How to understand the ROI of investing in People

Editor's Notes

1. I used to be a derivatives trader on the floor of the stock exchange.. Crazy. Never had a conversation. Just yelled. Tremendous impact on how I think about my current role. Investment is all about calculating risk and ROI (RETURN ON INVESTMENT) Wouldn’t make a move without knowing potential upside/downside Calculating ROI and understanding where to get the best return on my investment was KEY to that job It’s so important, in fact, that a Nobel Prize was awarded for the Black-Scholes options pricing model, a mathematical equation that prices derivatives and helps traders calculate ROI
2. The reason it hasn’t happened yet is pretty straightforward. It’s really hard to calculate this. For a few clear reasons. First, it’s very difficult to assign a concrete value to a human being and their impact on your company Example: What do you do for an engineer? Is it lines of code? Most CTOs would kill me if I said that. Features shipped? Too many variables (choosing what to measure) What about the other contributions? How someone improves the culture? What they do outside of their day job? If they help the rest of the team? Too subjective (how to measure it) Basically, any output that is qualitative. All companies have that - like for your legal team – the quality of their contracts? So no one has really cracked the code yet; no one has really done this reliably and consistently before
3. In response to that fuzzy math, most companies do one of two things (or both things) Anything (they copy what other companies do, essentially copy/pasting vision/strategy from other companies onto their own) Without understanding what the ROI is for them there Perks war – companies saw Google had a great culture, and great perks, and so they started investing in perks (everyone just started doing what everyone else was doing) Nothing! (they under-invest in their people) So lots of companies have understaff their People functions, wait a long time before building it out. Because coming back to this concept of known cost, unknown return -> spending is expensive if you don’t know what you’re getting from it. Neither solution results in a good ROI
4. How do other parts of the business do it? They say – here’s that status quo. And here’s a new return I can produce. And guess what happens? The executive team starts to salivate, and you bet they get the investment they’re asking for.
5. Let’s try another one What if the CTO said… You know that 1-year product roadmap we’ve all committed to? Guess what?
6. How do we do that? What’s our version? It’s about getting past this fuzzy math – getting past the known cost, unknown return. What we need to do is understand the ROI of our efforts.
7. How do we do that? What’s our version? It’s about getting past this fuzzy math – getting past the known cost, unknown return. What we need to do is understand the ROI of our efforts.
8. In response to that fuzzy math, most companies do one of two things (or both things) Anything (they copy what other companies do, essentially copy/pasting vision/strategy from other companies onto their own) Without understanding what the ROI is for them there Perks war – companies saw Google had a great culture, and great perks, and so they started investing in perks (everyone just started doing what everyone else was doing) Nothing! (they under-invest in their people) So lots of companies have understaff their People functions, wait a long time before building it out. Because coming back to this concept of known cost, unknown return -> spending is expensive if you don’t know what you’re getting from it. Neither solution results in a good ROI
9. First let’s simplify the equation a little We can break the employee lifecycle into four distinct gates (Less emphasis on the four gates, more on the variables) Start date Fully contributing member Decision to leave Last day Any improvement we make to this curve, at any of these points, will change the ROI Now, let’s understand the variables in this equation. [talk through this]
10. First let’s simplify the equation a little We can break the employee lifecycle into four distinct gates (Less emphasis on the four gates, more on the variables) Start date Fully contributing member Decision to leave Last day Any improvement we make to this curve, at any of these points, will change the ROI Now, let’s understand the variables in this equation. [talk through this]
11. First let’s simplify the equation a little We can break the employee lifecycle into four distinct gates (Less emphasis on the four gates, more on the variables) Start date Fully contributing member Decision to leave Last day Any improvement we make to this curve, at any of these points, will change the ROI Now, let’s understand the variables in this equation. [talk through this]
12. First let’s simplify the equation a little We can break the employee lifecycle into four distinct gates (Less emphasis on the four gates, more on the variables) Start date Fully contributing member Decision to leave Last day Any improvement we make to this curve, at any of these points, will change the ROI Now, let’s understand the variables in this equation. [talk through this]
13. First let’s simplify the equation a little We can break the employee lifecycle into four distinct gates (Less emphasis on the four gates, more on the variables) Start date Fully contributing member Decision to leave Last day Any improvement we make to this curve, at any of these points, will change the ROI Now, let’s understand the variables in this equation. [talk through this]
14. In response to that fuzzy math, most companies do one of two things (or both things) Anything (they copy what other companies do, essentially copy/pasting vision/strategy from other companies onto their own) Without understanding what the ROI is for them there Perks war – companies saw Google had a great culture, and great perks, and so they started investing in perks (everyone just started doing what everyone else was doing) Nothing! (they under-invest in their people) So lots of companies have understaff their People functions, wait a long time before building it out. Because coming back to this concept of known cost, unknown return -> spending is expensive if you don’t know what you’re getting from it. Neither solution results in a good ROI
15. Any improvement we make to this curve, at any of these points, will change the ROI Now, let’s understand the variables in this equation. [talk through this] There are a few things: How quickly they ramp to fully contributing member
16. How high someone can go naturally
17. How much higher they can go over time with the right inputs
18. How long they stay If they ramp faster, there’s less time they’re ‘not productive’, and more overall output in a similar period of time
19. The whole area is your new ELTV The green is your incremental. That’s the ROI that we’re trying to capture. That’s the return.
20. And you can loosely map these to distinct people practices.
21. In response to that fuzzy math, most companies do one of two things (or both things) Anything (they copy what other companies do, essentially copy/pasting vision/strategy from other companies onto their own) Without understanding what the ROI is for them there Perks war – companies saw Google had a great culture, and great perks, and so they started investing in perks (everyone just started doing what everyone else was doing) Nothing! (they under-invest in their people) So lots of companies have understaff their People functions, wait a long time before building it out. Because coming back to this concept of known cost, unknown return -> spending is expensive if you don’t know what you’re getting from it. Neither solution results in a good ROI
22. Now for the math part. Let’s put numbers to all of this. Sales person: $60k/year salary -> $5k /mo Quota: $600k yearly quota -> $50k /mo
23. Assumptions: Case 2 vs Case 1 -30% faster ramp -20% higher sales in year 1 -10% increase in output after year 1; 15% after year 2 -2x tenure
24. Using incredibly conservative estimates, we came to a $1million dollar difference over 3 years with JUST ONE HEADCOUNT 2.2x difference in our two scenarios Let’s play out a few more…
25. Using incredibly conservative estimates, we came to a $1million dollar difference over 3 years with JUST ONE HEADCOUNT 2.2x difference in our two scenarios Let’s play out a few more…
26. In response to that fuzzy math, most companies do one of two things (or both things) Anything (they copy what other companies do, essentially copy/pasting vision/strategy from other companies onto their own) Without understanding what the ROI is for them there Perks war – companies saw Google had a great culture, and great perks, and so they started investing in perks (everyone just started doing what everyone else was doing) Nothing! (they under-invest in their people) So lots of companies have understaff their People functions, wait a long time before building it out. Because coming back to this concept of known cost, unknown return -> spending is expensive if you don’t know what you’re getting from it. Neither solution results in a good ROI