Calculating Engagement ROI

Engaged people outperform unengaged people, all things being equal.  And some engaged people can produce greater returns than others.

For this reason, savvy business leaders target their engagement efforts where they’ll get the biggest returns and the most leverage. You can do this, too.

What do they do that you can do?

For those who missed an earlier Leadership Report, let me reiterate two fundamental, but not universally understood, notions about engagement.

First, employee engagement is a condition that occurs when your employees share the values and purpose of the organization and are willing to “do whatever it takes” to help the organization succeed.  The condition must be properly directed at hitting or exceeding operating or financial performance goals that are important to your business. When you do this well, you’ll hit those goals more efficiently. It’s the equivalent of driving your car to a destination on eight cylinders instead of five.

Second, engaging people requires hard work and resources, as do so many things that are worth doing.  There’s a cost associated with increasing employee engagement.  But the return can be huge—or it can be small. In fact, somewhere along the line, there can be a point of diminishing returns where the cost to engage people is greater than the gains increased engagement can create.  (Do you have to be at a six sigma level (99.9997 defect free) in everything? Most would say no.

Initial efforts to engage people often—but not always– should be focused where the potential gains are the greatest.  Below is a Pareto chart (named after Vilfredo Pareto, which is why it’s always capitalized), representing five cities where a company maintains distribution centers. The height of the bars reflects the number of customer service complaints each facility received in a given unit of time.  The percentage numbers above each bar reflect the engagement scores (on a scale of 1-100) for that facility.

Pareto chart poor service delivery1 - Calculating Engagement ROIThe data tell us that the biggest opportunity for improvement is at the Atlanta facility where the complaints are the highest and the engagement scores are the lowest.  This shows us where the potential opportunity is to improve engagement, but doesn’t necessarily tell us the size of the potential return on the investment (ROI).

To calculate the ROI, we need to know answers to some questions.

  1. What’s the size of the problem caused by the complaints? This might be reflected in warranty costs, the cost of rework, processing customer returns or loss of contracts or future sales.
  2. What are the root causes of the complaints and what actions and investments are required to make the root causes go away and lift to occur?
  3. How much of #1 and #2 above do people have control over? That is, to what extent will an investment in engaging people modify discretionary effort, eliminate root causes and create the gain?
  4. Knowing the size of the investment and the size of the gain will reveal the ROI.

It’s important to appreciate what employees can and can’t control through the use of their discretionary effort. To use an exaggerated example, insurance company employees have no control over where a hurricane hits. But, they do have control over how accurately or quickly they process the claims.

Similarly, the employees in the Atlanta facility in the example above have a lot of control over what goes on inside the four walls of the distribution center. But control over inventory levels may be dictated by a corporate supply chain operation, something employees in the distribution center may have no control over. Yet the inventory levels may be too low, causing late shipments that are spawn the customer complaints. So, it’s important to focus engagement efforts where people have control over the results that need to be improved.

Typically, the ROI is higher where the opportunity is the greatest. As a leader increases engagement over time, performance goes up and the so-called low hanging fruit gets picked. Reducing cycle time, for instance, becomes increasingly challenging as the degree of difficulty goes up. Eventually the investment/return lines can cross and leaders need to decide whether to keep improving performance at a cost that may well be higher than the cost to create those gains. That’s, as they say, a strategic decision.

However, as I’ve said many times, aiming for a 100 percent engaged workforce is a fool’s errand in almost all cases.

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