4 -2 0 2 4 6 8OU TPUT I N C R E A S I N G E L T V How much higher they go over time Onboarding Hiring Management & Development Management & Culture These inputs can be most impacted by a few People practices.
- 24. That’s the theory. Let’s put some numbers behind it and walk through a case study to see how big the ROI actually is.
- 25. In this case study, we’ll look at two hypothetical companies to see the impact of slightly better People practices. • Company 1 is good at their People practices • Company 2 is a little bit better In each case, we’ll look at the performance of a salesperson. ASSUMPTIONS: Salary: $60k per year Quota: $600k per year C A S E S T U D Y
- 26. -10 0 10 20 30 40 50 60 70 80 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MONTH N ET R EVENUE (1,000s) A S S U M P T I O N CASE 1 6 months to ramp and consistently hit quota A better onboarding program can decrease ramp time by 30%1 CASE 2 4 months to ramp and consistently hit quota 1Organizations with a strong onboarding process improve new hire retention by 82% and productivity by over 70%. (Brandon Hall, The True Cost of a Bad Hire, 2015) O N B O A R D I N G
- 27. -10 0 10 20 30 40 50 60 70 80 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MONTH N ET R EVENUE (1,000s) A S S U M P T I O N CASE 1 6 months to ramp and consistently hit quota CASE 2 4 months to ramp and constituently hit quota A better onboarding program can decrease ramp time by 30%1 O N B O A R D I N G Case2: Fully ramped in 4 months Case1: Still ramping 4 months in 1Organizations with a strong onboarding process improve new hire retention by 82% and productivity by over 70%. (Brandon Hall, The True Cost of a Bad Hire, 2015)
- 28. -10 0 10 20 30 40 50 60 70 80 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MONTH N ET R EVENUE (1,000s) A S S U M P T I O N 1A study from the Boston Consulting Group shows that recruiting is the HR function with the highest impact on revenue. Excellent recruiting practices contribute to more than 3x revenue growth and 2x profit margins. A better hire can outperform a peer by 20%1 CASE 2 Consistently surpasses monthly sales quota by bringing in $60k per month Consistently hits $50k per month sales quota CASE 1 H I R I N G
- 29. -10 0 10 20 30 40 50 60 70 80 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MONTH N ET R EVENUE (1,000s) A S S U M P T I O N A better hire can outperform a peer by 20%1 CASE 2 Consistently surpasses monthly sales quota by bringing in $60k per month Consistently hits $50k per month sales quota CASE 1 H I R I N G Case 2: 20% more sales 1A study from the Boston Consulting Group shows that recruiting is the HR function with the highest impact on revenue. Excellent recruiting practices contribute to more than 3x revenue growth and 2x profit margins.
- 30. -10 0 10 20 30 40 50 60 70 80 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MONTH N ET R EVENUE (1,000s) A S S U M P T I O N 1Companies that hire managers based on their management skills saw a 48% increase in profitability. (State of the American Manager, Gallup, April 2015) Great management and development can improve an employee’s performance by 20% in a year1 CASE 2 Goes from $60k in monthly sales to $72k in monthly sales in year 2 Continues to hit $50k per month sales quota CASE 1 M A N A G E M E N T & D E V E L O P M E N T
- 31. -10 0 10 20 30 40 50 60 70 80 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MONTH N ET R EVENUE (1,000s) A S S U M P T I O N CASE 2 Goes from $60k in monthly sales to $72k in monthly sales in year 2 Continues to hit $50k per month sales quota CASE 1 M A N A G E M E N T & D E V E L O P M E N T Case 2: 20% increase in sales in year 2 Great management and development can improve an employee’s performance by 20% in a year1 1Companies that hire managers based on their management skills saw a 48% increase in profitability. (State of the American Manager, Gallup, April 2015)
- 32. -10 0 10 20 30 40 50 60 70 80 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MONTH N ET R EVENUE (1,000s) A S S U M P T I O N A great culture, coupled with good management, can increase employee tenure by one year1 CASE 2 Continues to thrive for another year Starts to look for a new job 20 months in; leaves after 2 years CASE 1 C U L T U R E & M A N A G E M E N T 136% of people switching jobs left because they were “unsatisfied with the work environment / culture” of their previous employer. (Why and How People Change Jobs, LinkedIn, 2015)
- 33. -10 0 10 20 30 40 50 60 70 80 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 36 MONTH A S S U M P T I O N 136% of people switching jobs left because they were “unsatisfied with the work environment / culture” of their previous employer. (Why and How People Change Jobs, LinkedIn, 2015) A great culture, coupled with good management, can increase employee tenure by one year1 CASE 2 Continues to thrive for another year Starts to look for a new job 20 months in; leaves after 2 years CASE 1 C U L T U R E & M A N A G E M E N T N ET R EVENUE (1,000s) Case 2: Employee stays on another full year
- 34. P U T T I N G I T A L L T O G E T H E R : 3 - Y E A R O V E R V I E W -10 0 10 20 30 40 50 60 70 80 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 MONTH N ET R EVENUE (1,000s)
- 35. -10 0 10 20 30 40 50 60 70 80 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 MONTH N ET R EVENUE (1,000s) P U T T I N G I T A L L T O G E T H E R : 3 - Y E A R O V E R V I E W Before you click on, guess what the difference is in $$… (I’m serious)
- 36. -10 0 10 20 30 40 50 60 70 80 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 MONTH N ET R EVENUE (1,000s) P U T T I N G I T A L L T O G E T H E R : 3 - Y E A R O V E R V I E W $1,300,000
- 37. • Making a 20% better hire • Onboarding her 2 months faster • Helping him improve 20% year over year • Increasing her tenure by 1 year ROI of $1,300,000 over three years for one employee P U T A N O T H E R W A Y …
- 38. And the numbers really start to add up when you factor them across your entire employee base and make even bigger improvements than the assumptions we used.
- 39. • If you want to read more, you can check out the whole whitepaper here. • Tweet at me with any questions, comments, or feedback at @MaiaJo_ . • Start using this concept—and help make it better. Let’s push our industry forward —Maia Thanks for taking the time! @MaiaJo_
Editor's Notes
- I used to be a derivatives trader on the floor of the stock exchange.. Crazy. Never had a conversation. Just yelled. Tremendous impact on how I think about my current role. Investment is all about calculating risk and ROI (RETURN ON INVESTMENT) Wouldn’t make a move without knowing potential upside/downside Calculating ROI and understanding where to get the best return on my investment was KEY to that job It’s so important, in fact, that a Nobel Prize was awarded for the Black-Scholes options pricing model, a mathematical equation that prices derivatives and helps traders calculate ROI
- The reason it hasn’t happened yet is pretty straightforward. It’s really hard to calculate this. For a few clear reasons. First, it’s very difficult to assign a concrete value to a human being and their impact on your company Example: What do you do for an engineer? Is it lines of code? Most CTOs would kill me if I said that. Features shipped? Too many variables (choosing what to measure) What about the other contributions? How someone improves the culture? What they do outside of their day job? If they help the rest of the team? Too subjective (how to measure it) Basically, any output that is qualitative. All companies have that - like for your legal team – the quality of their contracts? So no one has really cracked the code yet; no one has really done this reliably and consistently before
- In response to that fuzzy math, most companies do one of two things (or both things) Anything (they copy what other companies do, essentially copy/pasting vision/strategy from other companies onto their own) Without understanding what the ROI is for them there Perks war – companies saw Google had a great culture, and great perks, and so they started investing in perks (everyone just started doing what everyone else was doing) Nothing! (they under-invest in their people) So lots of companies have understaff their People functions, wait a long time before building it out. Because coming back to this concept of known cost, unknown return -> spending is expensive if you don’t know what you’re getting from it. Neither solution results in a good ROI
- How do other parts of the business do it? They say – here’s that status quo. And here’s a new return I can produce. And guess what happens? The executive team starts to salivate, and you bet they get the investment they’re asking for.
- Let’s try another one What if the CTO said… You know that 1-year product roadmap we’ve all committed to? Guess what?
- How do we do that? What’s our version? It’s about getting past this fuzzy math – getting past the known cost, unknown return. What we need to do is understand the ROI of our efforts.
- How do we do that? What’s our version? It’s about getting past this fuzzy math – getting past the known cost, unknown return. What we need to do is understand the ROI of our efforts.
- In response to that fuzzy math, most companies do one of two things (or both things) Anything (they copy what other companies do, essentially copy/pasting vision/strategy from other companies onto their own) Without understanding what the ROI is for them there Perks war – companies saw Google had a great culture, and great perks, and so they started investing in perks (everyone just started doing what everyone else was doing) Nothing! (they under-invest in their people) So lots of companies have understaff their People functions, wait a long time before building it out. Because coming back to this concept of known cost, unknown return -> spending is expensive if you don’t know what you’re getting from it. Neither solution results in a good ROI
- First let’s simplify the equation a little We can break the employee lifecycle into four distinct gates (Less emphasis on the four gates, more on the variables) Start date Fully contributing member Decision to leave Last day Any improvement we make to this curve, at any of these points, will change the ROI Now, let’s understand the variables in this equation. [talk through this]
- First let’s simplify the equation a little We can break the employee lifecycle into four distinct gates (Less emphasis on the four gates, more on the variables) Start date Fully contributing member Decision to leave Last day Any improvement we make to this curve, at any of these points, will change the ROI Now, let’s understand the variables in this equation. [talk through this]
- First let’s simplify the equation a little We can break the employee lifecycle into four distinct gates (Less emphasis on the four gates, more on the variables) Start date Fully contributing member Decision to leave Last day Any improvement we make to this curve, at any of these points, will change the ROI Now, let’s understand the variables in this equation. [talk through this]
- First let’s simplify the equation a little We can break the employee lifecycle into four distinct gates (Less emphasis on the four gates, more on the variables) Start date Fully contributing member Decision to leave Last day Any improvement we make to this curve, at any of these points, will change the ROI Now, let’s understand the variables in this equation. [talk through this]
- First let’s simplify the equation a little We can break the employee lifecycle into four distinct gates (Less emphasis on the four gates, more on the variables) Start date Fully contributing member Decision to leave Last day Any improvement we make to this curve, at any of these points, will change the ROI Now, let’s understand the variables in this equation. [talk through this]
- In response to that fuzzy math, most companies do one of two things (or both things) Anything (they copy what other companies do, essentially copy/pasting vision/strategy from other companies onto their own) Without understanding what the ROI is for them there Perks war – companies saw Google had a great culture, and great perks, and so they started investing in perks (everyone just started doing what everyone else was doing) Nothing! (they under-invest in their people) So lots of companies have understaff their People functions, wait a long time before building it out. Because coming back to this concept of known cost, unknown return -> spending is expensive if you don’t know what you’re getting from it. Neither solution results in a good ROI
- Any improvement we make to this curve, at any of these points, will change the ROI Now, let’s understand the variables in this equation. [talk through this] There are a few things: How quickly they ramp to fully contributing member
- How high someone can go naturally
- How much higher they can go over time with the right inputs
- How long they stay If they ramp faster, there’s less time they’re ‘not productive’, and more overall output in a similar period of time
- The whole area is your new ELTV The green is your incremental. That’s the ROI that we’re trying to capture. That’s the return.
- And you can loosely map these to distinct people practices.
- In response to that fuzzy math, most companies do one of two things (or both things) Anything (they copy what other companies do, essentially copy/pasting vision/strategy from other companies onto their own) Without understanding what the ROI is for them there Perks war – companies saw Google had a great culture, and great perks, and so they started investing in perks (everyone just started doing what everyone else was doing) Nothing! (they under-invest in their people) So lots of companies have understaff their People functions, wait a long time before building it out. Because coming back to this concept of known cost, unknown return -> spending is expensive if you don’t know what you’re getting from it. Neither solution results in a good ROI
- Now for the math part. Let’s put numbers to all of this. Sales person: $60k/year salary -> $5k /mo Quota: $600k yearly quota -> $50k /mo
- Assumptions: Case 2 vs Case 1 -30% faster ramp -20% higher sales in year 1 -10% increase in output after year 1; 15% after year 2 -2x tenure
- Using incredibly conservative estimates, we came to a $1million dollar difference over 3 years with JUST ONE HEADCOUNT 2.2x difference in our two scenarios Let’s play out a few more…
- Using incredibly conservative estimates, we came to a $1million dollar difference over 3 years with JUST ONE HEADCOUNT 2.2x difference in our two scenarios Let’s play out a few more…
- In response to that fuzzy math, most companies do one of two things (or both things) Anything (they copy what other companies do, essentially copy/pasting vision/strategy from other companies onto their own) Without understanding what the ROI is for them there Perks war – companies saw Google had a great culture, and great perks, and so they started investing in perks (everyone just started doing what everyone else was doing) Nothing! (they under-invest in their people) So lots of companies have understaff their People functions, wait a long time before building it out. Because coming back to this concept of known cost, unknown return -> spending is expensive if you don’t know what you’re getting from it. Neither solution results in a good ROI