Return on Investment, or ROI, is one of the most fundamental calculations behind business decisions. Often times, ROI dictates which initiatives get investment and support, and which end up on the edit room floor. Mastering the ROI calculation is critical for gaining support and funding for your programs. Of course, this begs the question – what is this powerful ROI calculation?
Like with so many great questions, the answer is, unfortunately, “it depends”.
ROI calculations depends on what the team, department, and/or organization covets – it could be revenue or donations. But it could also be resource time, customer acquisition, user retention, cost of sale, time to market, company valuation, stock price, number of votes in your candidate’s favor, or any other number of metrics. In other words, ROI depends on how you define success.
All ROI calculations have three basic components:
The current state – what it is now
The future state – what it will be after the initiative is done
The cost of change – what it will take to go from current to future
The best way to truly understand how to calculate ROI is to see it in action. Let’s use one of the most common forms of ROI for internal initiatives (such as initiatives to improve efficiency, diversity, equity, and inclusion of a hiring process): monetary value. In other words, how much a new process is saving the company as compared to the current methods.
Component 1: the current state. How much it costs now
All ‘return’ calculations start with the current state – how else can you prove the great value of the new process or approach if you can’t compare it to what’s happening now?
In any current state calculations, especially ones that measure complex processes full of variations, exceptions, and inconsistencies, it’s not about being right, it’s about being “directionally accurate”.
Directionally Accurate: A term that conveys that the numbers and equations are best estimates based on limited or partial data combined with process knowledge. Otherwise known as “ish”, “in the ballpark”, “guestimate”, “SWAG” (Scientific Wild A** Guess).
For a simple cost calculation, include the following:
Cost of Attraction/Advertising: Average cost of attracting talent – such as posts on job boards, social media advertisements, career fairs (virtual or in person), etc.
Cost of labor: Average cost of attracting, screening, and selecting talent. This includes all those resume reviews (if you do them), screening calls, interviews, post-interview conversations, post-post-interview conversations where you debate the results of the conversations, etc. Note: don’t forget to take into account different salary ranges when calculating average labor costs.
Cost of process technology and services: Average cost of technologies and services used within the process. This includes staffing agencies and consultants, applicant tracking solutions, assessments, video interview tools, and anything else you are using to augment the process.
Keep the calculation as simple as you can. Here are a few tips to make it easier:
Remember ‘directionally accurate’: Knowing exact numbers can be difficult, if not impossible. You may not have the systems in place to accurately measure things like labor hours, or they can vary so widely from job to job, the range becomes huge. Rather than spending far too long searching for the right answer, use your and your team’s knowledge of the system to generate a best guess average. Having something that gives a directionally accurate idea of costs quickly is far more valuable than spending months trying to calculate the right answer at the expense of fixing the problem.
Make the variable what you can control. The calculations will be based on something – cost per job, cost per day, cost per department, etc. Choose the word that comes after “per” based on what it is you want or can change. For example, if your initiative will save time, make everything “cost per day” or “cost per hour”. If your initiative will replace one technology with another, do ‘cost per department’ or ‘cost per job’.
Ignore what you can’t change. Don’t waste time calculating costs that will be unaffected by your initiatives. Since these costs are on both sides of the equation, they won’t affect your ROI. In other words, they are there with or without your initiative, so there will be no return on investment on that cost. For example, if your initiative has nothing to do with your ATS, then ignore its cost and just note that it is there.
Keep it simple: Current state costs can get very complex. They can include all sorts of opportunity costs and ‘doing it wrong’ costs. For example, the costs of all the days the job has not yet been filled and therefore the new employee is not generating value and the costs of hiring someone who is okay but not great and therefore is generating less value for the organization and the costs of increased attrition because of bad hires. These costs are very real, complex, and could end up leading you and the rest of the organization down a never-ending analysis path. Unless your initiative is specifically targeting more complex costs and including them is required to create a strong ROI, don’t use them.
Component 2: The future state. The expected new costs after the initiative is complete
To compare how great the future will be compared to the present, you need both the present costs and the future value.
To do this, repeat the same calculations as step 1 (including the emphasis on ‘directionally accurate’) but replace the values with what you expect the costs to be once the initiative is done.
For example, if the initiative will result in saving time, then the number of hours will go down so it will be a lower labor cost. If the initiative replaces current technologies with new ones, then replace the costs of the old with the new in the technology and services costs.
Most initiatives will have multiple changes, and not all of them need to go down. For example, you may be adding or replacing a technology with one that is more expensive but, by doing so, you anticipate saving labor costs and reducing the need for consultants. In this case, the technology costs go up and the labor and services costs go down. As long as the labor and services costs go down more than the technology costs go up, the ROI is positive.
Here are a few tips for future cost calculations:
Use directionally accurate. For future costs, this is even more relevant than current costs as you are likely estimating impact, extrapolating it from a Center of Excellence program, or inferring it from someone else’s data.
Match the current state cost variables. Don’t add or remove variables from your future costs unless they are new or removed with the initiative. If you do, you are not comparing fairly. For example, if you include the cost of a staffing agency in the current cost, and you are still using a staffing agency after the initiative, you have to include it in the future costs.
Highlight the changes. The part your audience will care about most when evaluating an ROI (your boss, organization decision makers, etc.), is the difference between the current and future state. In other words, what exactly is the initiative going to do to the numbers and why. When calculating future state, track what the differences are and how you estimated those differences. You will be happy you did when defending your analysis later.
Component 3: The cost of change. What will it take to get from now to the future
The last component to an ROI is the cost of getting from where we are now to where we can be in the future. In other words, the investment.
The cost of change is made up of two components: resources and time.
Resources are all of the inputs to make the change – labor, technology, funding, etc. The easiest way to calculate this is to translate everything to monetary value. For example, if it will take two full time staff in TA three months to execute the project, then calculate the value of those resources for that time (i.e. salary).
Here are a few common resources that contribute to change:
Initial technology costs – set-up, integration, adoption. Note: this is not to be confused with the sustaining cost of the technology, such as a subscription cost. That is already taken into account in the second component – future costs.
Labor costs: the cost of labor hours spent executing the project.
Services costs: the cost of external resources to help implement the change such as consultants or external IT services.
Training/adoption costs: the costs of all the creation and dissemination of training materials as well as the time to absorb those materials (i.e. the time employees are spending in training).
Cost of risk: All change has risk – spend overages, scope creep (i.e. the project gets bigger as you do it), wrong turns, failed trainings, etc. Risks are not bad, they are reality. Don’t worry about them, budget for them.
In addition to resources, change takes time. Specify the time to manage expectations that this isn’t a ‘throw money at it to make the problem go away’ scenario.
Bringing it all together: Calculating ROI
Armed with the three components, you now have your ROI.
Return = Cost of current – Cost of future. (in other words, how much money will be saved).
Investment = cost of change.
Putting them together will sound something like this:
With an investment of $100,000 over one year, half of which will be labor budget of two FTEs to run the project, we will save over $40,000 per year.
Bonus points if you can include the “break even” (when the organization makes back its investment) and a general value statement. For example:
The program will pay for itself in under three years and within five years, we will save over $100,000.
ROI for any other metric works the same way. Just replace ‘cost’ with whatever success is for your initiative/organization.
You can do it. We can help. Career.Place offers free trials to collect future state data and we help guide our customers through ROI calculations; from current state analysis to investment estimates, we are here to help.