Performance WS 1999

Calculating Return On Investment in Human Performance
Interventions and the Increased Value of Human Capital

Harold D. Stolovitch
Jean-Gabriel Maurice

Capital: Any form of wealth employed for the production of more wealth.

Human Capital: The sum total of all knowledge, experience and human performance capability an organization possesses that can be applied to create wealth.

Numerous documented cases have convincingly demonstrated that training, by itself, rarely achieves desired organizational results. The causes for this have also been documented: problem not due to skill/knowledge deficiencies; insufficient resources to do the job; lack of incentives to perform; abundance of task interferences; no support system to encourage or sustain performance. The list is virtually endless.

Human Performance Technology (HPT) has been making its case for almost forty years: performance gaps must be dealt with systemically and systematically. Now, training specialists, human resource development consultants and line managers are listening.

"Performance improvement" has become the sought after goal. HPT has become a credible means for its achievement.

Interest in human capital has also recently grown. A number of recent publications (e.g. Crawford, 1991; Edvinsson and Malone, 1997; Stewart, 1997) have made a significant impact on management thinking. There is mounting evidence of a powerful relationship between human capital and business results. Witness the market value of major companies compared to their book values. Many companies in the 1990’s have been sold for more than ten times book value (e.g. Lotus to IBM: book value $230 M; purchase price $3.5 B). The invisible value is attributed to intellectual capital assets of which human capital is a major component.

Human capital is the sum total of an organization’s human performance capability. However the potential of this capital can only be actualized if the organization can unleash it effectively. This is where HPT plays a significant role as its purpose is to engineer effective performance valued by the organization, individual performers and customers.

To highlight the impact of HPT interventions requires concrete means for demonstrating value, i.e. a model for calculating and displaying the ROI of HPT interventions and the increased value of human capital. Published models exist. (See for example, Phillips, 1997). What follows is a brief description of a model we have derived from many respectable sources and tested in live settings. A recently published article (Stolovitch and Maurice, 1998) expands on the model and provides not only more details, but a documented case with a 615% ROI over one year.

An ROI Model

Step 1. Calculate potential far improved performance. Conduct a front-end analysis to determine the nature of the performance gap (magnitude, value, urgency) and select an appropriate basket of interventions.

Step 2. Calculate estimated intervention costs. Include development, implementation and maintenance costs. Remember that internal personnel costs are calculated at 3 times base salary to include benefits and overhead (fully loaded cost). Divide by annual workdays (220-235) to determine daily costs.

Step 3. Calculate the worth of the performance interventions. Worth (WPI) is equal to the potential value (V) of achieving desired performance (from step 1) divided by estimated costs (C) of interventions (from step 2). [WPI=V/C].

Step 4. Develop and implement interventions. Carry out this step with the help of specialist teams and line managers in partnership. For more about this, see Stolovitch and Keeps, 1998 and 1999.

Step 5. Calculate the true cost of the interventions. This mirrors step 2. Real costs replace estimates.

Step 6. Calculate organizational ROI. This usually requires waiting for six months or more after interventions have been implemented. Gather results data (e.g. sales figures; productivity gains; rejection rates; absenteeism figures; speed of order processing; number of disputed invoices) and assign monetary value to these.

Step 7. Calculate individual increased value of human capital. Create a human capital account for each employee. The account should contain an initial value equal to the base salary. As the performance of the individual increases, so does the value of the account. "Deposit" the value of the improved performance attributed from the performance interventions to individual accounts. When the value of the account is significantly higher than an individual’s salary, adjust compensation to retain him or her.

To Conclude

HPT offers a solid means for producing performance improvement gains. A clearly defined, applicable ROI model can facilitate calculating these gains and demonstrating the increased value of an organization’s human capital.