VP of Strategy & People at Greenhouse
Articulating the return on investment (ROI) of People Practices is extremely challenging. Unlike other departments in the organization, the output of the People Team isn’t as directly tied to business outcomes and has few measurable outputs. Because of this, it’s difficult to demonstrate the absolute value of making investments in your talent or talent practices.
However even small improvements in hiring, onboarding, and managing talent can result in significant ROI for the business. In this whitepaper, I’ll walk through a case study that quantifies the return of a handful of People Practices and propose a framework to help you articulate the ROI of People Practices more broadly.
To help assess the business impact of People Practices I would like to introduce and define a new concept: using Employee Lifetime Value (ELTV) to compare the relative return of People Practices.
Employee Lifetime Value represents the total net value over time that an employee brings to an organization. The People Team’s job is to drive the organization to maximize ELTV. It can achieve this goal by developing and executing programs that impact the inputs that drive ELTV. When we put these programs into the context of the employee lifetime value, we can more clearly see their relative ROI and their contribution to the business.
This concept is illustrated in the graph below, which presents ELTV in terms of the employee lifecycle. The X axis represents time, spanning from the start date to the day the employee leaves and the Y axis represents employee output.
At the “Start,” an employee’s output is negative because they’re not yet doing anything to contribute to the team but they have consumed resources from the recruiting and hiring team.
They then ramp up productivity until reaching the next milestone, “Fully contributing”, where an employee has fully ramped up in their role.
At some point, an employee’s growth plateaus and they start to consider other employment options. They make the “Decision to leave.” Generally after this point their productivity starts to decrease.
Finally, an employee reaches their “Last day” at the company. Their output goes to zero at this point.
The ELTV of the employee is represented by the gray-shaded area under the curve (the integral, for those who like calculus). The goal is generally to make this area as tall and as wide as possible. Note: This is a simplified version of the curve for illustration purposes. In reality, there are dips and valleys and it’s generally not as linear.
As illustrated, there are four ways to increase ELTV, or maximize the area under the curve:
These inputs can be loosely mapped to a handful of strategic People Practices, as presented below. In reality, each of these practices impacts the whole curve, but for the sake of illustrating the impact, I’ve isolated the variables.
Onboarding: A good onboarding program accomplishes two goals:
1) It decreases the time it takes an employee to become a fully contributing member
2) It significantly increases the likelihood that the employee will stay with the company long-term.
Hiring: An excellent hire has a higher maximum output from the beginning, plus has the added network effect of attracting and elevating other top performers.
Management & Development: Excellent management and development practices increase the value an employee brings to the organization over time.
Management & Culture: A strong management practice and positive culture are directly correlated with retention, which results in an increase in ELTV.
To demonstrate the impact of these inputs, let’s consider two common scenarios. To illustrate how much impact even a small improvement in People Practices can have, I’ll use conservative assumptions for each input. In reality, the differences can actually be much greater.
We’ll use salespeople for our scenarios, as their output is more directly measurable than many other roles. Let’s assume that in both Scenario 1 and Scenario 2 the salespeople have salaries of $5,000 per month and quotas of $50,000 per month. Their projected output per month is $50,000 of revenue less their salary of $5,000, resulting in $45,000 net revenue per month.
An important note: For most roles, output will not be easily measured with one number. In those cases, you might perform a similar exercise, but just compare the different scenarios and assess based on relative value. Generally the differences will be compelling enough, even absent precise calculations.
Conservative assumption: A better hire —which can be achieved by taking a structured and data-driven approach to sourcing, interviewing, screening and closing—can outperform a peer by 20%.
Conservative assumption: Great culture and management practices can add a year to employee tenure.
If we continue the graph out over three years and assume that it takes 4 months to backfill the salesperson in scenario 1, the relative difference in ELTV becomes staggering. In the case study we walked through, the difference between average and slightly optimized People Practices for one salesperson over the course of three years is $1,300,000 in net revenue, or a 2.5x difference for the organization.
In this case study, the difference between average and slightly optimized People Practices for one salesperson over the course of three years is $1,300,000 in net revenue, or a 2.5x difference for the organization.
The output of a salesperson is easy to measure. It becomes a lot harder to articulate the output of other roles that have less quantifiable impacts. However, the relative difference in ELTV between average versus great People Practices is so dramatic that simply comparing two scenarios can give you enough information to assess the ROI of a particular initiative.
We can apply ELTV to Engineering, but instead of “net revenue” on the Y-axis, let’s use an abstract concept of “engineering productivity”. In the sales case study, I assumed a 20% difference between the two salespeople. In engineering, I’ve heard some people say that a great engineer is 10xas good as an average engineer. For the sake of sticking with conservative assumptions, we’ll assume that difference in engineer #1 and engineer #2 is 3x.
The ELTV difference between these two engineering examples is 6.6x over three years. Put another way, that means that one engineer in scenario 2 can do the work of 6 engineers in scenario 1. That’s a staggering return on investment from a handful of People programs.
I’m really excited about this concept. And there’s one part of it that I hate. I hate that it implies that people are a number (i.e., their ELTV). For my entire career, I’ve prioritized building awesome teams and cultivating the best work environment I can. For me, investing in people, their development, and the way we all work together is the end goal. I want my team to grow, develop, make an impact, and have fun at work. If I had unlimited resources, I’d throw most of them into my people. BUT, unlimited resources is not the reality of most businesses. As an executive, I have to make hard choices about where to invest. And so I developed the ELTV model as a framework to help me justify and articulate all of the investments I think should be made in people. I sincerely hope that businesses use this framework in that lens, and realize that investing in your talent isn’t just the right thing to do, it’s the smart thing to do. Life is better when work is more engaging, more rewarding, and more fun, and it just so happens that we can make a case for that philosophy from an ROI perspective too.