People pros know it can be a struggle to make the case for resources for your People team. Whether you’re trying to get more headcount, purchase software to supercharge one of your processes, or put together training to give your team new skills, you may have encountered some resistance from the person who holds the purse strings. Your CEO, CFO, 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 traditionally been tough to demonstrate the concept of ROI. It’s difficult to assign value to people objectively and there are too many variables. But here at Greenhouse we’ve been giving this a lot of thought, which is why former VP of New Products, Lauren Ryan recently presented “How to Understand the ROI of Investing in Your People.” In this webinar, Lauren set out to answer the question: “What is our story as People practitioners for the return we’re going to provide if we get a particular investment?”
Lauren explains that the answer lies in the concept of employee lifetime value (ELTV):
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? I’m giving you the lowdown right here, right now.
Defining Employee Lifetime Value or ELTV
To help illustrate the concept of ELTV, Lauren began with a 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. Lauren noted that 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. In other cases, such as for engineers, it’s not necessarily a specific number, but represents their contribution to the company.
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 People or Talent team? “For any improvement we make to this curve at any of these points, we can change the ROI,” explains Lauren.
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, says Lauren, 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. Lauren spells out 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%, Lauren shared 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, Lauren outlined 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. We’re talking about a huge return over time,” says Lauren. If these differences add up to $1.3 million per salesperson, imagine what you could do with a 20-person sales team.
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 People practices 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 People and Talent functions have the ability to participate in strategic conversations.
If you still feel like you need some additional information, be sure to watch the full webinar, where Lauren digs in to a few more case studies, answers frequently asked questions about ELTV, and shares a proposal template that will help you present ELTV concepts when requesting budget or resources.