Return on investment is perhaps the most foundational key performance indicator (KPI) in use today. The deceptively simple formula, (Earnings - Cost) ÷ Cost, defines a flexible indicator that leaders regularly use to assess multiple aspects of their business such as overall profitability, marketing effectiveness, pricing suitability, and profit on inventory. It is also frequently used with scenario analysis to choose between multiple options and understand whether it makes financial sense to make investments in new properties, plants, or equipment.
ROI analysis can be especially applicable when the firm’s resources are not involved in the process or means of production being evaluated. When firms hire out a job, outsource a project, or contract with a secondary manufacturer to produce a product, costs are generally well quantified and understood. This makes for straight forward calculations with “earnings” for the calculation stemming from expenses eliminated, incremental production and sales volumes achieved, or price premiums they are able to charge as a result of the investment. But what happens when the waters are a little muddier?
While incredibly useful, leaders can become overly enamored with the simplicity and flexibility of ROI and begin applying it in ways that are ill suited for informed decision making. When you love your hammer, everything looks like a nail. There is perhaps no greater example of this than when leaders attempt to quantify the value of human development by applying ROI to employee training and executive coaching. “Specifically, the problem is… identification of the relevant variables and the allocation of dollar values [to the] costs and benefits” Andrews and Laing point out in their 2018 article in the British e-Journal of Social & Behavioural Research in Business. “[T]his in turn causes management to doubt the validity of the claimed returns for the training dollars” (Andrews and Laing, 2018, p. 2). Assigning a valuation to development work is further complicated by the selection of time used to calculate it.
When acquiring a new skill or technique, human beings generally experience a temporary decrease in task fluency and productivity before the new skill is mastered and gains begin to accrue. To measure ROI on such change efforts, a subjective determination is required to decide how long to wait before evaluating results to account for the temporary dip and how long to continue tracking improvements. Almost any initiative or investment that results in a measurable improvement will show a positive ROI if given enough time for the improvements to accrue, and evaluations of ROI for coaching and training seem particularly sensitive in this regard.
For example, in their case study Andrews and Laing found that it took more than 3 years for increased revenues to offset the costs of training that the firm incurred in the first year of the study. However, a negative ROI in the first three years ultimately led to a relatively modest return of 6% when calculated at year 4 and a healthy 30% ROI when the analysis included results from the 5th and final year of the study! Unlike expenditures on capital assets where productivity increases and useful service life can be estimated with relative accuracy, funds spent to acquire skills, knowledge and abilities (SKAs) that develop human potential or change behavior offer no such certainty. By definition, human capital investments are more volatile and uncertain than other types of business spending.
Subjective and uncertain evaluations lead many businesses to look for ways to reduce the hard costs of development programs wherever possible. To that end, development programs are frequently led by internal trainers, managers, human resource personnel, or peer mentors. While the use of such internal providers does generally reduce an employer’s cash expense relative to hiring outside experts, it further obscures the cost of the initiative for the purpose of measuring ROI. Redirecting employee efforts from their normal duties effectively replaces cash spending on external service providers with a combination of internal opportunity cost from redirecting internal resources away from their primary function and potential quality losses if the necessary expertise does not already exist within the organization. This combination of hard and soft costs makes total expense much more difficult to quantify. As a result, leaders who look outside their organization for development expertise may benefit from fresh perspectives, new ideas, and a simpler denominator for their ROI calculations.
When businesses bring in outside development resources and expertise, it is frequently done by the firm’s top executives and senior leaders to meet their own professional development needs. The Conference Board’s 2018 Global Executive Coaching Survey, showed that only 13.9% of internal executive coaches reported working directly with their company’s CEO and direct reports on development-focused activities. Meanwhile 55.7% reported working with executives 2 to 3 levels below and 63.3% reported this type of work with employees 4 to 5 levels below the CEO and their team. In contrast, 67.3% of external coaches reported that they provide development-focused coaching directly to the CEOs and top level of executives of the companies that hire them. In addition, 80.9% of external coaches reported targeting development-focused work with executives 2 to 3 levels below the CEO as well.
Senior leader’s preference for outside counsel likely stems from several factors. The first and most likely is organizational power dynamics. Executive coaching requires a type of vulnerability, transparency, and exploration of uncertainty that senior leaders find awkward and difficult to do with someone in their own organization. Leaders want to paint a clear vision and communicate messages effectively and consistently to their team. Executive coaching with someone who ultimately reports to you can interfere with that goal and exacerbate company politics by putting privileged confidential information into the hands of an internal coach who resides within the organization. Even when the leader and coach are immune to such pressures, assumptions from others can create internal people issues and distractions that senior leaders would rather not have to deal with.
Another motivation stems from the structure of executive coaching itself. Formal executive coaching and development work generally relies on both a knowledgeable coach or facilitator and a client who is eager to absorb, master, and apply the insights, techniques, and information they are exposed to. If a client is not motivated to engage in the work or to learn and master the material, then even the best coach will not be able to improve their performance. No player is ever made better by sitting back and watching their coach run through drills for them. Senior leaders often have no reliable way of assessing or predicting the extent to which lower-level employees intend to engage, internalize, and apply the support of external coaches and consultants. It is therefore understandable that some may find it difficult to pay top dollar for external resources when the value proposition is only partly determined by the quality of the instructor. When it comes to their own development, however, senior leaders are certain about the extent of their own motivation to leverage the best resources they have available to them.
Of course, executive coaching and long-term development work is much more than a simple training intervention or content review. It is a sustained process designed to hold leaders accountable to their own goals and holistically improves their self-awareness, social and emotional intelligence, and ability to perform at every level. It is also used by firms to signal recognition of both the current value and future potential of key employees. It is almost impossible to assign a hard dollar amount to these relationship outcomes and yet they are nonetheless important sources of value for firms that directly influence everything from employee retention, engagement, satisfaction, absenteeism, burnout, and more. Indeed, many of the outcomes for executive coaching non-financial. In a meta-analysis of empirical studies of external executive coaching, De Meuse, Dai, and Lee found that 70.7% to 93.8% of executive coaching recipients saw sustained behavior change as a result of their coaching experience. In addition, they found purely financial ROI to be a myopic yardstick for executive coaching evaluation as the primary outcomes cited by participants were improvements in leadership behaviors (82%), work-life balance (67%), building teams (41%), and developing staff (36%). “96% of organizations reported that” coaching improved “individual performance” but metrics tied directly to financial measures such as executive sales performance were shown to capture only a small part of the impact and only as lagging indicators (De Meuse, Dai, and Lee, 2009, p. 122).
Statements about employees being a firm’s greatest asset are common to the point of being cliché. Leaders often follow up on such statements with talk about investing in their people. Unfortunately, the language of investment and returns encourages firms to think about the impact of development work and executive coaching in purely financial terms. We can and should do better. When it comes to this work, consider substituting another more holistic word in your consideration of ROI. Induing is a wonderful British word that describes the act of equipping, providing, or endowing a person with specific and useful qualities, talents, or skills. Induing describes the essence of executive coaching and employee development work. It is messy, joyous, frustrating, rewarding, valuable, and contributes to much more than just the bottom line.
As a leader, consider the example you want to set for your team. Do you want your team to strive to improve, be open to change, and concerned about their own professional development? Consider role modeling the change you want to see by engaging an executive coach of your own. What will your return on induing be? That depends on what you put into it. If you are ready to do the work, we’re ready to help.
Let’s get to work!
About the Author
David Macauley
A passionate business educator and innovator, David Macauley helps businesses and organizations succeed by developing, equipping, and empowering their people.
As a Convene's first Chair in Austin Texas, David engages business owners and CEOs to inspire business performance with an eternal perspective. David's Convene group members work in fellowship to profitably grow their businesses, build their leadership skills, and develop their people through peer-to-peer collaboration and one-to-one coaching. Click here to learn more and connect with David!
Abel and Ray (2018). Global Executive Coaching Survey 2018. The Conference Board.
Coutu and Kauffman (2009). What Can Coaches Do for You? Harvard Business Review
Pratt (2017). How to Measure Your Return on Investments (ROI). Business.org
This article is used with permission and first appeared on the Wendworks company blog.