This article aims at presenting a scheme of evaluation of ROI in occupational testing and assessments. The purpose of psychometric testing in occupational settings is to measure job-related traits/characteristics of applicants to assess their suitability for role/organisation and to help predict their future performance. Assuming that one is using tests that are reliable (i.e. consistent in measuring) and valid (i.e. are measuring what they claim to measure), here is a general process flow of calculating the return on investment (ROI), as one would normally do for any major business initiative.
What is Return on Investment (ROI)?
Generally speaking, return on Investment (ROI), is a measure used to evaluate the efficiency of an investment. To calculate ROI, one divides the benefit (return) of an investment by the cost of the investment and expresses the result as a percentage or a ratio. The formulae is:
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment
If the result of the above formulae is positive, then the investment has earned more than its cost and if the result is negative then one would have been better by having never made that investment. Therefore, it appears but natural that one should do the ROI calculation associated with the investment on psychometric testing to ensure it is giving more than it takes.
Steps to calculate ROI for psychometric testing
First step in calculating ROI is to quantify the cost and gain from the investment. These cost and gains must be expressed in the currency terms rather than other common HR Metrics. For sake of illustration, I am using INR here, but the same logic applies to calculation in any currency.
Cost of the Investment
The cost of investment is relatively straightforward to calculate. It normally includes both direct and indirect costs.The direct cost is everything you pay to your psychometric testing provider and/or external consultant, which typically includes:
- Set up and customisation cost
- Cost of Training
- Cost of Psychometric tests / Reports
- Report interpretation (feedback by qualified professional)
- Cost of Consulting related to selection or deployment of tests
Indirect costs are relatively difficult to calculate. The major problem arises in their accurate identification. These typically consist of internal personnel costs associated with the implementation (e.g. total hours in training x average cost of attendees) and ongoing management (e.g total man-hours spent on managing testing process x average hourly salary of personnel involved in doing so).
Gains from the Investment
Just like the cost, gains from investing in psychometric testing are also direct and indirect. The specific direct gains will depend on the underlying business reasons that made you decided to use psychometric testing.
Some example of such direct gain headers are:
- gains from increased performance as measured by an increase in results (e.g. sales increase in rupee terms)
- gains from increased number of productive hours due to lower absenteeism
- gains from reduction in accident and injury (measured by the associated cost savings e.g. Reduction in incidents x average incident cost)
- gains from reduced employee turnover (measured by replacement cost savings (e.g. Reduction in number of replacement hires x average cost of replacing employer).
Indirect gains are often more difficult to quantify but they must be included as they are sometimes larger than the direct gains in case of psychometric testing. Therefore it is crucial to include them for accurate calculation of ROI. An example indirect gain is the savings associated with spending less time on manual screening as measured in dollars (e.g. X hours less time spent reading resumes x average hourly salary of personnel involved in doing that).
Why it is Important to Calculate ROI?
Calculating ROI is standard practice for all major business initiatives and it should also be the case for psychometric testing. Some of the business benefits of calculating ROI on psychometric testing are:
- Documenting the value of psychometric assessments for senior executives and the board to justify the cost
- Helping to justify the use of testing to line mangers and other non-HR personnel who might be sceptical
- Making it easier to justify further investment in HR initiatives to senior management
- Increasing the perceived value of HR Department and HR Initiatives in the eyes of business people.
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