Appraisals undervalued? Then calculate their return on investment

Return on investment

After last week’s claims by former BBC HR director Lucy Adams that appraisals do not work, Ian Lee-Emery suggests that a simple calculation of the return on investment (ROI) from performance management can help you prove that they do and build a business case for best practice.

Does performance management add real value in your organisation or do people dismiss it as an HR bureaucracy that takes valuable time away from the “day job”? Intuitively, we all know that performance management can benefit individuals and the organisation. But too often it does not.

Part of the problem might be that different people have different views on the real purpose of performance management. Team members may use it as an excuse to look for a pay rise; managers may see it as a chance to deal with poor performance; and business leaders may promote it in order to reassure themselves that everyone understands and supports the business objectives.

So, although you may have a performance management process in place, conflicting perceptions such as these may be preventing individuals and the organisation from getting the best out of it.

So how can you convince the senior team – and all managers and staff in your organisation – to change not only their point of view on performance management but also their behaviour? Why should they invest in adopting best practice?

The answer to both of these questions is to express the benefits of performance management in figures, because numbers are the “language” that is best understood by the business.

Calculating the return that you could achieve by implementing best practice performance management is not as difficult as you might think. All organisations may be different but they do have one thing in common: people create value in teams led by a manager. So, start by quantifying that value.

For example, take an organisation with revenues of £320 million that employs 2,500 staff, working in 375 teams. The average revenue per team is approximately £853,000. We can then calculate the cost to employ that team, by adding their salaries plus a share of the overheads. If this comes to £336,000, then the net contribution made by an average team (the difference between what they contribute and what it costs to employ them) is £517,000.

Now, let us assume that this organisation introduces best practice performance management. Each manager starts to become more effective as a coach to their team. Other benefits accrue, such as: better goal alignment and increased employee engagement; more relevant, goal-focused conversations about performance; issues of underperformance start to be addressed and more relevant development planning starts to take place.

Here is the critical question: if all of this happened, what impact would it have on the performance of each team? Could it make a 1% improvement in a team’s performance in a year? Would it, more realistically, be a 5% or even a 10% improvement?

The impact on productivity, efficiency and performance could be significant, even in teams that don’t generate revenue or in not-for-profit organisations. There is a clear benefit in using performance management more effectively to get people to implement and work on whatever it is that drives the organisation’s success. But, in our simplified example above, if we just look at a conservative estimate of a 1% improvement in each team’s performance (£5,170), that equates to nearly £2 million worth (£5,170 x 375) of potential net productivity improvements, just by introducing a few small behavioural changes.

Calculating the return on investment that your organisation can gain from best practice performance management not only gives you a baseline of where you are, it helps you create an informed business case. Armed with this, you can convince business leaders of the need to establish performance management as a priority in your organisation and you can explain to managers and employees exactly what is in it for them. All of this will create a strong commitment to performance management.

Embedding best practice performance management within your organisation will create an uplift in performance, help to close skills gaps, enable career progression within the business and create a better engaged workforce. And all of this can be initiated by simply looking at performance management through the lens of ROI.

Ian Lee-Emery

About Ian Lee-Emery

Ian Lee-Emery is the founder and managing director of talent management software provider Head Light.

2 Responses to Appraisals undervalued? Then calculate their return on investment

  1. Avatar
    David 5 May 2014 at 9:23 am #

    Actually measuring the ROI would be a great idea. Sadly, this article merely assumes that there will be a positive ROI. Would a mere 1% benefit not be consumed by the cost of the performance management system? Sadly, many companies do not even know how much their system costs, in terms of direct time, multitasking, and staff demotivation.

    By focussing on individual performance rather than teams and the overall ened-to-end system, performance management systems may equally well decrease the organisation’s overall performance.

    Why do you assume that performance management would increase employee motivation and engagement, when survey after survey shows that it does the opposite?

    “Now, let us assume that this organisation introduces best practice performance management” Or we could make the more realistic assumption that a company introduces an average, mediocre process, labelled as “best practice” and therefore unchallengeable by staff.

  2. Avatar
    Ian Lee-Emery 12 May 2014 at 10:26 am #

    David – thanks for your comments. In essence the main point is that for many organisations, and certainly those of a certain size, 1% does indeed create benefits over and above the cost of introducing such a system. Our model takes into account factors such as training time, time spent in pilot mode and so on. Similarly we do take a team view on performance where the manager/team member combination is so prevalent.
    What we don’t focus on is where many do – i.e. that going on-line will make the financial case on its own through cost savings. Same practice, just different tools. We don’t think there’s ROI here, but we do when a manager can be more effective through better goal setting and performance conversations and so on. 1% from being a better a manager? I’d expect so!
    And as long as it is 1% or thereabouts, then the ROI is certainly positive for many organisations.