Factoring Employee Costs into ROI Calculations
There are so many clinical definitions of ROI out there, it’s easy to get the impression that there’s some biblical law that tells us that the Investment in Return on Investment is only allowed to refer to direct expenditures of money. While this narrow view might be useful for some, chances are you can get a lot closer to the truth than this.
One of the best examples I can give has to do with a startup (let’s call this fictional company DunceCo) putting together a limited-edition gift set. Margins were slightly lower than anticipated, so the project manager was told that rather than having all the pieces of this promotional set be put together in the company’s warehouse, she was to assemble a team within the company’s headquarters who would assemble all of the components into one finished promotional set. This would save about $.20 per set, or $100 (500 units were being assembled).
The only problem is, this took about 20 people away from their usual revenue generating jobs for about 30 minutes apiece! On top of that, these employees were not particularly skilled at putting together components to make sets — leaving a not insignificant portion of the sets to become unusable.
As far as I can tell, the project was marked something of a success in that a creative way was found for costs to stay down. But did costs really stay down?
- Since we don’t know enough about DunceCo, let’s just assume that these 20 workers are making, on average, $55,000 a year.
- Factoring in benefits, each of these people likely cost $73,000 a year.
- This would mean each one of these people is costing the organization $35 an hour.
- If a total of 10 manpower hours were used to get all of these sets complete that would be $350 that is not factored into the ROI calculation!
- Remember, in this example, assembling at the warehouse would have just cost the company $100.
This is a perfect example of what should NOT happen when determining ROI on a project. Know your costs! It’s so simple that it’s embarrassing to say, but as we speak, there is an organization out there just like DunceCo, spending $350 to save $100. I am not up for that kind of investment; are you?