Vol. 49, No. 1
Businesses make significant strides in calculating the return on family-friendly programs.
Lost Arrow opened its on-site facility for employees’ children in 1984. Today, the center’s programs, conducted in three buildings on the corporate campus, serve 83 children ranging in age from eight weeks to nine years. Each weekday afternoon, buses from Lost Arrow go out to area schools to transport girls and boys back to the center for after-school activities. The programs are also open to employees’ grandchildren (one now enrolled is Garaway-Furtaw’s grandson, and she lays him down for his nap each day). When space is available, children of nonemployees can be admitted.
The program is supported not only by the company but also by tuition revenue. An employee with a 2-year-old in the pre-school program five days a week pays $467 per month, for example, while a nonemployee pays $570.
On-site child care is just one of several family-friendly programs at Lost Arrow, which offers a long menu of employee benefits and has been cited as one of the “100 Best Companies for Working Mothers” by Working Mother magazine. Referring to those benefits and their economic impact on Lost Arrow, Garaway-Furtaw says, “We do it because it’s the right thing to do, but the numbers support it as well.”
Lost Arrow—often referred to as Patagonia, a strong retail brand among climbers and other outdoor enthusiasts—spends about $530,000 a year on family-friendly benefits. In return, it captures more than $190,000 in federal and state tax breaks, and it saves an estimated $350,000 in costs associated with recruiting, training and productivity because its family-friendly approach helps hold turnover below the average for apparel manufacturers.
Moreover, the benefits’ financial pluses don’t include the value of increased morale and enhanced company reputation, Garaway-Furtaw says. “The analysis really puts a numerical value on the hard cost issues for the program but doesn’t account for the soft costs.”
A Family of Three
Child care, flexible work arrangements and extended parental leave are the most recognized family-friendly perks, and they help place organizations on “best places to work” lists such as Working Mother’s and Fortune’s.
What’s more, at many companies—as at Lost Arrow—family-friendly is also bottom-line-friendly. According to a 2003 report by Circadian Technologies, a Lexington, Mass., consulting firm specializing in extended-hours operations, a company can achieve a measurable return on investment (ROI) by sponsoring a child care program, whether an on-site facility or an inexpensive resource and referral program. The financial benefits typically come from reduced absenteeism and turnover and improved recruitment and productivity.
According to the report, turnover rates among extended-hours employees decreased to 7.7 percent from 9.3 percent when extended-hours child care services became available.
Jennifer Allen, author of the Circadian study, “Cost Benefits of Child Care for Extended Hour Operations,” says, “The report shows that when you look at the money you can save on absenteeism and turnover by having child care programs, there is definitely a return on investment.”
Flexible working arrangements offer pluses as well, some companies have determined. New York-based Deloitte & Touche, a global consulting and financial advisory company, estimates that formal flexible work arrangements available to its 30,000 partners and employees in the United States helped the company avoid $41.5 million in turnover-related costs during 2003. The arrangements at Deloitte include compressed workweeks, reduced-hour provisions and telecommuting.
Each year Deloitte surveys its client service professionals, employees and partners, asking them if they would have left the company if it did not offer the option to work on a flexible schedule, says Kathryn Davie Wood, Deloitte & Touche’s Boston-based senior manager, national human resources.
According to the Employer Tool Kit, based on a similar document prepared by the Oregon Commission for Child Care and other agencies and available from the Maryland Child Care Resource Network, pharmaceutical giant Merck & Co. found that it cost approximately $50,000 to replace the “average” employee but only $38,000 to give the employee a six-month parental leave of absence with partial pay and benefits.
Merck, based in Whitehouse Station, N.J., provides employees with benefits and full pay for up to eight weeks following the birth or adoption of a child. After eight weeks and up to six months, employees on parental leave do not get paid but keep their benefits and are guaranteed reinstatement. From six months to 18 months, they retain their benefits but are not guaranteed job reinstatement, although they have access to in-house job postings.
James Murray, Merck’s senior director of health benefits management, prefers not to judge the program by its costs. “You cannot put a dollar value on it,” he says. “We see the significant value and think it’s an appropriate investment.” Inflexibility in accommodating employees’ child care needs is a major reason why women leave the work force, Murray says, and Merck wants to maintain employment diversity and be an employer of choice.
“We are sensitive to the cost of every decision made,” he adds, “but that decision is based on value, and value doesn’t need to be expressed in monetary terms.”
The Bottom-Line Prism
Although Merck and other companies may not choose to apply dollar values to their family-friendly benefits, it’s becoming more common to do so. As senior executives focus increasingly on bottom-line results in a troubled economy, HR departments are being asked to justify the costs of such benefits.
“On the C-suite level, everything has gotten to be ‘Show me the numbers,’ ” says Barry Barnett, a principal with PricewaterhouseCoopers HR Services in New York.
Says Michelle Deneau, a senior consultant in San Jose, Calif., with PricewaterhouseCoopers’ Saratoga Institute, which specializes in workforce metrics: “You are definitely starting to see at the C level increased pressure on HR to show some type of quantitative impact on the organization of family-friendly benefits.”
While employers may feel less compelled to offer family-friendly programs now because recruiting is easier, trimming such benefits can be “shortsighted,” Barnett says. “Employees committed to a company because of the policy will leave, and when the economy rebounds there will be fewer workers, and the war for talent will return.”
Moreover, Barnett says, taking away a popular benefit can leave a bad impression with employees even if they don’t use the programs—particularly with women, who often join organizations based on whether or not such programs are in place.
He adds that the economic argument for family-friendly programs still exists even if they’re not needed to recruit workers. He notes that PricewaterhouseCoopers saves money by not having to provide office space to workers who telecommute. “If people are productive working from home and we are saving rent, then why would we not do this?” he says.
Despite the economic downturn, Deloitte & Touche has never scaled back its formal flexible work program, Wood says, and in fact is looking to expand it. “If these programs did not make business sense they would be gone.”
Doing the ROI Math
Says Merck’s Murray: “Senior management is asking, ‘What are we getting for our money?’ But that’s where I think we need to bring in the value in terms of competitiveness and choices given to employees,” he says. “These are things that are hard to quantify in terms of dollars.”
Measuring ROI is not easy; there are no uniform standards. Measurements are “very specific to each employer,” says PricewaterhouseCoopers’ Deneau. “We have some broad definitions, but, when it comes to family friendly-benefits, each organization varies it quite a bit.”
The Saratoga Institute helps organizations calculate ROI for a wide variety of HR issues, not just benefits. There are no standard benchmark data for family-friendly benefits for two reasons, says Deneau. First, not all companies offer such benefits, so facts and figures are scarce. Second, “family friendly” is a broad term and hard to define; “apples to apples” comparison data are difficult to obtain.
Deneau suggests that employers first identify what they are attempting to accomplish through a family-friendly program. If reduced turnover is the goal, then an organization can measure ROI by determining how outlays for the program reduced turnover. Start by determining how many employees would have left the company if the program didn’t exist, Barnett says, and then figure the cost of replacing them. If the replacement cost is higher, the program saved the company money.
For example, if a company’s annual cost for its on-site child care center is $10,000 per employee for the 20 employees using it, then the employer’s outlay for the facility is $200,000. But if the availability of the center keeps four $60,000 workers from leaving, then the facility has saved the company a certain amount in turnover costs. How much? According to Barnett, 150 percent of salary is considered the typical cost of replacing a worker. The figure includes recruiting, training, lost productivity, and the time and resources necessary to get a person into a job and proficient at it. Thus, the child care center that kept four $60,000 employees on the payroll enabled the employer to avoid $360,000 in turnover costs, saving the company $160,000.
Deloitte & Touche began measuring the savings from its formal flexible work arrangements in 1996, the year after they were instituted. “The focus at that time was to determine how the arrangements were working and how to enhance them,” says senior HR manager Wood. The company arrived at its $41.5 million savings figure by applying the standard 150 percent replacement multiplier to the average annual salary of workers who would have left the firm if there were no such arrangements. The company then multiplied the result by the number of respondents on the internal survey who indicated they would have quit the company for that reason.
Wood says she thinks that 150 percent is actually low for calculating replacement costs and that Deloitte’s savings are higher.
Reduced absenteeism can also be factored into the family-friendly ROI equation, says Circadian study author Allen. For example, she says, her study showed that the costs associated with absenteeism in extended-hours operations decreased by $300 annually per employee when some form of extended-hours child care became available.
According to a survey by the Human Resources Group of CCH Inc., a tax and business law information provider in Riverwoods, Ill., absenteeism cost $789 per employee in direct costs in 2002, up from $755 in 2001 and $610 in 2000.
Although companies that have analyzed family-friendly benefits have generally come up with “hard” numbers that support the programs, there can be “soft” benefits as well. For example, Lost Arrow’s family-friendly program has made it an employer of choice, says Garaway-Furtaw. The company typically receives 10,000 resumes for about 30 openings each year. “I’ve interviewed new members of the Patagonia family who have shared that the presence of the work/family program was a reason why they chose to work here, even though they did not have children,” she says.
Deloitte & Touche too has seen its family-friendly benefits—flexible work arrangements—aid in recruitment, Wood says. “We added a question to our survey regarding recruitment several years ago, and a very high percentage of new hires stated it was a very important factor in making their decision.”
There are even attempts to quantify some of the “soft” pluses of family-friendly benefits, says Judith Presser, a senior consultant with WFD Consulting in Watertown, Mass. WFD uses a “commitment” and a “support” index to gauge the effectiveness of work/life programs. “Commitment and support translate into greater retention and productivity and should be measured,” says Presser. Moreover, she says, research demonstrates that employee attitudes have an effect—whether positive or negative—on customer satisfaction and, ultimately, on revenue and the bottom line.
Elayne Robertson Demby is a freelance business writer in Weston, Conn.