Measuring the Effectiveness of HR and Diversity in ROI Terms

The mission of human resources and diversity is to maintain a fair, equitable and positive work environment for all employees, in support of the organization’s mission. It is based upon the belief that the success of any organization, and its ultimate value, is primarily dependent upon its people, and that the development of the greatest potential for each employee will create job satisfaction and career opportunities for individuals and provide maximum benefit to the organization. 

Calculating HR and Diversity ROI Impact

That being said, a method to measure HR and diversity effectiveness in an organization requires HR and diversity professionals start with metrics derived from the organization’s mission, vision and values statement. They must also build metrics that are derived from key stakeholder expectations.

HR and diversity must be aligned in a way to shows how the “use” of talent drives business objectives such as improved customer service, reduced costs (such as reduced compliance litigation, reduced turnover, increased retention, etc.) community and social responsibility objectives achieved, sustaining a climate of equity and fairness, improved market share and increased revenue due to improved operations processes, as well as training and development to build strategic capability, etc.

From a return on investment point of view, there are a host of HR and diversity measures, analytical indices and calculations that can be used to demonstrate HR and diversity’s effectiveness. For example, our retention research and other benchmarks estimate that it will cost 1.5 times the salary of the employee you lose to replace him or her. Therefore, if you lose a high-potential employee making $50,000 a year, it will cost you $75,000 to hire a replacement. If you lose 12 of these types of employees, that is a $900,000 hit to the organization’s bottom line.

That’s just the financial loss. What about the cost of losing their knowledge of the organization’s customer needs, your key processes, systems and competitive advantage approaches? What if HR and diversity could show that the retention improvement and the inclusion enhancement initiative it put in place last year saved the organization $900,000 by reducing turnover of key high-potential employees? Depending upon the role of this high-potential human asset, the replacement multiplier could be as high as five times the individual’s salary or higher.

There are at least 10 different processes to isolate HR and diversity’s contributions from all others, giving credit to their contribution as well as identifying the contributions of others. It is important to isolate HR and diversity’s contribution since, for example, the benefits department could state that these employees were retained due to an improved benefits package.

The question raised in this discussion is an important one for the future of HR and diversity if we want to be seen as strategic business partners and not merely a staff function that serves as the “police” for doing the right things. We should not be the first area the organization thinks of when looking for a way to cut budgets and save money. We must create a paradigm shift in how HR and diversity are viewed to be seen not only as critical to compliance but also critical to the business. This will requires the strategic use of HR and diversity ROI-based analytics and metrics to forge a strong business-based value proposition.

It is challenging to make an effective business case for diversity and HR merely on the basis of representation. Increasing representation by demographic groups do not make businesses operate more effectively, improve revenue or enhance market share. It is the effective utilization of these human capital assets that make the critical difference. R. Roosevelt Thomas said it well, “You don’t go out and get diversity, diversity simply is.”

Improvement in organizational performance depends upon having an effective diversity management capability to make quality decisions in the midst of managing any complex mixtures (i.e., differences, similarities, levels, gender, age, etc.). Based upon my research, I have advocated that measuring the diversity-related impact of organizational performance heavily depends on diversity professionals possessing strategic diversity ROI measurement skills and competencies to effectively utilize diversity measurement and diversity ROI analytic sciences.

CEOs want to see the impact and ROI of their diversity and HR investments but instead receive only activity and satisfaction data. The C-suite reports that the majority of feedback received from HR and diversity boils down to activity counts and satisfaction level data. This does not mean that this data is not important, only that business partners that are viewed as vital utilize measurement processes that demonstrate their role and value in driving business outcomes beyond gross measures such as revenue per full-time employee. This metric, for example, does not show a direct link to the effective use of human capital assets to generate specific amounts of the total revenue number.

Value creation by applying effective inclusion metrics, for example, is a framework for success that empowers executives and leaders to better understand and manage their firm’s most valuable asset — their people. When an organization’s values are in alignment with its people brand promise, value is created in the form of brand equity and that brand equity can be used to drive sustainable competitive advantage and superior financial performance.

The Invisible Thread of Inclusion

Inclusion is the invisible thread that ties the elements of an organization’s culture together. It helps to promote open communication, knowledge sharing and innovation by creating a collegial, mutually respectful environment. It allows workers to bring their full capabilities to bear in the workplace by fostering a unified culture of acceptance and idea utilization.

I define inclusiveness as the act or process of using the information, tools, skills, insights and other talents that each individual has to offer that results in the measurable, mutual benefit and gain of everyone. It also includes providing everyone with opportunities to contribute his or her thoughts, ideas and concerns. Inclusiveness results in people feeling valued and respected. When applied effectively, it leads toincreased engagement, improved product, improved service delivery and enhanced financial performance.

Therefore, it makes sense that programs promoting inclusion have a measurable impact on an organization’s bottom line and on workforce productivity. Not long ago, the Institute for Corporate Productivity released an inclusion measurement study that addressed some of the measurement issues relating to inclusion and the bottom line. This study was released as part of its “Inclusion Measurement: Policies and Practices of High-Performance Organizations” report, which found a 14 percent gap between high- and low-performing organizations — 22 percent compared to 8 percent — when it comes to the use of productivity data in determining inclusion success.

The goal of the study was to determine how high-performance organizations are approaching the inclusion challenge and how they are measuring success. A high-performance designation was based on i4cp’s Market Performance Index, which is identified through a series of questions that determine a company’s current performance in revenue growth, market share, profitability and customer satisfaction vs. those same items five years ago.

Make Measurement Follow Initiatives
The aforementioned finding on productivity as a metric for inclusion success demonstrates increased interest among higher-performing organizations in evidence-based human resources, or EBHR. EBHR is driven by the need for more stringent HR metrics that are relevant to business goals and the bottom line.

The study showed that, though 62 percent of organizations overall reported that one driver of inclusion initiatives is to increase productivity and engagement, only 15 percent of respondents reported using productivity data to assess the success of those efforts. This begs the question: How are the other organizations going to know if they have addressed the driving forces behind their inclusion program’s goals and objectives? Based on supplemental interviews and focus groups conducted by i4cp, the answer is either the business case for inclusion has yet to be made in those organizations or the case was made based on inspirational (“faith-based”) definitions and drivers for the inclusion initiative that don’t lend themselves to measurement.

Diversity and HR Intervention Failures
Almost every organization encounters unsuccessful diversity or HR interventions and programs — those that go astray, costing far too much and failing to deliver on promises. Project disasters also occur in other parts of business organizations as well as in government and nonprofit organizations. Many critics of these projects suggest these failures could have been avoided if 1) the project is based upon a legitimate need stemming from a comprehensive business and performance needs analysis from the beginning, 2) adequate planning is in place at the outset, 3) data is collected throughout the project to confirm that the implementation is on track, and 4) an impact study is conducted to detail the project’s contribution. Unfortunately, these steps are unintentionally omitted, not fully understood or purposely ignored; thus, greater emphasis is being placed on the process of accountability.

Shifting to Evidence-based, Science-based and Outcome-based Diversity Management Approaches

It is critical for our professions to begin immediately moving to fact-based or evidence-based management and measurement instead of faith-based. This means applying HR and diversity ROI measurement sciences as a performance improvement technology, not merely a cobbling of programs and interventions focused solely or primarily on talent management and pipeline challenges.

Evidence-based HR and diversity management proceeds from the premise that using better, deeper logic, facts and prescriptive and predictive analytic methods to the extent organizations and their employees are able to drive business outcomes and objectives is a much more effective and efficient approach. This allows the organization to strategically utilize scarce resources.

It is based on the belief that organizations must face the hard facts about what works and what doesn’t, and reject poorly designed and non-evidence-based diversity and inclusion initiatives that often pass for sound advice and solutions. This will help organizations perform better in the long run. This move to fact and diversity and HR ROI sciences-based approaches supports the expansion to a comprehensive set of success analytics and measures, including financial ROI, and leads to better organizational decisions regarding methods to drive business performance outcomes.

Executive Appetite for HR and Diversity ROI Value
Providing monetary contribution and HR or diversity ROI reporting is receiving increasing interest in the executive suite. Top managers who watch budgets continue to grow without specific accountability measures are frustrated, and they are responding to the situation by requiring functions to show their value and worth. They are beginning to demand ROI calculations and monetary contributions from departments and functions that previously were not required to produce them, especially given the current economy. As a consequence, in some subtle and not-so-subtle ways, I hear from colleagues, for example, that diversity departments that do not show their value are experiencing:

  • Budget cuts out of line with cuts made in other departments.
  • Whole positions or talent resources being eliminated or transferred to other departments.
  • CDO reporting relationships changed to report into the human resources function instead of a direct line relationship to the CEO, president, board or as a key member of the C-suite.
  • Access to influential people and resources diminished due to poor internal brand image and lack of credibility in the results delivered.
  • Perceptions of diversity and inclusion as not really essential to core business drivers, operational processes and market needs.
     

Shifting the Paradigm

In some cases, for years these function and department heads had convinced executives that their processes could not be measured and their activities should be taken on faith. Well, the era of faith-based interventions is over and has been for some time. Executives no longer buy that argument; they are demanding the same accountability from these functions as they do from sales and production areas of the organization.

These major forces are requiring organizations to shift their measurement process to include the financial impact and ROI. When HR and diversity organizations incorporate HR and diversity ROI processes and strategies as a standard part of their practice, they will be viewed as truly credible strategic business partners. As a result, this enhanced approach will help shift the paradigm such that HR and diversity are valued strategically as core to the organization’s business and its success.