How Much Money Will We Save by Implementing Performance Management?

How Much Money Will We Save by Implementing Performance Management?
	We just created and implemented job descriptions, policies and procedures, and performance evaluations. Have you seen any research that connects a monetary number for return on investment within companies that put these systems into place? I have seen research that says it improves morale, increases profitability and decreases turnover. However, I've never seen any research that indicates whether implementing these systems saves you X amount in dollars or increases profitability by X percent.—Skeptical, director of HR, consulting/legal, Abbeville, Louisiana
	Despite some claims to the contrary, return-on-investment research that directly links performance management implementations to financial return is rare. This is because it is very difficult to document accurately. Any ROI statistics that you uncover that claim to show this linkage should be viewed with skepticism and utilized only as very rough estimates of the potential return. ROI is generally based on two measurement components: quantitative and qualitative. Quantitative ROI is normally expressed as a quantity that is clearly measurable in dollars, time saved, headcount, improved margins, or other metrics that would stand up to scrutiny by your CFO. Qualitative ROI, on the other hand, relates more to benefits based on less measurable factors such as customer perception, employee engagement or recruiting success. If you are still intent on measuring the ROI of your performance management system, start by beginning with the end in mind. Whatever the positive impacts of a performance management system might be (and they can be significant), proving your case begins with establishing a set of ROI metrics that are meaningful to senior management. These metrics should be directly linked to the performance goals of the organization and based on evidence gathered prior to implementing the system, and again at points post-implementation. For example, linking improved achievement of a production employee's goals to stepped-up output of the department, reduced time to fulfill orders, higher volume of orders, and finally to improved company revenue and profit could provide a quantitative measurement to demonstrate ROI. Now to the difficult part mentioned previously. How do you convince the CFO that the ROI was truly generated by the performance management system and not other factors? The real difficulty, and hence the scarcity of research data, stems from the fact that organizations are not static but are extremely dynamic. For instance, if a new manager took over the production department in the example mentioned previously, how could you prove that the improved output of the employee resulted from the performance management system and not the manager's leadership? You probably can't. So, this is where common sense takes over. Can you reasonably expect that people who understand what their goals are, how they link to the big picture, how their performance will be measured, and the connection between performance and rewards will produce more? Obviously, the answer is "Of course." Can you do this with a paper-based performance management system? Maybe, but it's not likely to be effective for an organization of any size or complexity. That would likely be as inefficient as trying to run your company with a paper-based financial system.     [SOURCE: Dave Laurence, managing director, PeopleMatter, a division of Capital H Group Chicago, October 13, 2006.]