Measuring the exact impact of effective performance management is difficult but it is possible to show the potential financial gains it can lead to.
Newton’s third law of motion states that for every action, there is an equal and opposite reaction. This relates to how forces, such as gravity, behave. We can use it to explain the relationship between two different objects like a tyre on a car as it drives along a road. The forces between the two are equal in size and opposite in direction. It is neat, simple and always follows the same pattern, making it very easy to predict the outcome.
Humans unfortunately don’t live by such hard and fast rules. When they are involved in a process, there is no such straightforward formula to forecast the result. For example, there is no equation to work out exactly how many sales will result from a TV advertising campaign for a particular product. Marketers can use past experience, industry benchmarks, customer testing and sales data to predict what they hope will happen, but at the end of the day there are no guarantees.
Whenever emotions are involved in a process, it becomes impossible to know for certain what the outcome will be. For those used to working in science or with figures, this can be hard to understand. In the workplace, this often leads to confusion and tension between finance and operations who are used to working with certainty, and marketing and HR whose output is based on building a connection with people and can be highly subjective.
This doesn’t mean marketing and HR shouldn’t provide targets for their activities, it just means that these will need to be reviewed and adjusted depending on how well their content is received by customers or employees. Finding the right message is an art, not a science.
Measuring the impact of performance management
Why do organisations have a performance management process? There are many different reasons. Here are just three:
- It provides clarity for employees so they know what they should be working on and when.
- It provides alignment, meaning everyone in the organisation is contributing to the overall company strategy.
- It provides a framework for developing employees to ensure they have the skills they need to execute their roles effectively.
These are all designed to underpin an efficient and effective organisation, focused on hitting targets. They are also part of creating a workplace where employees want to be – where they feel useful and valued, something that is vital in the current economic environment.
How well each of these is executed is not down solely to the effectiveness of the performance management process. It depends on many other factors within the business such as the culture, management expertise and competence of the senior leadership team.
However, it is possible to track trends and establish benchmarks for the organisation, so HR and senior leaders can understand the impact of their process and how much it is contributing to the bottom line.
Calculating the ROI on performance management
As discussed above, it is impossible to attribute a true ROI to performance management as there are so many variables involved. However, it is possible to calculate a forecast that demonstrates the value of both a performance management process and online system. This helps to set expectations with key stakeholders internally such as the senior leadership team and, importantly, the Finance Director or Chief Financial Officer. It will show to them that investing money on a platform can lead to financial gains.
This process is still vital even for businesses without a system as it will show if they are providing employees with the support they need to be happy and effective. For HR teams trying to persuade the c-suite to invest in a system, it will give them the figures they need to create a compelling business case.
The free Appraisd ROI calculator
As this is by no means a simple process, to help speed things up we’ve created a comprehensive Performance Management ROI Calculator which does all the hard work for you. Simply enter the number of employees and the average salary in your organisation and the calculator will do the rest.
It focuses on three key areas which effective performance management can impact:
- The cost associated with absenteeism
- The costs associated with employee turnover/churn
- The potential uplift in revenue due to more productive employees
What are the returns you can expect?
From working with hundreds of clients of all different sizes, from a wide range of sectors and locations we know effective performance management can make a huge difference to the business and the bottom line. Here are just a few of the benefits identified:
“It’s not just in performance terms that we’ve seen the benefits. It’s helped us reinforce and live up to our brand values more effectively. Around a third of objectives are tied to our brand values and this has helped these come to the fore and become part of everyday behaviour.”<div class="author">Neil Wainwright-Farrar, Head of Learning and Development, Clarity Travel</div>
“People now recognise that having a good performance conversation means that something happens as a result. For example, we now run a report which identifies employees’ career aspirations and goals. By integrating this, we can follow these up with managers and make sure plans are put in place.”<div class="author">Katie Woods-Ruddick, Chief People Officer, px Limited</div>
“Setting quarterly OKRs has helped move my team forward, maximising their potential and aligning them with our strategic business objectives.”<div class="author">John McClenaghan, Head of Customer Support, Natterbox</div>
