ROPI – Return on People Investment

Posted by: in Corporate and Strategy on December 5, 2012

The core driver of any business is investing with the expectation of positive (financial) returns. Companies build manufacturing plants and buy machinery to establish the means to create products and then get them to market.

When customers in their target markets buy their products, the resulting revenue stream is what makes the up-front investments start paying off in the form of profit – also known as return on investment (ROI).

When business people talk about invested capital, this is what they generally mean: physical plants, equipment and transportation, the kinds of investments that are amortized and depreciated over time.

Building a new production plant may cost, say, $150 million and the senior managers justify the expenditure based on the projected ROI – how long it will take to “pay” for the investment before they can start realizing a profit.

However, we rarely hear business people talk the same way about the investment they make in their people, whether they are getting a good return on that investment.  Employees are often an overlooked part of the big picture.

Huge Expenditure

That seems ironic, especially in light of the fact that the cost of personnel is often the biggest line item on most companies’ balance sheets. In addition to salaries, health care costs, and other benefits, investing in people also includes:

  • The time and money it takes to find the right person for a given position, including paying the recruiter and investing the man-hours to conduct interviews and winnow down the candidates to the final few.
  • The initial and ongoing training necessary to assure that people acquire and sustain the skills needed to be the best they can in their jobs, and to excel and rise in the organization, further adding value.
  • Various other costs incurred in retaining people, such as salary increases, incentives and bonuses.

This all may seem obvious. I only reiterate here it because of what we have been experiencing for the past four years or so. Millions of American jobs have been lost – evaporated. And the job shrinkage doesn’t appear to be over in light of recent announcements we’ve been reading about recently: Citigroup’s head-count reduction of 11,000; Dow’s announced cut of as many as 2,400 jobs in Europe; Canadian Pacific’s decision to eliminate 4,500 jobs; and Siemens’ pledge to cut 4,700 positions in its lighting division.

Naturally, a good leader resorts to lay-offs only as a last resort, doing so only after hiring and wage freezes, other expense cuts, and/or price increases have failed to stop the red ink. They know that every single laid-off employee is a lost opportunity, a lost investment. Good leaders feel an ache in the pit of their stomachs at the prospect of having to cut the work force by even one person.

While they are conscious of the personal side of each lay-off – the family that’s impacted, and the blow to the employee’s ego and sense of self-confidence – the business leader side of their personality aches at the loss of investment capital.

The Deeper Impact

However, the bigger challenge and what keeps these leaders awake at night is what each lay-off does to the company and its future prospects. Yes, shedding jobs reduces expenses to better ensure the company’s ability to persevere in the trying times – which is the point, after all.

But the care, feeding, and cultivation of effective employees are works in progress. When it all meshes and the company is thriving, there are few things that make a leader prouder than seeing the employees operating at their best, as a team, contributing collectively toward the company’s mission.

When lay-offs are unavoidable, however, that finely tuned machine loses its edge. Remaining employees lose their focus on the mission, instead concerned for their own future with the company, while wondering when the other shoe will drop.

That said, even in the toughest times, businesses need to continue to cultivate their people, to be sure they understand how much they mean to the future success of the business and how important it is for them to stay focused on the mission.

Of course, the key is communications – through both good times and bad. Keep employees well informed and actively engaged in the external challenges the company is facing: competitive threats, economic turmoil, government regulation and taxation, etc.

Share with them, too, the company’s opportunities and always invite their perspective and ideas. Open and honest communications build trust and understanding, which will be what leadership needs most when the situation gets tough, when the best efforts of everyone and their full engagement to the company’s mission is central to seeing it through hard times.

By: Jack LeMenager

Jack is a director in the Corporate & Strategy practice of WCG, a unit of W2O Group.

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