News By Tag
* Strategic Planning
* Culture Management
* More Tags...
News By Location
Measuring the ROI of Leadership Development
Investing in management and leadership development is costly. Does leadership development really pay off? How can we measure the ROI of investments made in leadership development?
·Does leadership development really pay off?
·How can we measure the ROI of investments made in leadership development?
There are a number of ways to approach this issue. The Cost of Not Investing in Leadership Development = Cost of Turnover.
One way to get an idea of the value of investing in leadership development is to look at the cost of not investing in leadership development. The cost of not investing in the development of people is an indirect cost; it is the cost of turnover.
As a company grows it is likely to outgrow the skills and capabilities of its people. A reasonable rule of thumb is that whenever a business doubles in size as measured in revenues it requires a different set of capabilities. The management challenges and issues of a $25 million dollar business are very different than the management of a business with $50 million in revenues. The same is true of a $100 million business that has grown to $200 million or a $500 million business that has grown to $1 billion.
As companies grow form one stage to the next, the so-called “Peter Principle” comes into play. This is the notion that people get promoted to their level of incompetence!
· A bookkeeper is promoted to Controller;
· a secretary become the VP of HR;
· A sales person becomes the VP of Sales or marketing.
· A shipping clerk become the VP of manufacturing
Unfortunately, they might not have developed either the advanced technical skills or the managerial skills required of the new higher level position. They begin to experience difficulties in their position. Some are terminated and replaced, while others are simply moved aside and another person is hired to perform their duties.
This indicates the opportunity cost of not investing in leadership development!
(Which is the cost of recruiting, selecting and training the replacement)
Measuring the ROI of Training
To measure the ROI of training, we will draw upon concepts and methods from the field of “Human Resource Accounting,”
We can use this to estimate the ROI of training as follows:
1-1 Current turnover (rate or) number of people terminated
1-2 Replacement cost of the position
1-3 Current cost of replacing personnel turnover Pre-training
Compared with 1-4 Turnover rate after training
1-5 Replacement cost of the position (same as 1-2)
1-6 Revised cost of replacing personnel turnover Post-training
1-7 Difference between 1-3 and 1-6 divided by Investment in Training
1-1 Current turnover (rate or) number of people terminated = 100
1-2 Replacement cost of the position (average) =$50,000
1-3 Current cost of replacing personnel turnover Pre-training:
1-4 Turnover rate after training =80
1-5 Replacement cost of the position (same as 1-2) =$50,000
1-6 Revised cost of replacing personnel turnover Post-training:
1-7 Investment in Training $100,000
1-8 Difference between 1-3 and 1-6 divided by Investment in Training:
Use any number you wish! You will see that the potential ROI of training can be very significant!
Return Required to Break-Even on this Investment
We can also use this “formula to calculate the required “breakeven”
1) The average Replacement cost of the position is $50,000
2) The investment required on training is $100,000
3) The breakeven point is to reduce turnover by 2 people: $100,000/$50,000 = 2.
If the training reduces turnover by two (2) people, the investment will break even.4
Be sure to visit our http://www.mgtsystems.com/
1 Source: Eric G. Flamholtz, Human Resource Accounting, Second Edition Revised and Expanded, Jossey-Bass Publishers, Inc., 1989.
2 See Eric G. Flamholtz, “The Theory and Measurement of An Individual's Value to an Organization,”
3 For simplicity, I am ignoring present value or discounting, but the underlying principle of this illustration the same.
4 Obviously different numbers will lead to different results, but the ROI method is the same.
310 477 0444