Any time I have presented on the subject of measuring Diversity and Inclusion’s impact on the bottom-line, issues of accuracy and precision invariably arise. It has been argued that to measure Diversity activities convincingly or with any high degree of confidence is difficult. Diversity measures based on “report cards” don’t allow for competing hypotheses in assertions such as “managing Diversity leads to increased profitability.” (Some would argue that other efforts could just as easily have caused the profitability to increase). Another contention is that there is lack of control over thousands of factors that influence a large organization’s profitability. That is, lack of control over factors like inflation, labor market conditions, and cost of money can make it virtually impossible to effectively measure Diversity with accuracy.
In general, this argument is correct, though similar conditions prevail throughout the organization. Everyone knows certain factors are not controllable. The marketing department does not have control over the product or the customer; the finance department does not control the cost of money or inflation. Yet both departments are able to evaluate much of their work quantitatively. If we are willing, we might admit that there are more issues out of control than in the control of any organization. The task of management is to reduce the uncontrollable variables and to instill as much order as possible.
C-Suite management does not require accuracy at the .05 level of statistical significance for general reports of progress in Diversity efforts. In research, precision is critical, obviously. In pharmaceuticals or medicine, extreme care must be taken with procedures and measurement. Results are often required to be statistically valid beyond the .001 level. That kind of measurement with a capital “M” is not required in the operational measurement of Diversity just to get a sense of the progress being made in your Diversity efforts. We are not operating in a laboratory, but in the field, with all the problems inherent in field research and experimentation. Accuracy is necessary, but precision is naturally limited by internal and external conditions. Though we can’t control the variables in the environment completely, we can still come up with usable numbers and “compelling evidence” of Diversity’s contribution to the bottom line. However, there are some exceptions. For example, Diversity measurement leading to Diversity ROI impact does require the use of scientific processes and analytics to demonstrate correlation and causality. A seven-step methodology like the Hubbard Diversity ROI Methodology can be used to highlight these relationships and reveal what drove the results using evidence-based outcomes.
Seven Levels of Data Capture
The Hubbard Diversity ROI methodology captures seven types of data, with the actual Diversity ROI calculation being only one of them. The seven types of data include:
- Level 0: Needs Analysis
- Level 1: Reaction, Satisfaction, and Planned Action
- Level 2: Learning
- Level 3: Application and Behavioral Transfer
- Level 4: Business Impact and Consequences
- Level 5: ROI
- Level 6: Intangible Benefits. The Intangible Benefits include measures that cannot be credibly converted to monetary values.
Here is a sample of a few of the most-debated questions:
- Isn’t Diversity ROI calculations based on nothing but estimates that can be too subjective?
No. Estimates are only used when isolating the effects of a Diversity program or Diversity intervention’s business impact, when converting data to monetary values, and when tabulating program costs. Estimates are used only when other methods are not available or become too time-consuming or expensive to use. Also, estimates are adjusted using “Confidence Level” factors to improve credibility.
- How does ROI in Diversity and Inclusion differ from the ROI used by the finance and accounting staff?
The classic definition of ROI is earnings divided by the investment—no matter what the application. In the context of calculating the ROI of Diversity and Inclusion, the earnings become the net benefits from the program/initiative (monetary benefits minus the costs) and the investment is the actual program cost. The difficulty lies in developing the actual monetary benefits in a credible way.
- Do I have to be a whiz at finance and statistics to understand the ROI methodology?
No. Most of the basic principles of finance and accounting do not relate to what is needed to develop the ROI in Diversity and Inclusion. However, it is important to understand issues such as revenue, profit, and cost. Only basic statistical processes are required to develop most Diversity ROI impact studies.
- Doesn’t ROI cost too much?
No. When external resources are used, the cost for a Diversity ROI study may be as little as 5 percent of the entire project. A large banking group and a large telecommunications company using similar approaches report that the average costs for their ROI studies range from $3,000 to $5,000 per study. The total cost of all evaluation, including selected ROI studies, is usually in the range of 3 to 5 percent of the total project budget.
- Does the ROI process reveal program weaknesses? Strengths? Recommendations?
Yes. At low levels, data always capture deficiencies or weaknesses in a process. At the application level, the process requires collecting data about the barriers (which inhibit success) and enablers (which help success). Each study contains a section for recommendations for improvement. You must know what your weaknesses are in order to improve them. In addition, you want to avoid losing strengths that are working for you and providing value.
- Is it appropriate to calculate ROI for every program?
No. Only a few select programs should be subjected to evaluation at the ROI level. Ideal targets include programs that are very expensive, strategic, operationally focused, highly visible, involve large target audiences, and have management’s attention in terms of their accountability.
- What types of applications are typical for ROI analysis?
The applications vary, but usually they include a range of programs such as Leadership Competencies for a Diverse Workforce training program, Unconscious Bias Training, Measuring the ROI of ERG and BRG initiatives, Multicultural Marketing and Sales Initiatives, Innovation and Diverse Work Team Performance interventions, etc.
How Much Statistical Analysis is Enough?
It is not necessary to introduce heavy statistics to persuade management and employees of the need for progress and accountability in Diversity change initiatives and to highlight their impact on profitability. This does not suggest that “control group”, financial and “mental model” processes should be avoided. It suggests only that the optimum array of Diversity measures should include a blend of data and levels of measurement. In many business situations, activity- and process-based (report card) Diversity measures can play a vital role in the organization’s leadership agenda. Evidence-based outcome measures that go beyond mere “Report Card” (activity-only based) are critical to Diversity being seen as a driver of business performance.
Report card measures of Diversity are like snapshots of the past. They can provide a historical reference to accomplishments or serve as milestones along the path to producing outcomes. Examples: the number of diversity-competent employees, cost per trainee-hour, and turnover by performance level by gender by length of service. These measures provide opportunities for personal feedback regarding achievement and measuring accountability for implementing new diverse workforce change or improvement activities and processes. These report card and evidence-based outcome measures are a key part of a value chain for implementing change in any organization.
The Diversity Value Chain
This value chain is comprised of four basic components:
- Diversity Activity/Intervention
Generally speaking, all Diversity processes are begun for the purpose of producing value. Any other purpose would be wasteful. One of your objectives should be to develop more effective ways to measure and evaluate changes made in the organization to improve performance based upon Diversity improvement activities/processes, outcomes, impact, and resulting value.
Some typical value chain examples:
- Increase diverse talent recruitment sources
- Lower agency rates
- Lower hiring costs
- Jobs filled faster
- Less need to use temporary help
- Reduced operating expense
- Faster human resource to organizational need
- Improve diverse work team problem-solving processes
- Reduced Time to Solve
- Increase in reasons given in survey for long service by diverse workforce members due to enhanced team collaboration skills and respect for ideas
- Retention savings as compared to rolling average of previous years
- Install succession planning for diverse workforce
- Fewer emergency diverse workforce hires
- Less recruitment expense
- Lower operating expense
For every use of resources to improve an organization using a Diversity activity/process, there should be an improvement in results. We call the result an “outcome”. The difference between this outcome and the previous outcomes before the Diversity process improvement was implemented is the “impact”. The dollar improvement represented by the impact is the “value added”. An example might include changing the talent acquisition methods used to hire diverse workforce talent (activities/process), which shortens the time to fill jobs (outcome).
Time-to-Fill Formula: TF = RR – OD where:
TF = Time to have an offer accepted
RR = Date the requisition is received (e.g., January 4)
OD = Date the offer is accepted (e.g., February 20)
TF = January 4 – February 20
= 47 days
As jobs are filled faster, there is less need to use temporary or contract workers. The cost avoidance can be calculated and a dollar savings computed. If, through the Diversity department’s effort to change acquisition methods, jobs are filled faster, not only does the organization reduce operating expense, but the cost of the human resource product is lowered and moved to market faster. Lower human resource (human asset) acquisition cost and shorter human resource asset delivery time to the organization can create a competitive advantage, especially in light of less successful competitors (based upon benchmarking analysis comparisons).
Thus, report card and outcome-focused measures of Diversity activities and/or processes are vital in order to gain feedback on staff accountability for generating solutions to address such key business issues as inadequate diverse talent acquisition and the like. Without these activities or processes, we could not produce the accompanying outcomes, impacts and results. Even if these activities or processes produced poor results, the Diversity department can gain by knowing what else doesn’t work and then shift its efforts to more productive outcomes.
Creating an Effective Scorecard
In addition to report card and outcome-based measures, it is critical to have “scorecard measures”, a notion popularized by Harvard professors Robert Kaplan and David Norton in their book entitled: “The Balanced Scorecard” (Kaplan and Norton, 1996). In my book, “The Diversity Scorecard: Evaluating the Impact of Diversity on Organizational Performance, 2004, unlike the “report card”, I presented both lead and lag indicators and other analytics of performance and profitability that could be used to highlight Diversity’s impact on organizational performance. Report card measures only tell of past performance (lag indicator). Scorecard measures, on the other hand, reflect both “lead” indicators (such as Diversity climate survey favorable response ratings that indicate if an employee plans to leave within the next six months) and “lag” indicators of Diversity performance such as “high potential Diverse workforce voluntary turnover” that indicates what has happened (after the employee has left the organization leaving little chance to retain a valued human asset).
For the most part, any object, issue, act, process, or activity that can be described by observable variables is subject to measurement. The phenomenon can be evaluated in terms of cost, time, quantity, or quality. The central issue in applying measurement to the Diversity change process is this: to decide what is worth measuring and to agree on the measure as a fair representation of progress and accountability (given field limitations). Often, management will accept progress over perfection.
So, if you are not measuring Diversity’s ROI impact to demonstrate the effect and contribution you are having on the bottom-line, what’s stopping you?
Dr. Ed Hubbard, author of over 40 business books and recognized as the Pioneer and Founder of the Diversity Measurement and Diversity ROI Analytics fields, is an expert in Organizational Behavior, Organizational Analysis, Applied Performance Improvement and Measurement Strategies, Strategic Planning, Diversity Measurement, and Organizational Change Methodologies. He holds a Practitioner Certification and Master Practitioner Certification in Neurolinguistic Programming (NLP), a Neuro-science discipline. Dr. Hubbard earned Bachelors and Masters Degrees from Ohio State University and earned a Ph.D. with Honors in Business Administration.