How to calculate performance management ROI

‍Get the figures to demonstrate performance management ROI to senior leaders 

Any effective performance management system should enable the following three things in any organisation:

• Help employees to perform to their full potential
• Align employees to the goals of the organisation 
• Focus employees on their development and progression within the business

It is the role of any HR team to make sure their performance management system supports these key pillars and facilitates improvement in all these areas. In turn, these improvements will provide a boost to the bottom line. However, calculating just how much this amounts to is complex. Many factors will affect the engagement, motivation and ultimately the performance of any employee – management, leadership, support, training – to name but a few. Nevertheless, having an online performance management system that employees like using, that is simple to navigate and provides useful insights and reports will undoubtedly benefit any organisation.

How can HR teams deduce the performance management ROI on their system?

A return on investment (ROI) forecast is exactly that: a forecast. While it is possible to make good assumptions, true ROI can only be calculated in retrospect, and even then, it's not a controlled environment and many variables are involved that are beyond true measurement. Just as with marketing spend, performance management ROI cannot be attributed to one element or another with absolute certainty.

However, a performance management ROI forecast is still essential for evaluating whether to proceed with an investment with a system like Appraisd and it will help to set expectations with stakeholders internally. Senior leaders, especially the Chief Financial Officer or Finance Director, will want to know what this investment will mean for the business. Will spending this money lead to financial gains through improved productivity?

Even for those organisations who could not imagine having an online performance management system, it is still worth making the ROI calculation. It is an effective way of checking that your process is providing employees with the support and focus they need to ensure they work to their full potential.

For HR teams who are still making the business case for a dedicated performance management platform, our comprehensive Performance Management ROI Calculator can help strengthen your argument, giving you the figures to back up your proposal. 

In our calculator, we have focused on some key measurable figures: 

• Costs due to absenteeism
• Costs due to employee turnover/churn
• Revenue per employee increases due to productivity.

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Building the performance management ROI case for HR teams

What are the predicted returns?

From our experience of working with hundreds of clients over the past decade, we understand what the benefits are of having a relevant and tailored performance management process on a dedicated platform. We have deduced when using Appraisd to provide one-to-ones, performance reviews, feedback-giving and objectives-tracking, performance managers can expect the following improvements:

• More timely and relevant feedback is given to employees, increasing their engagement and helping to improve their performance and productivity as they understand their strengths and where to focus their efforts. As feedback becomes embedded in the performance management culture of the business, the value of the work employees produce increases every year.

• Employees attain a greater sense of purpose through more frequent one-to-ones or check-ins with their manager and greater clarity on their objectives. They feel more valued, more in control of their own development and are less likely to leave the company.
• Managers build up a stronger relationship with their direct reports, getting to know them better and understand what motivates them and what their ambitions are. Through this process they can more easily spot those who are likely to leave the company and, in some cases, avoid this happening and reduce the costs around employee turnover.
• By introducing a performance management process that is consistent across the organisation, with everyone following the same framework, it helps to increase inclusion and promote diversity within the business. Measuring employees against SMART objectives, reduces subjective assessments and enables more meritocratic promotions within the company.
• Employees who are measured against relevant objectives are more likely to be motivated and engaged with the organisation. This can help to increase the reputation of the employer brand (for example through more positive Glassdoor reviews or support an Investors in People applications) which can make it easier to attract the most talented candidates for new positions and fill those vacancies more quickly.
• With a clear overview of performance across the organisation, it can help senior managers to create succession plans. This means the business is less exposed if key employees leave the organisation as likely successors have already been identified within the business.

Time and money savings from moving performance management online

For organisations moving from paper-based processes to online performance management systems like Appraisd, we estimate reviews will be at least 25% quicker, with far less time needed to prepare for them and follow them up. For an organisation with 500 employees, who have reviews twice a year, this could save upwards of 1,000 hours. This is already a huge saving that can be included in any performance management ROI calculations. 

What are the costs?

The costs of implementing a new performance management system are:

• The licence fees
• The cost of time spent by employees conducting 1:1s, setting objectives, giving feedback and other performance activities.
• The cost of the time spent by the performance manager and the rest of the HR team in implementing it against the cost of managing the old paper-based or legacy online system.

Download our free Performance Management ROI Calculator to use it for yourself to discover how much you could save your organisation. There is also a worked example for a 100-person organisation illustrating the savings involved based on our own experience.