Hey HR Folks - Did You Do an EROI?

ROI is big these days.  Everyone is making sure they do the ROI - Return on Investment - for any expense in order to justify that expense.  But I think there is a step missing in the process based on the questions I've been getting, some tweets I've seen and some recent posts in my blog reader.

The questions vary but in general they are:

"How do I do the ROI on my "X" program."

Many would applaud the person for asking the question.  My initial reaction is - "Huh?  How could you even have run the program if you haven't figured out how to justify the expense?"

In other words the time to do the ROI isn't after the program has started - or after its been completed.  The time to do the ROI is before it even get's greenlighted as an expense item.

EROI

What I'm talking about is EROI - or - ESTIMATED Return on Investment.  That's right - taking the time up front to ask yourself how you will measure your initiative and establishing the appropriate measures, costs, expectations, results, etc., before you run the program.  This is critical for a couple of reasons...

1. Establishing the EROI makes you go through the process of identifying the value of the program and the outcomes.  Without taking the time to do the EROI you are simply checking off a box - "Employee reward program?  Check.  Employee Peer2Peer program, check, Engagement Program - check."
   
   What does any of that mean?  Nothing - it's just a CYA so that you can point to it when the CEO or other CXX person asks "what are we doing about employee engagement."
   
   
2. Doing an EROI allows you to look at various outcomes.  I'm not suggesting you run a full Monte Carlo simulation but I am saying that you need to look at the program from a few different angles.  What would happen if the market collapses?  What would happen if sales doubled?  What would happen if the factory went on strike?  Assigning probabilities to events that could impact your program will allow you find any holes in the structure and give you a "watch list" that you can use to continually evaluate the program and adjust if necessary.

If you don't do the EROI - you have no business doing the ROI.  Finding out if your program works without the first step of estimating its impact is like putting up the umbrella after you're soaked to the skin. 

Take the time to evaluate the potential impact of your program before you run it. 

Comments

[Fred H Schlegel]

So true. An initiative without measurable evaluation goals in place is not an initiative, it is a hobby. As a side note, it is acceptable to create a plan in which measurement of financial ROI is fuzzy - but the non-financial returns make a desirable impact. Calling out this up front can lead either to establishing methodologies to do an accurate financial measurement (if the program is big enough) or acceptance of the alternative evaluation technique. Always good to have this done up-front. Saves arguing time.

[Wally Bock]

Good insight, Paul. If you don't estimate the cost/benefit of different programs, you can't make intelligent choices about them. If you don't know how to measure success, you can't craft a program to achieve it.

I would add that often people want to put "hard" numbers on the estimate. Often that's not possible and it's rarely desirable. Measurement or judgment don't require decimal places.

[Paul Hebert]

Fred, Wally - thanks for commenting. You both make a good point in that not all ROI is financial (although many CXX levels want it to be - enlightened ones know better.) One of the reasons I try to run the numbers in a variety of ways is to show that the program isn't a slam dunk and that there may be other ways to look at the results - both positive and negative - that can clue you in as to whether you should run it or not.

I'm still amazed however, at the number of programs that are conducted where the ROI is the last thing they do versus the first thing.

When the ROI is done at the end (with not thought at the beginning) you'll either find a way to prove it worked - or find a way to prove it didn't. And both will be right answers.

[Kye Swenson]

I agree that it's tough to come up with ROI with hard numbers. I often see percentages used instead...based on the previous year's numbers. That's not a bad strategy, but often the numbers get skewed because the economy is always changing...and more importantly...your competition. That's why I think it's so beneficial to keep a log of what your competitors are doing on a yearly basis, even if it's basic.