Yes, Believe It: You Can Measure the ROI of Your HR and Culture
Most entrepreneurs are eager to measure the return on investment (ROI) of their business practices and strategies; I’m no different. But what really intrigues me is figuring out the ROI of categories that are traditionally -- and notoriously -- difficult to measure, like HR and culture.
With that in mind, I sat down to chat with Maia Josebachvili, a well-known expert in the area of "People Practices," meaning employee-recruitment culture and engagement. Currently the VP of marketing and strategy at recruiting software provider Greenhouse, Josebachvili has had an impressive career that's included stints as a Wall Street derivatives trader, founder of Urban Escapes and senior director at LivingSocial.
People Practices, Josebachvili told me, have “a known cost with an unknown return,” in that executives have traditionally struggled to measure the financial impact this area has. For that reason, they've tended to underinvest in it.
In our interview, Josebachvili began the conversation by sharing the framework she personally uses for measuring HR: something she calls employee lifetime value (ELTV). As illustrated in the chart below, ELTV measures the value an employee brings to an organization, from his or her first day to the last:
As Josebachvili explained: “When we first hire you, you're technically a negative contribution, because we spent time and money recruiting you. Then the line goes up, and eventually into the positive area, symbolizing the onboarding process to becoming a contributing employee. The line continues to increase over time, as you grow and develop as an employee, until you leave the company.”
The concept of ELTV rests on four inputs, each of which can increase or decrease an employee’s lifetime value: hiring, onboarding, development and culture. In that way, an increase in ELTV doesn’t rely simply on the number of years an employee is with the company. “If you’re better at recruiting, and hire a better person, that individual’s ELTV is going to be higher,” Josebachvili said. “If you’re really good at developing them and making them a stronger contributor over time, their ELTV will grow that way, too.”
The staggering return on good HR practices
To illustrate the impact of ELTV in practice, Josebachvili shared a case study example (the full version of which can be found in her LinkedIn article on the topic). In the example, she studied a salesperson since it’s relatively easy to calculate the revenue associated with that role; but a similar calculation could be used for any employee.
To start, Josebachvili compared two fictitious companies to show how much impact even small improvements in People Practices can have.
Fictitious company No. 1 is a standard organization with average People Practices. Company No. 2 is one with slightly better, more optimized People Practices. By implementing those more optimized People Practices when it hires the hypothetical salesperson, Company No. 2, Josebachvili said, sees the following results (according to her research) from the four inputs mentioned above:
Hiring: The salesperson is a better initial hire, outselling peers by 20 percent.
Onboarding: A better onboarding program decreases the salesperson’s ramp time by 30 percent.
Development: Better management and development practices improve the salesperson’s performance by 20 percent in a year.
Culture: Better culture and management practices add a year to the salesperson’s tenure.
Josebachvili called these estimates conservative -- the real impact could be even greater, she said. But even with the numbers in this case study, the difference between an average company and one with slightly better People Practices -- for that one theoretical salesperson -- over three years would represent an extra $1.3 million in net revenue, Josebachvili said. That’s a staggering return for even just a small investment in People Practices, in areas like hiring, management and culture.
Looking at Josebachvili's ELTV metric, we can easily see how different People Practices can impact an employee’s value. In the chart below, note how moving each of those inputs could significantly increase ELTV.
Circling back to “known cost with unknown return,” Josebachvili said she had found that, “Many organizations are really scared to spend an extra $10,000 on recruiting software, for instance, because of the cost. But they don’t realize that just one better hire from that software could give a 100-fold return.”
Where it all begins
After looking at the ELTV metric and all the inputs associated, the next logical question you might pose is, “Where should an organization start?” Many founders, particularly startup founders, realize several years into their company's life, that their People Practices are a bit lacking, but that addressing all the facets of HR at once is not realistic.
Josebachvili said she thought the best way to leverage a company's time for the biggest impact was to start with hiring. “If there's any place where you're going to start investing in your culture and your people, it's in the people you bring in the door and how you assess them,” she explained. “What I would do is make sure you're actively prospecting, make sure you're actively tracking the effectiveness of everything you're doing and create recruiting like you would sales and marketing or any other business unit.”
Tracking your metrics over time and simultaneously putting in the effort to improve your recruiting techniques is critical, Josebachvili said. If you don’t do these things, “Then you're not really putting in the effort to try to bring better people into your organization," she said. "It boggles my mind when I ask people what their offer-acceptance rate on job offers is, and they don't know. It's like asking a salesperson what their win rate is. You would expect every head of sales to know their win rate.”
We next switched gears to discuss onboarding, which Josebachvili said she believed can be as impactful as great hiring. “Leaders need to recognize that onboarding isn’t just a warm and fuzzy thing you’re doing to make sure the person likes your company and has friends,” she explained. “It’s actually related to their long-term performance at the company.”
Successful onboarding, then, means ensuring that the new hire feels like a part of the team and can start having an impact early on. “You want them to gain all the information they need as quickly as possible, so they they can be successful,” Josebachvili said. “And you want them to really understand what success looks like.”