How better hiring and HR practices can result in 6x ROI for businesses
6 mins, 10 secs read time
HR executives and People Team leaders know it can be a struggle to make the case for resources for your functions like hiring and learning and development. Whether you’re trying to get more headcount, purchase software to supercharge one of your processes, or put together training to give upskill your team and others around the organization, you may have encountered some resistance from the person who holds the purse strings. Your CEO, CFO, Board or whoever’s in charge of allocating financial resources might be hesitant to give you the green light if you can’t make a clear case for the return on investment (ROI) of your request.
Within the world of People and Talent, it’s been tough to demonstrate ROI, mainly because it’s difficult to assign value to people objectively and there are many variables to consider. But here at Greenhouse, we believe that people are the single biggest factor when it comes to achieving your business goals. The concept can be explained by looking at Employee Lifetime Value – what we call ELTV. In one of our webinars, “How to Understand the ROI of Investing in Your People,” the question posed ELTV is the answer to the question: “What is our story as HR and People practitioners for the return we’re going to provide if we get a particular investment?”
Over time, there’s a certain value that employees will bring throughout their whole journey with the company, and our job as a People function is to increase that and maximize it.
But what exactly constitutes ELTV and how might you be able to apply it to your own work and organization? Let's get into it.
Defining Employee Lifetime Value or ELTV
To help illustrate the concept of ELTV in a tangible way, we've built this graph that represents an employee’s lifecycle. The X axis shows the amount of time that has passed and the Y axis represents the employee’s output and contribution to the company. The value of output can be a little difficult to quantify. In the most straightforward case, for a salesperson, this represents the revenue they’re generating through sales completed. In other cases, such as for engineers, it’s not necessarily a specific number, but represents their contribution to the company across a multitude of ways – from delivering new products and features, being a driver of culture, or even referring top talent.
There are four significant inflection points within the employee lifecycle: their start date, the point when they’re fully contributing to the company, the moment when they make the decision to leave, and their last day. The shaded area on this graph represents ELTV, an employee’s total contribution to your company during their tenure.
While the exact values on the Y axis are not important, it’s worth noting that the employee starts out in the negative zone. This is because you’ve already made significant investments (budget and resources from recruiting and the hiring team) before someone joins your team.
So how does this tie in with your work on a HR or Talent team? “For any improvement we make to this curve at any of these points, we can change the ROI,” we explain in the aforementioned webinar.
Here are the ways we can achieve this:
- We can impact how quickly someone ramps up, shortening the time to productivity
- We can improve how high someone can grow naturally by improving the quality of hire
- We can change how much higher someone goes over time through improved L&D; and management practices
- We can extend how long someone stays by creating a better company culture
Case study: The impact of slightly better People practices
It’s not fair to compare Michael Jordan to a high school basketball player, so let’s simply imagine two companies: one with good people practices, and one with slightly better people practices.
Company 1 hires a salesperson whose annual salary is $60,000 and whose sales quota is $600,000 a year. Company 2 does the same. We can make a few conservative assumptions about how the slightly better People practices at Company 2 can have a profound impact.
- At Company 1, it takes the new employee 6 months to ramp up and consistently hit their sales quota.
- At Company 2, which has invested more resources into onboarding, the employee can ramp up 30% faster and consistently meet their sales quota after just 4 months.
The next scenario is based on the assumption that a better hire can outperform a peer by 20%.
- At Company 1, the hire consistently meets their quota of $50,000 a month.
- At Company 2, the slightly better hire consistently exceeds their quota and brings in $60,000 a month.
Next, based on the assumption that better management practices can improve an employee’s performance by 20%, let's look at the following scenario:
- At Company 1, the hire continues to meet their quota of $50,000 a month.
- At Company 2, which has invested in management, the hire achieves 10% higher sales in year 1 ($60,000 a month) and 15% better sales in year 2 ($72,000 a month).
And finally, let's outline the following scenario, where culture and management practices impact an employee’s tenure:
- In Company 1, the hire starts to look for a new job after 20 months and leaves at the 2-year mark.
- In Company 2, the hire stays at the company and continues to thrive for another year.
To recap – in Company 2, with its slightly better People practices, the employee and company benefit from:
- 30% faster ramp time
- 20% higher sales in year 1
- 10% higher output in year 1, 15% higher output in year 2
- Doubled tenure
And what this translates to is the eye-popping dollar amount of $1.3 million—for just one person! Even if we’re wrong in our assumptions and one was 10 or 15% different compared to 20%, it wouldn’t really matter. This is clearly a huge return over time that impacts the bottom of line for every business. If these differences add up to $1.3 million per salesperson, imagine what you could do with a 20-person sales team when you have a structured, repeatable hiring process, People practices based on data-backed evidence and a culture of hiring throughout the entire organization.
Understanding the concept of ELTV has the potential to be a powerful tool to help you make the case for resources and budget. You can demonstrate how modest changes to your HR and People practices as well as your Hiring processes can impact individual, team and company performance, the same way Marketing teams show the ROI of particular campaigns and functions. Being able to do this type of modeling and forecasting also helps demonstrate that the HR and Talent functions have the ability to participate in strategic conversations – and they should be as they are a business-critical part of any organization.
Ready to put ELTV into use in your own work? Get the free eBook "How to understand the ROI of investing in people" for the ELTV framework and even more details and practical applications.