How much is your crappy appraisal costing your business?

How much is your crappy appraisal costing your business?

It’s 2018 and around 75% of businesses still collect employee performance feedback data manually (i.e. using pen-and-paper, Word, Excel or email).  

If you’re one of these businesses, it’s crushing your profitability.

It’s staggering how many businesses have persevered with such an outdated process, despite the launch of the software industry in the 60s and widespread internet adoption by the late 90s.   

And because of how painful it is to collect feedback this way, most businesses only have the stamina to do it once per year.

It’s called the annual appraisal.

And everyone hates it.  Actually, hate is a strong word. 

To be precise, 9 out of 10 managers “are dissatisfied with it” according to Corporate Executive Board.

So it’s not surprising that management teams are now slowly starting to modernise their appraisal/ feedback processes and invest in HR software.

(According to Bersin by Deloitte, around 70% of large companies are reconsidering their performance management strategy.)

Why has it taken so long?  Why now?

The shift is happening now because, in 2018, the cost of running an outdated manual appraisal process is piling up.

If your business has 250 employees, we estimate the cost of running manual appraisals is in excess of £320,000 p.a.

The cost is piling up because we’re going through a massive shift in workplace behaviour.

In the last 15 years we’ve experienced:

  • giant leaps in broadband and wireless internet speed
  • coupled with the introduction of social media so we can instantly share our thoughts
  • followed by the second most devastating global financial crisis in history
  • which we read and commiserated about on our smartphones
  • While syncing said articles and conversations in the cloud

Given the resources now available to even the smallest of businesses, companies now compete on culture.

Employees aren’t sticking around to wait for an amazing, modern, engaging work environment.  They’re taking their world-class education, global contact list, unassailable grasp on technology, desire to make an impact and newfound creativity to switch jobs with lightning speed.

I know what you’re thinking:  The ‘M’ word.

But it’s not just Millennials driving the HR evolution.  

There are three areas of financial wastage produced by a crappy appraisal, and they’re applicable regardless of employee age.


Waste #1: Lost time

Let’s say your annual feedback cycle consists only of an annual review and doesn’t use any software to help collate or distribute feedback.

CEB estimated that the average manager spends 210 hours per year on reviews, i.e. around 5 weeks.  That seems a bit lofty, but plausible for a large organisation.  

Adobe surveyed 1,500 US employees in late 2016, with managers reporting having spent 17 hours per review.  Still a big number.

We surveyed 1,241 UK employed people in April 2018 (90% below the manager level to give us the full picture).  

They spent 5.1 hours on average to complete their last review, with 25% of respondents taking more than 8 hours.   

That’s quite a big gap in input between the worker bees and the queen bees.  

But wait, shouldn’t worker bees be doing the tedious admin and working longer, with queen bees sitting back to review, opine and direct?

Why are the prized queen bees wasting precious time on a manual task that the hive figured out how to automate several seasons ago? 

 

The economics:

Instead of a once per year, drawn-out appraisal taking each employee 5+ hours, you could instead:

  • Ask employees to dedicate 20 minutes to giving feedback every two months as part of a bi-monthly check-in
  • Ask employees and managers to dedicate 40 minutes once per year as part of an annual preview1

Because after all, if you’ve taken a small amount of time to give feedback regularly throughout the year, an annual review should just be a look back on the last few months and some extra time for bigger-picture career planning and goal discussions.

Now, we’re not saying that you should do away with one-to-one chats.  Career planning and more delicate conversations should definitely be done in person.

But in the majority of instances, real-time feedback can and should be given electronically.

And in the majority of instances this means that your employees could be spending 2.5 hours less per year on giving others feedback, but giving more feedback.

2.5 hours per employee across 250 employees is an extra 625 hours generating returns for the business.

That’s an extra 3 months of output for one employee, or an extra £50,000 revenue.

(The average revenue per employee in the UK in 2015 was £200,000 for a business with 200-249 employees.)

I know what you’re thinking...Ugh, a feedback process every few months?  Do we have to, really?

Yes, you do.  

Here’s why...


Waste #2: Low morale driving down productivity

When an employee’s time is being wasted with an inefficient process, their profitable contribution to the business drops.  Simple.

But from an employee’s perspective, there’s a lot more at stake with appraisals than 3 errant hours filling out a form.

If you’re only getting one-way feedback, once per year, you’re less productive for the other 1,877 hours.

(assuming a 40 hour work week and 47 weeks of work.)

Two recent studies to support this:

  1. Chungsup et al, 2012:  When managers don’t regularly communicate directly with their employees, this leads to employee distrust, disrespect and a reduction in workforce morale and motivation.
  2. Shaban et al, 2017:  Low morale and low motivation affects productivity and company competitiveness.

Today the buzzword, the KPI for HR Directors to protect against low morale and motivation, is engagement.

Employees are engaged when they feel valued, when their efforts are recognised and when they are encouraged to thrive.  i.e. they smile at work outside of pay-day.

As Gallup puts it in this white paper, what separates engaged employees from others is the ‘discretionary effort they consistently bring to their roles’.

Gallup estimates there are 22 million actively disengaged employees in the US, costing the economy $450 billion per year in lost productivity from absenteeism, illness and other low morale issues.

On the flip side, McKinsey says you can achieve productivity gains of 20-25% from engaged employees.

But will switching from our crappy appraisal to a modern, streamlined feedback process really drive engagement?

That depends.  

Do you think your employees would feel a greater sense of belonging and a more integral part of their company culture if every few months their workmates gave encouragement and advice to each other?  

You know, like any sporting team on Earth?

 

The economics:

Let’s again say you have 250 employees and conservatively assume that

  • 5 employees become engaged due to your modern feedback process and the new-found connectivity they feel toward their colleagues and their career
  • For each newly engaged employee, you get a 20% uplift in productivity

That’s 40hrs/week x 47weeks/year x 20% x 5 = 1,880 extra (wo)man hours of output next year.

Which equates to roughly £200,000 incremental revenue for a UK business with 200-249 employees.


Waste #3: Loss of great staff

When an employee’s productivity slips, it's first clear to them and then clear to those around them.  

Before long, a cloud of don’t-care-vapour forms and starts spreading across the room/ team.

But it’s not just a lack of excitement about one’s job that rolls out the red carpet to the departure lounge.  

It’s the crippling emotions that so many people feel from their crappy appraisal that makes them leave.

In our recent survey, 56% of people said they experienced anxiety as a result of their last appraisal.  This aligns with Adobe’s 2016 survey whereby 58% of respondents said their performance review was stressful.

Taking this a step further, a TimesJobs survey in 2015 reported that 40% of people look to switch jobs after their appraisal, purely because of the appraisal process alone.  

In Adobe’s study, 22% of people had cried as a result of a performance review.

22% of people had cried.

Think about that for a second.  

In your row of colleagues at work, 1 of them has cried because of a process that’s designed to help them grow.

Employee resignations in the UK reached a five-year high at 15.5% in 2016 according to XpertHR.  In the US, the Bureau of Labour Statistics put the number of employees voluntarily quitting at 23.6% that year.

There is no exact monetary cost of staff turnover, but a tonne of smart people have come up with similar estimates.    

Josh Bersin of Deloitte believes losing a productive employee can cost up to 1.5-2x their annual salary.  This includes the incremental cost of hiring, onboarding, training, ramp time to peak productivity, the loss of engagement from others due to high turnover, higher business error rates, and general culture impacts.

 

The economics:

Let’s be conservative and assume that you’re losing 2 employees each year because of your crappy appraisal process (c.1% turnover for a 250-person business).

At £35k median annual UK salary and 1x turnover cost, this is costing your business up to £70,000 per annum.

Ouch.


But let’s put the data and money to the side for a moment.

Sure, a good business generates profitable growth.  

But people are the biggest asset of any business.

A great business generates growth in people and provides an avenue for employees to be their best selves.

People can’t grow without regular constructive feedback.

So set aside the economics for a moment and ask yourself as a caring human being:  

Is my appraisal allowing employees to fulfil their life potential?


1The phrase Performance Preview rather than Performance Review was coined by Prof Samuel A. Culbert

To the extent Howamigoing has not been able to source an original study or survey that is referenced in this article, a link has been given to the contributor's website or to a separate article which cites the study result.

Photo by Tom Pumford on Unsplash

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