SUMTOTAL WHITE PAPER

Calculating the ROI of an Employee Performance Management System

Calculating the ROI of an Employee Performance Management System

If you have experience managing talent, you already understand that an employee performance management (EPM) system will help your organization cut costs or improve profits. But how do you show that return-on-investment (ROI) to others? The more clearly you can show how an EPM system will positively affect your bottom-line; the easier it will be to get company buy-in. In most organizations, at least 70% of expenses are paid out in employee salaries. Even so, mass adoption of tools that help diagnose, develop and enhance these assets is a recent phenomenon. It doesnt make sense if you think about itrarely does a companys supply chain process go without automated monitoring tools and rarely do IT assets go unmonitored. So why not use technology to help optimize your organizations people? For that reason, this whitepaper will focus primarily on areas where EPM systems will reduce costs and increase productivity from its workforcenearly every organizations most costly expense. Obviously there are hundreds of tangible and intangible benefits in having an automated EPM system. Experience has shown that focusing on these areas will more than justify any software investments or process improvements and prove how simple the decision to revamp performance management processes should be for any organization.

Increased Workforce Productivity

Case Study: Capgemini Faced with breakdowns in productivity, renowned consulting firm Capgemini found that when completion of reviews by people managers climbed from a low of 53% in 2003 to 92.5% last year, productivity shot up. Backed with SumTotal technology, Capgemini now has full alignment with all employees and can track every employees increased utilization with a couple clicks of a button. How frequently do you see coworkers struggle passionately with projects that do not have the buy-in of the rest of your organization and will have an unlikely impact on the organizations overall performance? Are there people roaming your halls, equipped with nice titles and business cards, that when push comes to shove, dont really do anything for your company? Imagine your organization if every employee was working in line with the objectives of senior management.

The concept of cascading, line-of-sight goals and monitoring performance targets is not a new one. However, only recently have employee performance management systems been able to provide the ability to centralize and monitor data across an organization and ensure universal compliance toward a common set of objectives. The goal is to have this data readily available anytime management needs a diagnostic check, whereas manual processes take so much effort to compile data and enforce compliance that the processes almost always break down. So in conducting your ROI, think of the two major reasons employee performance management software will increase productivity: 1. People work on projects and tasks that they should be working on 2. With clearer visibility of goals, metrics, and how employees will be monitored, employees will work harder toward these goals.

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Various research studies differ on how much productivity is lost due to misdirected work activities. Some studies suggest that more than half of white collar work time is lost. In a landmark study of performance management effectiveness, Hewitt Associates measured a whopping 35% productivity benefit. Yet even a modest annual productivity improvement is alone a tremendous ROI. For the sake of this ROI, we recommend that you use a conservative 5% increase in overall workforce productivity. In other words, expect workers to gain two extra hours of productivity each week once a reoccurring performance management process is put in place with a technology backbone that provides the ability to report progress and enforce universal compliance in the process. Calculating the Productivity ROI of an Employee Performance Management System: Increased level of Productivity (measured in equivalent employee headcounts) Cost per individual efficiency

Amount saved in Human Capital

Note there are other ways to calculate productivity increases especially in terms of effects on the results of your overall business. You may consider using a different metric if youre certain you can make a compelling case.

Reduce Employee Turnover

Employee turnover is a big issue. Rarely, can you pick up an issue of a major periodical, like Business Week or The Economist, where talent shortages and recruiting issues arent in one of the headlines. Your organization should already have a grasp on how expensive it is to recruit and onboard an employees replacement. Many organizations are putting that replacement cost at about one years salary for the new hire! So in conducting your ROI for an employee performance management system, be sure to exploit one fact that your CFO will certainly understand: The best way to decrease recruiting costs is to decrease employee churn! So lets look at why people are leaving their jobs. The best source of this data is undoubtedly from internal, HR exit interviews. But if you cant retrieve that information, go online and youll find thousands of resources and surveys on why people quit their jobs. Here are the common reasons people leave based on research weve conducted: Common reasons people leave their job Job Too Busy or Limited Work/Life Balance Poor Communication Areas an Employee Performance Management System can Prevent Turnover Everyone is too busy. The question is: Are they too busy with their most critical tasks or are they too busy with the hurly burly of everyday work? The more focused an employee is, the easier it is for the employee to gauge whether the busy claim is valid. A performance management system, at its core, is meant to facilitate better communication by constantly ensuring employees know where they stand within the organization and what is expected of them. Any employer who cannot meet these two expectations at any given time is incompetent in managing its workforce. Most workers want to grow in their role, and like most things in life, if someone isnt getting what theyre looking fortheyll

No Job Growth & Challenges

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No Empowerment

No Recognition Company Culture

Pay

Questionable Promotional Practices

surely leave. In addition to tracking work performance metrics, performance management systems also manage employees individual development plans, highlight growth areas, and offer developmental/training opportunities. Empowerment breaks down when an organization is poor at planning its goals. When managers take the time to define objectives with their employees, there will be less ambiguity in roles and opportunity for empowerment. A performance-driven culture ensures managers address employee progress on the important aspects of the job. Managers are forced to recognize employee progress. Culture breaks down when management constantly reorganizes, changes strategies, and leaves room for ethical breeches. These are all tied to the communication of an organizational strategy. Aligned performance goals and objectives help enforce an aligned, results-oriented culture. Most employees have a good idea of how much they should be making. Linking performance data directly to compensation decisions ensures pay is aligned with merit and is fairly distributed among employees. Linking performance data to workforce succession planning decisions ensures you can easily identify who your true top performers are, assess the bench strength of any given position, start working on any skills gaps needed to promote people to the next level, and (most importantly) promote those who deserve it.

Calculating the Reduced Turnover ROI of an Employee Performance Management System: Estimated Reduction in Turnover (individuals per year)

Replacement cost per individual

= Reduction in Turnover effect

Note, these numbers differ across industries and regions. If you would like help in finding relevant figures for your organization, contact SumTotal Systems at 1.866.SMTOTAL and ask to speak with a performance management professional.

Improve Compensation Alignment

Most organizations claim to pay at market rates. Some organizations purposely pay above at a premium. Almost all companies are leaving some money on the table as they manage compensation. Compensation specialists have for years relied on market data and subjective review ratings to determine salary adjustments. This is flawed because most organizations suffer from the following cycle: As performance reviews arent objective and consistent among groups, some employees gain while others are victims to the process. Merit and compensation increases are given, often inconsistently, based on faulty data. And the cycle repeats itself year after year. The more out-of-whack this becomes, the worse it affects a companys bottom line. The grossly underpaid will eventually leave and youll have replacement costs mentioned above. Overpaid employees, surprisingly, often know who they are and will likely continue to exploit your system until you have you have sound, fair processes that support true pay-for-performance.

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No Compensation system is complete without sound performance management data! Calculating the effect of an employee performance management system in this case is not so cut and dried. If you are concerned about how your current performance management processes affect compensation, leverage compensation surveys and map them to the positions your organization currently employs. If you find that youre drastically overpaying your workforce even considering regional adjustments and other demographics, an employee performance management system can help close that gap. Again, no compensation tool is valuable without sound performance management data!

Performance Management Systems Save Time

Think of the last time you had to fill out performance reviews or update a career inventory. Did it take hours to get through? Were you able to give the process due consideration? Workforce performance management systems pay for themselves merely in the time they save managers with automated workflows and support tools like a writing assistant. But more importantly, these tools also allow contributors and managers to spend more quality time actually inputting valuable performance data. Human resources also have better control and visibility of performance management processes allowing them to save time by escalating in areas that arent being updated. In calculating the ROI, first try to assess how much manual work is taking place for managers and employees. Talk to managers to see where they spend Alza made a detailed study of time their time. Most likely they struggle with filling out spent on their appraisal process your organizations current forms, need the automated before and after automating with writing assistance help that comes with a best-of-breed SumTotal, and found an 80% employee performance management system and decrease in EPM process time struggle calibrating reviews among their various demands on its employee reports. Next, evaluate all of the administrative tasks population. In effect, a process that and headaches that could be saved within HR by once took five hours now takes automating the performance process. Chances are, one. Saving 1,000 employees just your current manual processes are so time consuming one hour per year, based on an and cumbersome that a performance management average labor cost of $40/hour, system would pay for itself with the efficiencies gained saves $40,000 per year. Alza also within HR. Take account of how much your HR demonstrated an 80% specialists struggle to consolidate performance, administrative cost savings. succession, and compensation data. Also identify the steps they have to take to serve as the organizations performance review watchdog, ensuring forms are filled out correctly and on time. An automated employee performance management system will take a lot of these headaches away. Case Study: Alza Corporation Calculating the Efficiency ROI of an Employee Performance Management System: Management (hours saved) HR (hours saved) Average employee Cost per hour Money saved by EPM System

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Tip: Be careful not to overemphasize the impact of time saved when justifying ROI to management! Some people see the amount of time spent on performance reviews as a sunk cost that managers are expected to complete on their own timelike during end of the year downtime, on a plane, or over a weekend. Since these are usually salaried employees conducting reviews, etc., your CFO may not care much when you say youre going to cut this time in half. Tying it all together Once you take the time to calculate some of these figures, youll quickly realize that investing in a properly functioning performance management system would break even almost immediately. Furthermore, with on-demand, web-based technology, your organization will have the choice of various low-cost deployment options to help rapidly get your project underway. This analysis focused primarily on the costs that affect human capital and operating margins, because as youre making your case, these will have the most evident financial impact. Thats not to say there arent countless other reasons to invest in an employee performance management system. Here are some other benefits of a best-of-breed employee management system:

You have universal access to valuable performance information The more data you have, the better your performance results will be You can actually enforce goal alignment Goal visibility increases everyones accountability You can act on employee development plans (rather than letting them die in a filing cabinet) Your HR organization can implement consistent performance guidelines and bestpractices Managers manage better and provide better feedback Employees can provide peers open and objective feedback Proactive channels of open communication are enforced Review cycles no longer have to be yearly Employee engagement is further invoked with collaboration tools Ability to implement a performance-oriented succession hierarchy Career paths are made clearer to employees and the organization alike Pay-for-performance can become a reality Reviews are more consistent and fair Save a tree ditch your paper and manual processes . . . and much more!

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Tip: When presenting your business case, be sure to bring in line managers to support your cause. Effectively selling and implementing an enhanced performance management process will depend on getting the buy-in of those in the trenches using this process everyday! Ensure that you get the support of these users just as you will get the support from HR, senior management, and IT. So in conducting your business case and ROI calculation, youll find there is no pure cookie cutter approach. Focus on the metrics that will matter most to your organization and sprinkle in some of the points above when you have evidence that theyre a hot issue within your organization. Most organizations find that once a case is put together, this isnt a very hard sell at all. Employee performance management systems are among the fastest growing enterprise software solutions out there. Its definitely worth the effort, and it will be hard to imagine anything else an organization could do that is as liberating and meaningful to every employee than the promise to constantly gauge their performance and development.

SumTotal provides talent management software and services enabling organizations to increase performance, engage and develop team members and retain their best people. To learn more about how SumTotal can work with you to help strengthen business performance, please visit our Web site at www.sumtotalsystems.com

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