ROI Survival Guide: Making Dollar & Sense From Your OD Programs

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Making Dollar & Sense From Your OD Programs

ROI Survival Guide:


On Measurement…

Knowing what to measure and Knowing what to measure and how to measure it makes a how to measure it makes a complicated world less socomplicated world less so..

Steven D. Levitt & Stephen J. Steven D. Levitt & Stephen J. DubnerDubnerFreakonomicsFreakonomics

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Purpose of PresentationTo present an easy-to-use method for establishing a financial return on dollars spent.

To convert intangible benefits into tangible benefitsTo quantify tangible benefits into financial termsTo build your skill in running simple, but powerful financial calculations

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ROI: A Systems Perspective

IndividualIndividualEmotional Connection

Personal RelevancePersonal Productivity

GroupGroupGroup Relevance

Group ProductivityMeeting Business Needs/Objectives

OrganizationOrganization

Solve business problemSupport business

objectivesIncrease profitability

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A Proactive Approach to ROI

Conducted prior to developing or implementing an initiative

Establishes quantifiable benchmarks

Encourages client to think through problem and solution; obtains buy-in prior to initiative

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A Proactive Approach to ROI

Estimates projected financial return beforedevelopment/implementation

Provides post-implementation comparison

Transforms OD from an activity to results-driven function

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ROI Challenges Unclear program objectivesCredibility and source of data used for calculationsConsistency in quantifying and analysisCost of conducting ROIUsefulness of dataAccountability inherent in ROI

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Evaluation Model

Level 1: ReactionLevel 1: Reaction

Level 2: RelevancyLevel 2: Relevancy

Level 3: PerformanceLevel 3: Performance

Level 4: Level 4: Business ImpactBusiness Impact Business Impact: Operational Efficiencies

Performance Impact: Applied on the Job

Effectiveness: Assessment

Evaluation: Feedback

Kirkpatrick’s Kirkpatrick’s 4 Levels4 Levels

Financial Impact: Value vs. CostLevel 5: Level 5: ROIROI

Phillips ROIPhillips ROI

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Data Collection

Level 1: ReactionLevel 1: Reaction

Level 2: RelevancyLevel 2: Relevancy

Level 3: PerformanceLevel 3: Performance

Level 5: Level 5: ROIROI

Level 4: Level 4: Business ImpactBusiness Impact Cost savings tied to business drivers

Performance reviews

Pre/post metrics

Surveys, questionnaires, , interviews

Kirkpatrick’s Kirkpatrick’s 4 Levels4 Levels

Phillips ROIPhillips ROIValue of cost savings; increased revenues

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The Process

Asking Asking QuestionsQuestions

Tangible Tangible vs. vs.

IntangibleIntangible

Dollar Dollar ValuationValuation

WhatWhat How ToHow To

Determine Needs

Determine Needs

DetermineSuccess Criteria

DetermineSuccess Criteria

QuantifySuccess Criteria

QuantifySuccess Criteria

DetermineValuation

DetermineValuation+

Data CollectionData Collection AnalysisAnalysis

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Knowing What to Measure

Asking Asking QuestionsQuestions

Determine Needs

Determine Needs

Determine SuccessCriteria

Determine SuccessCriteria+

Data CollectionData Collection

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Ask the Right Questions

Q 1: What is the business problem? (business/performance/workforce management)*Q 2: How is this issue affecting productivity/morale/attrition/effectiveness?(Business impact)Q 3: How does this issue affect your bottom line/profitability? (Financial impact)Q 4: What are the success criteria? (How will we know we’ve been successful?)*

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Ask the Right Questions

Why?Why?

Why?Why?

Why?Why?

Peeling the Onion

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Knowing How to Measure

Tangible Tangible vs. vs.

IntangibleIntangible

Dollar Dollar ValuationValuation

Quantify Success Criteria

Quantify Success Criteria

DetermineValuation

AnalysisAnalysis


Defining Tangible vs. Intangible

Tangible = Quantifiable business results (increases in sales, accuracy, customer satisfaction, employee retention, market share)Intangible = Human and organizational impacts (image in job market, job satisfaction, thought leadership, market perception, PR)

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Intangible vs. Tangible

IntangibleIntangible TangibleTangible

Tangible Value ElementsTangible Value Elements

CostCost SavingsSavings Revenue Revenue IncreasesIncreases

+

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Tangible = Financial (Monetized) Value

Intangible

Cost Savings

New

Revenues

Intangible

Cost Savings

Revenues

Current

TangibleTangible

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Tangible or Intangible?

Specific business problem solved (e.g., businessSpecific business problem solved (e.g., businessstrategy poorly executed)strategy poorly executed) TT

IIRetention of intellectual capitalRetention of intellectual capital

Culture changeCulture change T/IT/ILeadership developmentLeadership development T/IT/ISuccession planningSuccession planning T/IT/IPerformance managementPerformance management T/IT/I

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Tangible vs. Intangible

Performance ManagementPerformance ManagementIncreased productivityIncreased productivityIncreased retentionIncreased retentionClearly defined goalsClearly defined goalsIncreased revenuesIncreased revenues

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Tangible vs. Intangible

Culture ChangeCulture ChangeIncreased competitivenessIncreased competitivenessIncreased efficienciesIncreased efficienciesReduced attritionReduced attrition

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Monetizing The Value: 3 Methods

GrossGross Cost/Benefit Percentage:Cost/Benefit Percentage: Cost/benefit percentage Cost/benefit percentage beforebefore subtracting all costs from the value (e.g., 400%)subtracting all costs from the value (e.g., 400%)

NetNet Cost/Benefit Percentage:Cost/Benefit Percentage: The percentage that reflects The percentage that reflects the value the value minus all costsminus all costs (e.g., 300% vs. 400%)(e.g., 300% vs. 400%)

Payback Period (6Payback Period (6--12 months):12 months): Indicates the number of Indicates the number of months in which the full investment can be recaptured months in which the full investment can be recaptured (e.g., 3 months; 4+ months, the program is “free”)(e.g., 3 months; 4+ months, the program is “free”)

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Peeling The Onion

Culture Change

Why are increased efficienciesWhy are increased efficiencies& competitiveness important?& competitiveness important?

Larger market share; Larger market share; production cost savingsproduction cost savings

Why change the culture?Why change the culture? Increased efficiencies; increased Increased efficiencies; increased competitivenesscompetitiveness

Why is larger market shareWhy is larger market share& production savings?& production savings?

Higher profitabilityHigher profitability

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Valuation of Results

Larger market shareLarger market share

Cost of InterventionCost of Intervention $ 500,000$ 500,000

Total ValueTotal Value $2,000,000$2,000,000

$1,000,000 (Cost Savings )$1,000,000 (Cost Savings )

Culture Change: Results of “3 Why’s”

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$1,000,000 (Revenues )$1,000,000 (Revenues )

Production cost Production cost reductionsreductions


Monetizing The Value: Monetizing The Value: GrossGross Cost/Benefit PercentageCost/Benefit PercentageConverts the cost/benefit ratio into a percentage X 100 = __%X 100 = __%

Cost of InterventionCost of Intervention(Costs(Costs RevenuesRevenues ))++

($1,000,000 + $1,000,000)($1,000,000 + $1,000,000)

$500,000$500,000X 100 = 400%X 100 = 400%

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Monetizing The Value: Net Cost/BenefitCost/Benefit Percentage

Percentage reflecting the value minus all costs X 100 = __%X 100 = __%

Cost of InterventionCost of Intervention

RevenuesRevenues -- Cost SavingsCost Savings

($1,000,000($1,000,000 $1,000,000)$1,000,000) X 100 = 300%X 100 = 300%

$500,000$500,000

++ -- $500,000$500,000

Gross C/B Percentage: 400% Net C/B Percentage: 300%Gross C/B Percentage: 400% Net C/B Percentage: 300%

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Monetizing The Value: Monetizing The Value: Payback Period (36Payback Period (36--48 Mos.)48 Mos.)

Number of months needed to recapture the full investment

Cost of Intervention Cost of Intervention # Payback# PaybackMonthsMonths

==(Costs(Costs + Revenues )+ Revenues ) per Monthper Month

= = 9 Months9 Months

Total Value = $2,000,000Total Value = $2,000,000Cost of Intervention = $500,000 Time Period = 36 MonthsCost of Intervention = $500,000 Time Period = 36 Months

$55,555*$55,555*$500,000$500,000

*$2,000,000 *$2,000,000 ÷÷ 36 = $55,55536 = $55,555

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Case Study:Case Study:Succession Planning DataSuccession Planning Data

Data for calculations3-year projectionsDirect & indirect succession planning costs: $3,000,000Cost savings: $3,500,000Revenue increases: $6,000,000Payback period: 36 months

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Case Study: Case Study: ROI CalculationsROI Calculations

Gross Cost/Benefit Percentage:

Net Cost/Benefit Percentage:

Break Even Point:

433%433%

333%333%

2.75 months2.75 months

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Case Study: Case Study: External vs. InternalExternal vs. Internal

1. Which calculations do you want to use in establishingthe business case for hiring external consultants? Click all that apply.

2. What costs do you need to factor into calculating thecost/benefit percentage?

a, b

d

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Case Study:Case Study:Succession PlanningSuccession Planning

Data for internal vs. external costs# of profiles to be developed: 20Current # of internal OD consultants: 3OD consultant fully loaded hourly rate : $62.50External consultant fees:Internal OD consultant costs: Cost savings using externals:Cost savings using externals (%):

$180,000$180,000$100,000$100,000

45%45%

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$80,000


Case Study: Case Study: Succession PlanningSuccession Planning

Additional financial justifications: % increase in costs: 45%Internal development cost/profile: $9,000External development cost/profile: $5,000

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PostPost--DevelopmentDevelopment

Verify Verify

NeedsNeeds Success Criteria

Success Criteria

DollarValuation

DollarValuation+

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Tangible/Intangible Benefits




Thank You!

Julia GeismanMillennium Learning, Inc.

[email protected]