When ROI means "Retun on Inaction"

Stephen Burnett, Professor of Strategic Management, Kellogg School of Management, Northwestern University

One of the myths of the Great Recession that will reveal itself as the economy recovers is that a pain-free way to save money is to cut costs on things that might seem like discretionary or non-essential expenses, but in fact are not. An excellent example is money spent to improve the quality of an organization’s management.

While a firm hopes for attractive returns on its investments in management development, it is also important to factor in the potentially negative consequences of the decision not to invest in the quality of management. Investment decisions across the organization must be viewed symmetrically – there are returns on action and returns on inaction to be considered. A zero investment in management development is likely to yield an economic return far less than zero.

Development opportunities such as attending an executive education program can send powerful messages to employees that an organization appreciates their contributions and that there is the potential for career advancement. This in turn can provide the organization with a return on investment by providing employees with skills that can be immediately put to work on the job. But the absence of an investment in human capital and employee development opportunities could signal the reverse to an organization’s workforce. The March 2011 MetLife Annual Survey of Employee Benefit Trends speaks to this issue with some troubling statistics. Over one-third of the employees surveyed reported that they hoped to change employers in the next 12 months. At the same time, employee loyalty reached a three-year low, falling from 59 percent reporting a strong sense of loyalty in 2008 to 47 percent in 2010. The researchers attributed these findings to employees feeling overworked and underappreciated while being asked to work harder with less job security and often less pay during the past few years. The survey did not specifically address spending on development programs, but it has long been known that during difficult economic times, investments in people are among the first to be cut and the last to be reinstated.

The survey also reported that employers were blissfully unaware of the deterioration in employee loyalty, with employers reporting that loyalty had remained constant over the past three years. As the economy continues to improve, these employers will most certainly experience a sudden, unexpected, and significant increase in turnover as a third of their employees head for the door.

When considering investment in management development, do not forget the symmetry requirement. Along with asking about the return on the investment, ask also about the potential economic downside of not investing. Well-known and painful downsides include increased turnover, the lack of adequate internal candidates for new and existing positions, and lower employee morale and organizational commitment. Any one of these may trigger material negative returns. For example, it is commonly estimated that the direct hiring costs of replacing an employee are 50 percent of the compensation of the employee being replaced, with indirect costs far exceeding the direct costs. Indirect turnover costs include the impact on morale as well as the loss of organizational memory and intellectual and relationship capital.

The providers of management development services, including institutions like the Kellogg School, must continue to push managers to prepare carefully for developmental experiences, to apply what they learn from them, and to do their best to demonstrate to their sponsors the positive ROI gained from their experience. It is also important to remember two fundamental lessons of decision making: just because an outcome is difficult to measure does not mean it does not exist; and the returns to doing nothing are rarely zero.
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