Help & advice: Return on investment
The opinions presented in this paper are subjective and are offered as a basis for further discussion and research only.
Overview
Applying financial principles to operating decisions is necessary for companies to grow and compete effectively in today’s environment.
Return on Investment (ROI) is a measure of profitability on the capital required to fund a new project. Technically it is the value of the savings or benefit of a project, divided by the project cost. ROI can be a very effective tool for management to use. Projects can be ranked by ROI to determine which should get sequenced first. The cost of borrowing money can be included in an ROI analysis, helping a company determine if assets should be bought or leased.
Payback period
Some companies look at the time it takes to recoup an investment as a measure of the profitability of the investment. A more advanced application of this principle is for a company to use this information to budget with, and to understand the implications of a project on a company’s cash flow. The measure itself is called the 'payback period', and it is a function of ROI. The payback period is the time it takes to garner savings from a project equal to the total cost of the project. For typical projects with non-recurring up-front costs, payback can be calculated as the reciprocal of ROI.
Incentive statistics
In 2008, a survey by the Society of Incentives & Travel Foundation (SITE) showed that “tangible incentives increase work performance by an average of 22%”. The survey also showed that productivity increases by 42% when incentives are aimed at teams, or at the whole company, as opposed to individuals.
Results collected by the National Association of Sales Professionals and the Institute of Sales Promotions show that staff incentive programmes produce, on average, a 10% ROI.
ROI on incentive schemes
To measure ROI and the payback period a company needs to have a very strong comprehension of their costs. The company needs to have an understanding of the particular cost structure of their department/s and how to create effective ways to measure that cost on a regular basis. Depending on what areas a company is looking to improve, i.e. to reduce absenteeism, improve call rates, increase sales, invite ideas for higher efficiency, increase productivity, referral of sales opportunities, promote teamwork etc, benchmark costs need to be known before any measurement for ROI can be implemented.
Once introduced, ROI can be used to constantly and consistently apply financial principles to operating decisions for improving the profitability of a department in small, incremental steps each day.
Also for department managers, specific tools such as ROI and payback period can be very effective to evaluate the financial benefit of every decision they face.
The closer finance and operations can work together to model these business decisions, the better able both groups are to control the profitability of the company.
Examples of ROI on incentive schemes
Case Study One:
A call centre which has 1,200 agents looked at reducing their staff attrition rate by 5% (60 agents). Their normal attrition rates were 12%, however, last year that figure rose to 15% and they were now looking to get this figure down to 10%.
The costs of high staff turnover are obviously substantial. Not only are there the direct financial costs of replacing staff but also other repercussions such as the potential loss of key skills, knowledge and experience, disruption to operations and the negative effect on workforce morale.
It was decided that one of the initiatives would be to introduce a staff incentive scheme. A straightforward 'points make prizes' mechanic was decided upon with improved call rate, timekeeping and absenteeism being measured. Also extra points were awarded for every six months of service. The scheme ran for 12 months over a calendar year.
Results
Without taking into account all other turnover costs, such as training, and focusing purely on recruitment costs, the fees associated with 60 agents were £187,200 (60 agents, 2,080 hrs each, £10/hr, recruitment fee rate 15%). The actual amount given away on the promotion was £97,650. There was also a set up fee for the promotion of £3,250 and £4,010 was spent on communication material. Overall the scheme cost the company £104,910. This represented a saving of £82,290 purely on recruitment costs. The additional cost savings on training and line managers' time haven’t been taken into account.
Case Study Two:
A call centre looked at developing a plan to handle a projected 10% call volume increase over a three year period. Based on the new volume the call centre manager estimated that seven new agents would be needed to maintain the current service levels.
Rather than hire seven new members for the team, the manager researched a specialised training programme for the existing employees. The effect would be to decrease the average talk time for the centre based upon new customer handling techniques learned during the training programme. This solution, however, required an up-front investment and downtime for the staff while the specialised training took place.
Stats
74 call centre agents
10,000 calls per day
3-minute average handle time
£10/hour salary plus 25% additional benefit expense
One week specialized training in customer handling techniques
£600 programme fee per agent for the training
Current environment
74 agents
180 second (3 min) handle time
10,000 calls per day
Proposed environment
74 agents
165 second (2.75 min) handle time
11,000 calls per day
Results
The training cost to the company had two components; the programme fee was £44,400 (£600 each for 74 agents), and the lost production while the agents were being trained totaled £37,000 (74 agents, 40 hrs each, £10/hr, 25% benefits). All told, the programme would cost the company £81,400. However, the company would be able to handle the additional call volume without having to recruit additional agents. This represented an annual saving to the company of £182,000 (7 agents, 2,080 hrs each, £10/hr, 25% benefits). Despite the £81,400 up-front investment, the company proceeded with the training and realised the £182,000 saving during the first year that the volume increase hit the call centre.