Every successful manager and CEO knows that the organization’s ability to outperform competition and succeed in tough market conditions totally depends on the performance of people working in it. A well-known and popular management consultant, Peter Drucker said “Culture eats strategy for breakfast.” This highlights the importance of organizational culture and its impact on business’s success. Everyone knows the great saying of Late Apple’s CEO and Founder Steve Jobs, “The only way to do great work is to love what you do.” Where he is emphasizing on the importance of employee engagements.
Mr. Jack Welch, former CEO of General Electric once said “An organization’s ability to learn, adapt, and innovate is the ultimate competitive advantage.” These quotes are to highlight the importance and impact of active performance management on business’s success. Every business utilize some kind of performance management system to achieve their strategic and long term goals. Without a well-structured performance management system a business can never leverage the true potential of its employees.
We have witnessed surge in demand of digitally advanced performance management system over the past decade. Businesses operating in Dubai, Sharjah, Abu Dhabi, and all around the UAE are eagerly seeking ways to enhance and elevate their performance management systems. However, implementing a top-notch performance management system alone is not enough. Businesses should have a way to measure the impact and ROI of their performance management system. Whether a business is buying a brand new performance management system or making some changes in an existing system, the impact should be measured.
Measuring the ROI help businesses assess and evaluate the value of their investments in performance management system. It help them understanding how impactful their performance management system was, and what tangible impact does it had on the long-term business growth and strategic goals. Measuring the ROI of performance management system help businesses ensure all their resources are effectively and efficiently utilized and it is a great way of linking your performance management system to your business’s outcomes. In this blog we will briefly discuss how measuring the ROI can improve the impact and efficiency of their ongoing performance management system and strategy.
What is a Modern Performance Management System?
A modern performance management system is a well-structured platform, which is a combination of both strategy and digital tool. The modern performance management system are incomplete without a comprehensive digital solutions. That digital solution is a dedicated performance management software which offers a wider range of data collection and analytical tools. Businesses are increasingly adopting customized performance management systems for their easy implementation and superior alignment with business needs. These tools are designed exclusively to collect in-depth performance management data and then convert it to the actionable insights. Business leaders and managers can leverage performance management data and insights to take informed and timely decisions which help aligning individual performance with high-level organizational goals and objectives.
A modern performance management system is not just a monitoring tool, but it is a comprehensive framework which help increasing employee engagements and satisfaction. The performance management system help streamlining traditional performance management processes. For example, the annual reviews are replaced by much more impactful and efficient continuous feedback and 360-degree reviews. With continuous performance management the employee performance acknowledgment and appraisal processes become transparent and fair. The deficiencies associated with manual workflows and processes, are eliminated from the system. These tools help setting goals effectively, the employee training programs can be enhanced, and the employee engagement and productivity can be improved significantly.
An investment in a modern digital performance management system can greatly improve the performance, efficiency and productivity of an organization. Studies have shown by adopting to modern performance management systems businesses can boost their efficiency to up to 60%. With the passage of time, every business grows, the market conditions tend to change rapidly, and the overall customer behavior is subjected to evolve. All these moving parts require businesses to be efficiency, proactive and super-fast in adopting to new market conditions. This requires a deeper and highly accurate insights to employee behaviors and skill sets. Businesses can only prepare for future, if they know what to improve and when. Hiring talent is expensive and retaining right employees is vital for business success.
That is the reason many businesses and organizations invest huge resources into performance management systems, solutions and implementing best practices. However, most of the time businesses failed to realize the true impact of their investments. That is why it is crucial to measure the ROI of your performance management system. It will help you identify the areas of improvement and it will also help to estimate the positive impact of performance management system in certain areas. For example, imagine an organization is spending AED 20,000 per year on a performance management system, without quantifiable metrics how would you estimate how much revenue is generated by this investment or how the employee turnover fell? That is why it is extremely important to measure the ROI of your performance management system.
See Also: 5 Challenges in implementing Performance Management System
What are the Key Metrics of Evaluating the ROI of a Performance Management System?
Implementing a performance management system can greatly improve efficiency and productivity, however, it is crucial to evaluate how deeply it impact the entire organization. There is no complex mathematical calculations and formulas involved, measuring the impact of performance management system is simple. For example, after implementing a custom performance management system you can see how much customer complains reduced, how much customer journey is improved, how much revenue increased and how much turnover reduced, etc. These are some very simple indicators to evaluate your performance management system and strategy. Here are some most critical key metrics which will give you a more accurate and clearer picture of the impact of your performance management system:
- Employee Productivity: The employee productivity is the primary goal of any performance management system. In order to evaluate employee productivity you must monitor key metrics, such as task completion rate, number of sales by entire sales team, number of successful projects, and number of strategic goal achieved, etc. For example, if your sales risen by 15% after implementing a new performance management system, then this is one of the most clear indicator of its impact and effectiveness.
- Employee Retention: For any successful organization the employee retention is crucial. Recruiting and on-boarding is not only expensive, but it can have huge impact on performance and productivity. A new employee takes time to align with the organizational culture, workflows, and internal processes. That is why retaining high-performing employees is a key to long-term success. A good performance management system increases employee engagement, satisfaction and happiness. Thus measuring the employee turnover rate is a perfect indicator.
- Time and Resource Saving: Conducting traditional performance reviews and managing appraisal and performance management processes could take huge amount of HR’s administrative resources. The managers also spend significant amount of time in performance management activities. Measuring the time saved in those administrative activities and processes is a great indicator to evaluate a performance management system. The time and resources saved due to automation and digitalization of performance management processes can be converted into monetary value to calculate ROI.
When calculation the ROI of a performance management system you should consider both the tangible and non-tangible aspects. For example, the revenue growth is easy to quantify, hence it is a tangible return, which can be calculated with 100% accuracy. However, there are some factors, such as employee morale, happiness and even the employee turnover which are difficult to quantify and could make your calculations much complex. However, for a simple calculation we can focus on tangible aspects to instantly measure the ROI which will help us making adjustments and further refining the system.
See Also: The Future of Performance Appraisals: 6 Innovations and Changes [Quick Guide]
Calculating the ROI for a performance management system might seem complex, but it can be simplified by simply breaking it down into a few easy steps:
Formula to calculate the ROI
ROI (%) = [(Benefits – Costs) / Costs] x 100
Step 1: Determine the Cost:
It is important to include all expenses and not just the cost of the performance management software. All expenses should be calculated annually, for example, if you spend AED 20,000 on the performance management system software and its relevant infrastructure per year. Include the training cost and additional implementation cost as well, such as for employee training and consumed work hours, let say the cost is AED 5,000 including everything. Then the total per year cost would be AED 25,000.
Step 2: Measure the Benefits
As I have mentioned earlier that there are two types of benefits, some are tangible which can be quantified easily, and some are non-tangible which we can’t precisely measure. For the sake of calculation we will only consider the tangible or quantifiable benefits. For example, if you witnessed 15% productivity increase across a team or department generating AED 1 Million annually, then the benefits is AED 150,000. This could be reduction is customer churn, increase in sales, or cost-reduction in specific function, etc.
Step 3: Calculation of ROI
Using the above examples, we can plug the number ins to the ROI formula:
ROI (%) = [(AED 150,000 – AED 25,000) / AED 25,000] x 100 = 500%
In this particular example, we can see a fivefold return over your investments, highlighting the actual tangible impact of your performance management system on annual bases.
You can further refine this calculation by including the intangible benefits such as the employee morale, reduction in employee turnover, the positive impact on customer loyalty or brand reputation, etc. All these factors are very difficult to quantify, however, you can use industry benchmarks and you can conduct internal surveys to estimate the values of these benefits which will further help you refining your mathematical calculations.
Aligning with Business Goals and Employee Engagement (Intangible Benefits)
A performance management system is not like any other software upgrade that businesses usually used to drive efficiency and productivity. The performance management system is a complete framework of performance management strategy and a highly sophisticated AI-powered analytical engine with intuitive GUI for users. No matter how advanced and high-tech your performance management system is, if it is not aligned with your strategic and long-term business goals, you can never achieve the desired performance. That is why it is equally important to make sure your performance management system is fully aligned with your business goals. Goal alignment is not as that complicated, you have to start by defining your business goals and then enlist all key objectives that can help you achieving those goals.
The performance management system will help you achieving those objectives. You can measure the progress and compare it with past year to understand the impact of the performance management system. Furthermore there is one more one of the most impactful aspect is the employee engagements. A modern performance management system foster employee engagement, encourage a culture of team work and collaboration and provide a well-structured framework for employee recognition and development programs. Furthermore the performance management system encourage employee participation in various processes and offer multiple tools which help bridging the gap between employees and management. These factors can greatly improve the ROI of your performance management system.
Conclusion
Businesses often doesn’t realize that measuring the ROI for their performance management system is not just a financial practice, but it truly is a great strategic move. By measuring the ROI of your performance management system you can clearly and most accurately evaluate the impact of performance management system on your organization. This will also help you understand the strengths and weaknesses of your ongoing strategy and system which his essential for making improvements. A modern performance management system is not just a monitoring tool, but it is so much more. It help businesses aligning employees with strategic and high-level organizational goals. It help retaining talent, and keep on improving employees behavioral and professional competencies.
By evaluating the ROI of a performance management system businesses can easily quantify the benefits and impact of it on their efficiency, productivity and profitability. The ROI can be measured by calculating the positive impact or growth in terms of revenue. However, the performance management system have many untangle benefits such as employee morale, employee satisfaction, reduced turnover, improved decision-making, readiness for abrupt disruptions and market changes and adoptability, etc. Therefore considering these factors too will help you understand the actual impact of a performance management system which could be far higher than the tangible or quantifiable benefits such as increase in sales, revenue or cost-reduction, etc.
In this article we have briefly discussed the subject by exploring the key benefits of measuring the ROI of performance management system, and its tangible and intangible benefits. We have also discussed the actual formula to calculate the ROI. Most of the time businesses don’t realize how important it is to measure the ROI and sometime businesses often think it could be a very sophisticated and difficult process. By following the above instructions and considering the key factors you can easily calculate the ROI of any performance management system. If you want to learn more about the subject or if you want our help to implement a tailor-made performance management system for your organization, please feel free to contact us through our Contact Us page or leave a comment in the comment box below and we will get in touch with you soon.
