How to calculate the ROI of a skills-centered HR strategy
In pursuing a skills-centered HR strategy, you probably have an end goal in mind.
You’ll be looking to hire top talent, reduce attrition, fill skills gaps, improve employee satisfaction, and remain competitive. But how can you be sure that your efforts are truly paying off?
You might already be making the smartest hiring decisions, investing in the most suitable training programs, and uplifting and motivating your workforce. But you won’t know for sure unless you start calculating the ROI on your HR efforts.
The challenge of measuring ROI on skills
In some cases, calculating the ROI on an HR investment seems pretty straightforward.
Let’s look at a really basic example. You ask your workforce to complete a two-hour training program during which they will learn some basic Excel skills. At the end of the program, a short test will assess your employees’ understanding of its content. If everyone passes the test, you might safely assume you made a worthwhile investment: you identified a business need to improve Excel proficiency, you trained your workers, and you assessed their new skills.
But, in this case, there are additional things worth considering. How often are your employees putting their newly-earned skills to good use? What problems are they solving that they weren’t previously? How has your investment driven operational efficiencies or added value to the business? Does the value of these newly acquired skills outweigh the time your employees spent away from their desks to complete the training program? Did proposing this training deepen their engagement with your company? How is this investment in their skills changing how they feel about their progress at work?
As we mentioned, this is a simple example. What happens when you want to know the ROI of something less quantifiable, be it your employees’ soft skills, worker satisfaction, or hiring decisions?
There’s no one size fits all approach to calculating the ROI of your HR strategies, but here are a handful of things to try.
7 ways to measure ROI on HR strategy
1. The Kirkpatrik Model
University professor Don Kirkpatrick first began the development of the Kirkpatrick Mode lin 1959.
Organizations around the world use this four-level model, refined over the years and eventually published in 1993, to evaluate the effectiveness of their training and upskilling programs. The World Economic Forum estimates that the cost of reskilling is $24,800 per worker, so you want to be sure your efforts are paying off.
Here’s how the Kirkpatrik method works:
- Level One – Reaction: This stage requires you to assess your employees’ reactions in the immediate aftermath of an upskilling or training program. Did they find it beneficial? Was the information well communicated? Were the training materials sufficient? Will they apply their learnings moving forward?
- Level Two – Learning: For stage two, you will assess your employees’ information retention. To determine how much information was absorbed, you might choose to set work assignments or ask employees to complete a test. For accurate results, this step should be repeated shortly after a program is completed and a bit of time after. That way, you’ll know whether or not the knowledge has been retained by your employees for the long term.
- Level Three - Behavior: Now, you need to assess how your employees are incorporating their learnings in their day-to-day work. This can be achieved via self-assessments, manager evaluations, spot inspections, etc.
- Level Four - Results: The final step requires you to evaluate whether your program has delivered the required results.
The main benefit of the Kirkpatrick Model is that it provides a set of simple, evaluative steps that can be applied across any industry. You’ll gain insights into the success and impact of your upskilling or training programs so you can make changes and improvements as necessary.
The biggest downside of the Kirkpatrick Model is that it is time-consuming and costly to implement. It’s also a bit difficult to link financial outcomes to a specific program.
2. The Phillips Model of Learning Evaluation
The Kirkpatrick Model is useful for measuring the success of a training or upskilling program, but it falls short of providing an ROI cost-benefit analysis. With this in mind, Jack Phillips came up with the Phillips Model of Learning Evaluation, enabling organizations to compare the results of their programs alongside the costs of implementing them. Here’s how his five-step model works:
- Level One – Reaction: As per the Kirkpatrick model.
- Level Two – Learning: As per the Kirkpatrick model.
- Level Three – Application and Implementation: Alongside assessing how employees are implementing their learnings, this step analyzes why the program was a success or failure. This will enable you to make changes to improve your business outcomes next time around.
- Level Four – Impact: For this step, you will consider both the positive and negative impacts of a training or upskilling program. For this step, you will collate qualitative and quantitative data to analyze its impact, while also considering any external factors that might have contributed to employee performance.
- Level Five – ROI: This is where the Phillips Model most notably deviates from the Kirkpatrick model. Via a cost-benefit analysis, you will evaluate the costs of your program and its financial impact to calculate its value.
Importantly, the Phillips Model measures both the tangibles (e.g. monetary value) and the intangibles (e.g. employee satisfaction).
3. ROI training calculator
An ROI Training Calculator is a straightforward way to calculate the monetary benefits of a training or upskilling program.
Let’s imagine you spend three hours training 20 employees - who earn $25/ hour - on their sales technique.
Cost of training:
Time spent- 20 employees X $25/ hour X three hours= $1,500
Course development costs - $10,000
Course implementation costs - $5,000
Benefit of training:
As a result of this training program, your 20 employees generated 10% more sales in a year, which translated to a $100,000 sale increase
ROI% = ($ benefit of training - $ cost of training) / cost of training x 100
ROI% = ($100,000 - $16,500) / $16,500 x 100 = 506%
This method works best for technical or highly structured roles where financial benefits are easily identified and isolated.
NB: There are several ROI training calculators available online. Simply plug in your figures and let the calculator do the rest.
4. Performance reviews
When it’s more difficult to directly link employee performance to financial outcomes, performance reviews (or supervisor assessments) are the way to go.
Let’s imagine you send a team of middle managers on a course designed to improve their negotiation skills.
To measure the success of the program, you will assign a senior manager to monitor the performance of participants before and after their training is complete. They will note down any significant improvements in job performance and perhaps even use a control group of those who did not complete training.
If you want to make the evaluation process more scientific, you could require the senior manager to quantify improvement by percentage in key areas. For example:
- Customer service: +5%
- Communication skills: +10%
- Task completion: 5%
In this example, the average productivity improvement would be (5 + 10 + 5) /3 = 6.66%.
5. Business impact study
A business impact study examines the meaningful changes brought about by new processes, be it upskilling, hiring practices, succession planning, or an internal talent marketplace strategy. To understand how any of these skills-centered HR processes are impacting the business, you might look into:
- Turnover rate - Replacing an employee can cost more than half the annual salary for entry-level jobs and up to 200% of the annual salary for executive-level positions, so this is likely a key driver behind the implementation of new HR strategies.
- Time-to-productivity – This measures how long it takes for a new hire to become fully operational and productive. A shorter time-to-productivity indicates your business is making the right hiring decisions and onboarding employees effectively, which are often the outcomes of a skills-first HR strategy.
- Number of roles filled internally - An internal talent marketplace helps match existing employees to open roles. In doing so, you can improve employee morale and productivity and reduce turnover rates.
- Leadership development pipeline – A skills-centered HR approach will help you identify high-potential talent so you can expand and develop their capabilities as needed and fill out your leadership pipeline. Important for long-term business success.
- Profit margin – If newly implemented HR strategies aren’t ultimately driving profit for your business, you’re doing something wrong.
A business impact study should include a four-step process. Let’s imagine your goal is to drive an internal talent marketplace and reduce employee turnover.
- Step 1 - Evaluation Planning: Determine your objectives. Your success indicators would include X% number of roles filled by internal talent and improved retention rates.
- Step 2 - Data Collection: Does what it says on the tin. You collect relevant information, such as hiring data and employee satisfaction surveys.
- Step 3 - Data Analysis: During the data analysis stage, you isolate and analyze the impact of your program.
- Step 4 – Reporting: For this step, you produce an impact study detailing the outcome of your program.
6. Worker surveys
When you put your people and their skills at the center of your HR ecosystem, you get happier employees, which will ultimately improve retention rates and drive productivity and motivation. And what’s the best way to figure out whether your methods are working and your employees are happy? You ask them.
Worker surveys can include questions on everything from manager reviews and work environment, to company culture and brand reputation. But to evaluate your skills-first HR strategies, be sure to focus heavily on personal growth.
Not only will this reveal how successfully your existing programs are operating, but it serves to reassure your workforce that you care about their professional development. As many as 95% of millennial and Gen Z workers expect their employers to provide learning opportunities and 94% of all employees said they would stay longer at a company that invested in their future.
7. Skills Assessments
Skills assessments see organizations collect data on employee or candidate capabilities to be evaluated in conjunction with specific criteria.
As a way of determining a person’s ability to perform well in a particular role, skills assessments are perhaps most commonly used to test prospective candidates and inform hiring decisions.
But this technique can also be deployed to assess existing employees before and after they complete a training program or to track the evolution of your organization’s skill profile following changes to your HR strategy.
For example, if a group of software developers completes a coding course, you’d expect a skills assessment to reveal that their technical skills had improved.
Alternatively, a significant investment in your internal talent marketplace might see more employees gain leadership skills. Armed with this knowledge, you can make changes to your talent strategy and release the untapped and unexpected skills that will move your organization forward.
Skills assessments can also inform how you allocate work (a high-value client-facing project will require employees with communication and negotiation skills, for example)and where best to invest in career development (employees with no natural aptitude for coding should not be sent on the aforementioned course.)
You want to play to the strengths of your workforce at every opportunity.
Want to learn more about the importance of driving a skills-centered HR strategy, and how best to measure your efforts? Get in touch with 365Talents today.
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