Diversity ROI: Fad, Fiction or Full of Potential?

The calculation of diversity return on investment for the diversity and inclusion field began more than 15 years ago. In 1999, I published the book “How to Calculate Diversity Return on Investment” after the publication of my first book on this topic, “Measuring Diversity Results,” in 1997. Similar to the seminal work completed by Drs. Jack and Patti Phillips regarding ROI for the workplace learning and performance field, my work focused exclusively on creating ROI metrics and analytics tied to business performance for diversity, inclusion and its related fields utilizing diverse workforce talent, processes and systems.

Much like the workplace learning and performance field, the diversity and inclusion field is trying to determine whether calculating the ROI of D&I initiatives is fad, fiction or full of potential. Workplace learning and performance professionals found that to be taken seriously and show its maturity as a strategic business partner, not only did they have to master ROI for training initiatives, they needed to change the name of their entire field to focus on producing ROI-focused “business performance” solutions (instead of simply training and developing others). It is my opinion that diversity and inclusion is at this important crossroads. Whatever happens beyond this point will determine how the diversity and inclusion field matures as a professional business discipline.

To be effective, diversity professionals must demonstrate a kind of diversity maturity that allows them to internalize key diversity concepts and use them to guide their actions along with integrating the core skills.

Similarly, to be effective at diversity measurement, individuals aiming for greater diversity measurement effectiveness would do well to ask themselves some critical personal questions:

• Am I comfortable with working with metrics and evaluating data from all demographic groups?

• Are there concepts around measuring diversity, especially beyond race and gender, that I struggle to accept? If so, how have I attempted to overcome my biases?

• How will my comfort or lack of comfort with metrics affect my ability to utilize them within this workplace?

• Do I enjoy diversity measurement? If so, what kind and how much?

• Do I need to hire someone to conduct this portion of our strategic diversity impact analysis or simply support our efforts as a reviewer?

• Do I really want to do the real work required to rigorously apply diversity measures and follow the diversity return-on-investment process through to its conclusion?

Answers to these questions will help identify any baseline resistance to the diversity measurement process and whether your approach treats diversity ROI measurement as a fad, fiction or an approach that is full of potential.

Calculating Diversity ROI Still Challenges Many Practitioners

The application of ROI processes for diversity and inclusion has been slow to start, but the need for methods to calculate diversity ROI is still a topic of interest and aspiration. Diversity professionals must show accountability for the investment in their initiatives. Measuring ROI in a few significant, high-profile D&I initiatives is an excellent way to show fiscal responsibility. Based upon my experience and research, I would estimate somewhere between 15 and 25 percent of the D&I functions in the United States use diversity ROI as a tool. The gap between actual use and desired use is huge and underscores the misunderstandings and misconceptions of ROI as a legitimate part of measurement. In the past decade, we have logged many questions about diversity ROI that are asked in conferences, workshops and consulting assignments that are very similar to those asked about the application of ROI in the learning and performance arena. Here are some of the most-debated questions:

1. Is ROI just one single number? How can you communicate a program’s value with a number?

The diversity ROI methodology captures seven types of data, with the actual diversity ROI calculation being only one of them. The seven types of data include needs analysis, reaction, satisfaction and planned action; learning; application and behavioral transfer; business impact and consequences; ROI; and intangible benefits. The intangible benefits include measures that cannot be credibly converted to monetary values.

2. Aren’t diversity ROI calculations based on nothing but estimates that can be too subjective?

No. Estimates are only used when isolating the effects of a program’s business impact, when converting data to monetary values and when tabulating program costs. Estimates are used only when other methods are not available or become too time-consuming or expensive to use. Also, estimates are adjusted using confidence level factors to improve credibility.

3. How does ROI in diversity and inclusion differ from the ROI used by the finance and accounting staff?

The classic definition of ROI is earnings divided by the investment — no matter what the application. In the context of calculating the ROI of D&I, the earnings become the net benefits from the program/initiative (monetary benefits minus the costs) and the investment is the actual program cost. The difficulty lies in developing the actual monetary benefits in a credible way.

4. Do I have to be a whiz at finance and statistics to understand the ROI methodology?

No. Most of the basic principles of finance and accounting do not relate to what is needed to develop the ROI in diversity and inclusion. However, it is important to understand issues such as revenue, profit and cost. Only basic statistical processes are required to develop most diversity ROI impact studies.

5. Doesn’t ROI cost too much?

No. When external resources are used, the cost for a diversity ROI study may be as little as 5 percent of the entire project. A large banking group and a large telecommunications company using similar approaches report that the average costs for their ROI studies range from $3,000 to $5,000 per study. The total cost of all evaluation, including selected ROI studies, is usually in the range of 3 to 5 percent of the total budget.

6. Does the ROI process reveal program weaknesses? Strengths? Recommendations?

Yes. At low levels, data always capture deficiencies or weaknesses in a process. At the application level, the process requires collecting data about the barriers (which inhibit success) and enablers (which help success). Each study contains a section for recommendations for improvement.

7. Is it appropriate to calculate ROI for every program?

No. Only a few select programs should be subjected to evaluation at the ROI level. Ideal targets include programs that are very expensive, strategic, operationally focused, highly visible, involve large target audiences and have management’s attention in terms of their accountability.

8. What types of applications are typical for ROI analysis?

The applications vary, but usually they include a range of programs such as leadership competencies for a diverse workforce training program, unconscious bias training, measuring the ROI of ERG and BRG initiatives, multicultural marketing and sales initiatives, innovation and diverse work team oerformance interventions, etc.

Dispelling the Myths

The best way to dispel some of the myths and misunderstandings surrounding the diversity ROI methodology is to analyze the payoffs for the organization once the diversity ROI impact is calculated. Whatever the barriers, they are completely outweighed by the benefits, which include:

• Showing the contribution of specific programs.

• Showing the value of the program on a pilot basis.

• Justifying or maintaining budgets.

• Eliminating programs and initiatives that are not adding value.

• Redesigning or improving initiatives.

• Building relationships with key executives.

• Building support from the management team.

• Improving the satisfaction and skills of the diversity and inclusion team.

Many DROI Initiatives Will Generate Large Returns

It is not unusual for the ROI in diversity initiatives to be extremely large. Even when a portion of the improvement is allocated to other factors, the numbers are still impressive in many situations. The audience should understand that, although every effort was made to isolate the diversity impact, it is still an imprecise figure that may contain a certain amount of errors, similar to some other estimated business calculations such as inflation, actuarial table estimates and so on. It represents the best estimate of the impact given the constraints, conditions and resources available. Chances are the diversity isolation strategies are more accurate than other types of analysis regularly utilized in other functions within the organization since the Hubbard diversity ROI methodology requires that all estimates are factored by confidence level factor adjustments.

Too often results are reported and linked to D&I without any attempt to isolate the portion of the results that can be attributed to diversity and inclusion alone. If the D&I practice is to continue to improve its professional image as well as to meet its responsibility for obtaining results, this must be addressed early in the process.

Convert the Contribution to Monetary Value

In many evaluation impact studies, the examination usually stops with the tabulation of business results. In those situations, the initiative is considered successful if it produced improvements such as turnover reduction, improved customer satisfaction, reduced absenteeism or the like. Although these results are important, it is more insightful to compare the value of the results to the cost of the initiative. This allows the initiative to be primed to calculate its return on investment.

Identifying the Hard and Soft Data Contained in the Diversity Contribution

After collecting diversity performance data, it is helpful to divide the data into hard and soft categories. Hard data are the traditional measures of organizational performance. They are objective, easy to measure and easy to convert to monetary values. Hard data are often very common measures, they achieve high credibility with management and they are available in every type of organization. Hard data represent the output, quality, cost and time of work-related processes.

Almost every department or unit will have hard data performance measures. For example, a cross-functional team in a government office approving applications for work visas will have these four measures among its overall performance measurement: the number of applications processed (output), cost per applications processed (cost), the number of errors made in processing applications (quality) and the time it takes to process and approve an application (time). Ideally, diversity initiatives in this example can be linked to one or more hard data measures.

Because many diversity initiatives are more heavily related to soft skills, soft data are often reviewed in diversity measurement studies. Soft data are usually subjective, behaviorally oriented, sometimes difficult to measure and almost always difficult to convert to monetary values. When compared to hard data, soft data are usually seen as less credible as a performance measure.

Measures such as employee turnover, absenteeism and grievances appear as soft data items, not because they are difficult to measure, but because it is challenging to accurately convert them to monetary values.

Basic Steps to Convert Data

Before describing some specific strategies to convert either hard or soft data to monetary values, the basic steps used to convert data in each strategy are highlighted here. These steps should be followed for each data conversion process (Phillips, 1997).

1. Focus on the unit of measure. First, identify a unit of improvement. For output data, the unit of measure is the item produced, service provided or sale consummated. Time measures are varied and include items such as the time to complete a project, cycle time or customer response time. The unit is usually expressed as minutes, hours or days. Quality is a common measure, and the unit may be one error, reject, defect or rework item. Soft data measures are varied, and the unit of improvement may include items such as a grievance, an absence, an employee turnover statistic or a one-point change in the customer satisfaction index.

2. Determine the value of each unit. Place a value (V) on the unit identified in the first step. For measures of production, quality, cost and time, the process is relatively easy. Most organizations have records or reports reflecting the value of items, such as one unit of production or the cost of a defect. Soft data are more difficult to convert to a value because the cost of one absence, one grievance or a one-point change in the diversity attitude survey is often difficult to pinpoint. The array of strategies offered in this chapter will include a variety of techniques to make this conversion. When more than one value is available, either the most credible or the lowest value should be used.

3. Calculate the change in performance data. Calculate the change in output data after the effects of the diversity initiative have been isolated from other influences. The change (P) is the performance improvement, measured as hard or soft data that is directly attributable to the diversity initiative. The value may represent the performance improvement for individuals, a team, a group or several groups of participants or an organization.

4. Determine an annual amount for the change. Annualize the P value to develop a total change in the performance data for one year. This procedure has become a standard approach with many organizations that wish to capture the total benefits of the diversity initiative. Although the benefits may not be realized at the same level for an entire year, some diversity initiatives will continue to produce benefits beyond one year. Therefore, using one year of benefits is considered a conservative approach.

5. Calculate the total value of the improvement. Develop the total value of improvement by multiplying the annual performance change (P) by the unit value (V) for the complete performance group in question. For example, if one group of participants for a diversity initiative is being evaluated, the total value will include the total improvement for all participants in the group. This value for annual diversity initiative benefits is then compared to the cost of the diversity initiative, usually through the diversity return-on-investment calculation.

Strategies for Converting Data to Monetary Values

An example taken from a cross-functional team-building initiative at a manufacturing plant describes the five-step process of converting data to monetary values. This initiative was developed and implemented after a needs assessment revealed that a lack of teamwork was causing an excessive number of grievances. This diversity initiative was designed to reduce the number of grievances filed at step 2. This is the step in which the grievance is recorded in writing and becomes a measurable soft data item. Therefore, the actual number of grievances resolved at step 2 in the grievance process was selected as an output measure. The following information illustrates the steps taken to assign a monetary value to the data.

Example of Converting Data to Monetary Values

1. Focus on a Unit of Improvement

• One grievance reaching step 2 in the four-step grievance resolution process.

2. Determine a Value of Each Unit

• Using internal experts — the labor relations staff and the diversity staff — the cost of an average grievance was estimated to be $6,500 when considering time and direct costs. (V = $6,500).

3. Calculate the Change in Performance Data

• Six months after the initiative was completed, total grievances per month reaching step 2 declined by 10. Seven of the 10 grievance reductions were related to the diversity initiative as determined by supervisors (isolating the effects of diversity).

4. Determine an Annual Amount for the Change

• Using the six month value, seven per month, yields an annual improvement of 84 (P)

5. Calculate the Annual Value of the Improvement

• Annual Value = P x V

= 84 x $6,500

= $546,000

The total monetary impact of this diversity initiative was $546,000.

Several strategies are available to convert data to monetary values. Some of the strategies are appropriate for a specific type of data category, while other strategies can be used with virtually any type of data.

Calculating Diversity Return-on-Investment Using Methods Familiar to Executives

For some time now, diversity practitioners and researchers have tried to calculate the actual return-on-investment in diversity. If diversity is considered an investment — not an expense — then it is appropriate to place the diversity investment in the same funding process as other investments, such as the investment in equipment and facilities. Although these other investments are quite different, management often views them in the same way. Thus, it is critical to the success of the diversity field to develop specific values that reflect the DROI.

To illustrate this calculation, assume that a work-life and family training program had initial costs of $50,000. The program will have a useful life of three years, with negligible residual value at that time. During the three-year period, the program produces a net savings of $30,000, or $10,000 per year ($30,000 divided by 3). The average investment is $25,000 ($50,000 divided by 2) because the average book value is essentially half the costs. The average return is:

Average ROI = (annual savings / average investment)

= ($10,000 / $25,000)

= 40 percent

As highlighted here, diversity ROI calculations can be implemented easily with a few basic math skills and the patience to follow a step-by-step process that yields credible results. The need to calculate diversity ROI on initiatives and interventions will always be needed if D&I practitioners desire credibility and respect for the field similar to other disciplines. Like any other discipline, a professional approach to D&I requires both theory and science to be viewed as credible. Using a comprehensive diversity ROI methodology is neither fad nor fiction. Today it is a requirement to assess the strategic performance and financial impact on the bottom-line in ways the C-suite understands and desires.