How to measure return on investment (ROI) for culture change
Estimating return on investment (ROI) on culture change is a challenging task, according to Jerome Parisse-Brassens, who explains that the key to a healthy return calculation is to focus only on the behaviours you are trying to shift
“I want to see the business case.” One of the most common requests that my HR director clients hear from their CEO when they begin conversations about doing culture work is about cost structure and what the ROI is. This is not at all dissimilar to the response you would be getting with other types of initiatives. Is it possible to calculate a return on investment on culture development and how do you do it?
First, establish the rationale for the culture work
It is essential to build a credible story about the importance of culture for the business outcomes you are trying to achieve. Culture is a key enabler of your strategy and this is what you need to demonstrate as HR leaders. If needed, spend time educating the business about culture and getting them on board.
- Establish a clear link between the strategic imperatives of the organisation and how people need to behave to deliver on those. Describe how the behaviours you want to shift in the organisation are going to impact the outcomes. For example, by creating more empathy across the business, employees will listen more to your clients’ needs, increasing both customer satisfaction and loyalty, therefore reducing the impact and cost of customer churn.
- List all tangible and intangible benefits: increase in revenue or profit, lower recruitment costs, more projects delivered on time and on budget, improved reputation, more effective leadership, or higher employee engagement to name just a few. Many benefits can often be directly attributed to HR processes and systems and employee effectiveness.
- Clearly identify the risks of not proceeding with the culture initiative. Sometimes, the cultural risks will send a stronger message than the benefits and most chief executives are sensitive to this message. The media is full of stories of unmanaged cultures gone rogue. Think along the lines of Wells Fargo, Volkswagen or Uber. At the moment with the Royal Commission, Australian banks are in the spotlight and not for the right reasons. Your business will not want to make the headlines for a lack of investment and focus on culture, and as HR, you do not want to run the risk of being targeted for not having done the right thing either.
Next, estimate the ROI
If your rationale is strong enough, you may not need to go any further. If, however, you operate in an environment where you need to demonstrate an ROI, you will likely need to go one step further. This is where many HR practitioners recoil in horror. In my experience, it is not as difficult as it sounds.
The investment is the easy bit. It has the following main cost components:
- Culture assessment – surveys and focus groups.
- Leadership and employee development.
- Any work on systems and processes to realign them with the target culture.
- External provider costs.
Do not include business as usual activities into your ROI calculations. This would only drive your cost up and these activities will not be linked to the culture shift you are trying to create.
Estimating the return is the most challenging task and also the most controversial, and HR teams will need to access business data to successfully do this. The key to a healthy ROI calculation is to focus only on the behaviours you are trying to shift. Start from the business outcomes you are trying to achieve, isolate the behaviour shift needed, then calculate the financial impact of this behaviour shift by choosing a simple metric or two that are not influenced by too many other factors.
Here is an example:
Strategic imperative/business outcomeBe the brand of choice for our customers
What internal behaviours are we trying to shift?Empathy / Listening / Seeking to understand
What evaluation question are we trying to answer?Are our employees putting themselves in the shoes of our customers?
Examples of measures of success/metrics
- Customer satisfaction (Increase in percentage of customers who declare themselves 100 per cent satisfied after having their complaint processed)
- Customer churn rate
- Profit per customer visit
- Decrease in customer replacement costs
- Increase in profit per customer visit
The full ROI will be calculated across a few years, typically five. If the appropriate behaviours have been identified in alignment with the strategy, the calculation of the return is easier. I strongly suggest focussing on a very small number of behaviours, one or two, and choosing a small number of significant metrics. If the business imperative is compelling, the financial return will be significant.
It will always be difficult to isolate culture from other elements because it underpins everything done in the organisation. Culture is “the way we do things around here” and should be treated as any other enabler of the business, such as IT or finance. Sometimes the return will be immediately visible, sometimes not. But never shy away from calculating the ROI on culture when possible: just by doing this, you will be changing mindsets, therefore initiating the change that you want to see in the business.