What's your performance management ROI?

This article sets out the financial equation that ought to underline any investment in your employee feedback processes.

Everybody benefits from good feedback

On a personal level, we know that receiving quality, timely feedback from people we trust and respect can be THE catalyst for life-changing career development.

At a business level, we know that a company cannot perform at its best if its employees aren't getting ongoing direction and course-correction from their team.

But, there's still a slight reluctance for leaders to invest time and money into their employee feedback process.

"Yeah, our feedback process is lousy, we need to improve it, it's on the to-do list, we just need to close our fundraise and hit our numbers this quarter first..."

‍

In June 2020 we surveyed 500 people employed in UK businesses with 10-100 employees.

• 91% of employees think their company’s performance management process could be better
• 40% think that the feedback they receive is unhelpful and of low quality
• 38% think that they don’t receive enough feedback

Compounding this is the fact that around 80% of small business feedback processes are still run using Microsoft Excel or Google Docs or pen-and-paper. In contrast, only around 20% of small businesses are yet to make the switch from Excel etc to custom accounting software.

Why is investment in HR software so far behind investment in Finance software, when HR software impacts all employees but Finance software only impacts a few employees?

Management Debt

Ben Horowitz (cofounder of one of the world's most successful Venture Capital firms, Andreessen Horowitz, and author of The Hard Thing About Hard Things) says that when you ignore your employee feedback process, you accumulate Management Debt.

To (literally) take a leaf out of his book, see the below summary.

And Management Debt, as he explains and as I agree, is just like accumulating Technical Debt in your software: The longer you leave it, the nastier the clean-up will be. Management Debt is more disruptive to erase than Technical Debt though because it affects every employee, not just your dev team.

Calculating your ROF {Return On Feedback}

I believe that a key reason why small businesses have historically underinvested in employee feedback is that the financial return on investment hasn't been clearly grasped and communicated.

And perhaps because HR haven't been as good at communicating ROI to the CEO/COO as the finance department, but hopefully Howamigoing can help here.

Yeah, there are a tonne of stats online about how painful performance reviews can be, and how many Millennials are disengaged, but I've not yet seen a clear, simple, defendable calculation of the financial benefits from investing in employee feedback processes.

Here's my attempt to help you calculate and communicate your Return On Feedback as easily as possible.

‍

‍

Step 1: How many employees in your business?

With salaries and bonuses making up 60-80% of a company's profit margin, the more people you employ the more you stand to lose in £/$/€ terms from having a crappy (or no) performance feedback process.

Let's start quantifying the potential loss and assume you have 100 people in your business.

Then on average around 40 of them won't be getting regular, quality feedback on their work.

(Source = Howamigoing survey of 500 people referenced a few lines above.)

Assuming a 3:1 Employee-to-Manager ratio, this means that:

1. Around 30 junior staff are missing the course-correction needed to excel in their role. It's impossible for them to fully contribute to the team's goals
2. Around 10 mid-level or senior staff will be exercising poor judgment -- and unaware of it. It's impossible for them to lead a team to its potential when they're operating in a mindset vacuum

‍

Step 2: What's the cost to your business of losing a productive employee?

Of these 40 people that feel disconnected from their team and their work, around 10 of them will leave voluntarily in the next 12 months.

(Source = Average employee turnover rates in developed countries are 15-25%. Around half of this is voluntary turnover.)

That is, without regular, quality feedback, 10 people will decide that your business is no longer the place for them to progress in their career.

(Assuming their manager isn't a complete a**hole, an employee usually decides to leave because they've stopped learning and growing.)

For productive junior staff, the cost to the business of losing them is ~0.5x their salary. For productive senior staff, the cost is closer to 2x salary.

(Source = Deloitte/ Josh Bersin.)

Where does this cost come from?

1. The cost of hiring someone new (management time + recruitment spend)
2. The cost of onboarding and training someone new (internal + external training)
3. The loss of productivity as it takes 1-2 years for new employees to be fully self-sufficient
4. The lower engagement/ lower morale for those employees that lost a friend as well as a colleague

‍

Step 3: What's the investment required to stem this loss?

Let's say you pay your junior staff £30,000 and your managers £50,000 on average.

For a company with 100 employees, the annual investment of using software like Howamigoing is £3,600.

If just 1 junior employee does not resign in the next 12 months because you've made it easier for all staff to get better feedback more often, then you've saved at least £30,000 x 0.5 = £15,000, generating a return on investment of 4.2x.

If additionally 1 senior employee does not resign in the next 12 months because of this investment, you've saved an additional £50,000 x 2 = £100,000, generating a return on investment of 32x (£115,000 / £3,600).

‍

An insurance policy, not an investment

At a monthly cost of £3 per employee and with potential savings up to 2x an employee's salary, it's easy to see that investing in better feedback software is more like taking out an insurance policy against too much Management Debt, rather than investing in expensive machinery.

When you have an easy to use platform that allows all employees to get better feedback more often, you are ensuring:

1. That each employee can learn from others, grow and remain engaged in their work
2. That each team can work openly and cooperatively toward shared goals
3. That your business can reach its potential

Even though the financial benefit of investing in feedback software might not be as immediate as say upgrading your CRM, it will be much longer lasting and it will provide a far superior competitive advantage.

There's so much more downside than upside when you delay upgrading your performance management process.

If the thought of adding a new piece of software is daunting and feels like a distraction, remember that:

• Human nature is to make short-term decisions over long-term decisions (choosing to do today what gives the quickest reward)
• The longer you wait, the more your culture will erode and the worse your business will perform
• Howamigoing is here to help :-)

‍