Why A Formula Isn't Enough To Calculate ROI

In April, our Consulting and Assessment team will be traveling to Orlando, Florida for the 32nd annual Society for Industrial / Organizational Psychology (SIOP) conference.  While we will not be engaging in nerd improv, I will be chairing a panel focused on demonstrating return on investment (ROI) for people-focused projects. 

In today’s data-driven, analytics-focused environment, practitioners with the ability to show ROI is no longer a “nice-to-have” or something you think about once your program has been running for a few quarters. In fact, a best practice is to begin planning for ROI calculations before you decide to engage in a project.  You should be able to answer the question “how will we know if this is working?” before you begin the project.

In graduate school, we learn to plug numbers into an equation to come up with ROI for employee selection programs.  The formula looks something like this:

∆U = Ns rxy SDy zs - Na C

As you can imagine, few business leaders are interested in a deep discussion about virtually every letter in the Greek alphabet.  As applied practitioners, it becomes incumbent upon us to come up with practical, simple, (and some may say) elegant ways to show how the programs we build will return the money to the businesses that sponsor our work. 

In the panel, I’ll be leading a conversation between a mix of internal and external consultants who live this reality every day. One of the things I’m most excited about is the diversity of programs we will be discussing.  We will have industrial / organizational psychologists from some of the world’s most respected companies talking about the cool ways they have shown ROI for their work in call centers, high-potential rotational programs, executive selection, retail, and team building / development. 

The diversity of programs we are discussing helps to illustrate why a simple “formula” is not a sharp enough scalpel for this surgery. In an applied setting, we are often charged with solving very specific problems – “our average hire is too expensive” or “we are hiring too often from the outside for our executives” or “our turnover among call center reps is too high.”  Because of this specificity, analyzing the ROI of the solution requires a similar level of granularity.

I am looking forward to the discussion, and if you are attending SIOP, we would love to have you participate at 12:30pm on Saturday, April 29 in N. Hemisphere A1.