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Diversity Management Series Part II: Measuring ROI for Diversity Management

   4/1/2005

Fast Fact

Over 75% of human resource executives said they expected the use of human capital metrics for key performance indicators in order to meet strategic targets to increase over the next three years.

Source: Measuring More than Efficiency: The New Role of Human Capital Metrics, 2004.

Introduction

According to The Conference Board, HR leaders will increasingly explore new avenues by utilizing human capital metrics to meet organizational strategic goals as well as make strong contributions to company performance. In particular, the use of people measures will become increasingly important. 1 Therefore, one key area for HR leaders is how best to measure the return on investment (ROI) of diversity management for competitive advantage.

Challenges to Measuring Diversity

Many companies struggle with effectively measuring the results of diversity initiatives. In part, the challenge is determining what measures will yield useful information. For others, this task is difficult because they do not yet collect the necessary data required to measure diversity. Diversity programs, for example, are often considered to have “intangible” results, such as improved communication or improved teamwork (see Figure 1), yet such improvements may have a significant impact on productivity, growth and profits. Clearly, metrics is the path forward for organizations to successfully track results, as well as identify diversity management concerns that need to be addressed. 2

Tools to Measure Diversity

By effectively measuring diversity results, HR leaders and senior management can better quantify the business rationale for diversity and the impact of diversity initiatives. Traditionally, HR has used the following tools to measure diversity: 3

  • Equal employment opportunity and affirmative action metrics.
  • Employee attitude surveys.
  • Cultural audits.
  • Focus groups.
  • Customer surveys.
  • Management and employee evaluations.
  • Accountability and incentive assessments.
  • Training and education evaluations.

However, research shows that measures outside of human resources are likely to be more comprehensive and can better demonstrate the business impact of diversity management. By establishing broader organizational metrics in the following six categories, HR leaders can better measure the return on investment of diversity: 4

  • Demographics.
  • Organizational culture.
  • Accountability.
  • Productivity/profitability.
  • Benchmarking.
  • Programmatic measures.

Measuring Diversity’s Return on Investment

Organizations measure broad aspects as well as more focused areas of diversity management—from the organization’s demographic profile to race/ethnic and gender representation of different job groups and levels in the company, compared with labor market availability. Thus, it is important to develop a diversity balance sheet or scorecard—along with effective evaluation processes—because these measures promote support for dedicated resources for diversity initiatives, help link diversity initiatives to organizational strategic goals and objectives and demonstrate HR’s value to the organization. 5

Often dependent on leadership commitment to diversity, data collection is key to effective diversity measurement. Examples of meaningful data are: 6

  • Level of participation in the firm’s diversity vision formulation.
  • Number of diverse employees in formal mentoring programs who get promoted.
  • Percentage of diversity objectives aligned with key strategic business objectives that are tied to bonus and ompensation systems.
  • Representative mix on the board of directors.
  • Overall organizational climate and culture ratings and their effects on all represented groups.

As illustrated in Figure 1, many intangible variables are linked to diversity results. By following five basic steps, monetary values for intangible results can be established: 7

    1) Identify a unit of measure that represents a unit of improvement.

    2) Determine the value of each unit.

    3) Calculate the change in performance data.

    4) Determine an annual amount for the change.

    5) Calculate the total value of the improvement.

The diversity return on investment (DROI) is calculated by using the diversity initiative cost and benefits to get the benefit/cost ratio (BCR). BCR = diversity initiative benefits ÷ diversity initiative costs. This ratio is also referred to as a cost-to-benefit ratio. Specifically, the DROI calculation is the net benefit of the diversity initiative divided by the initiative costs: DROI% = (net diversity initiative benefits ÷ initiative costs) x 100. This formula is the same basic formula used to evaluate other investments in which the ROI is reported as earnings divided by the investment. For example, the initial cost of a diversity awareness program may be $50,000. The measurable value of the program is determined to be three years. During a three-year period, the program will have a net savings of $30,000 ($10,000 per year). Since the average book value is approximately half the cost, the average investment in this case is $25,000 ($50,000 ÷ 2). The average ROI = annual savings/average investment ($10,000/$25,000) = 40%. 8

Figure 1: Typical Intangible Variables Linked With Diversity

Attitude Survey Data

Employee Transfers

Organizational Commitment

Customer Satisfaction Survey Data

Climate Survey Data

Customer Complaints

Employee Complaints

Customer Response Time

Grievances

Teamwork

Discrimination Complaints

Cooperation

Stress Reduction

Conflict

Employee Turnover

Decisiveness

Employee Tardiness

Communication

Source: The Diversity Scorecard: Evaluating the Impact of Diversity on Organizational Performance, 2004.

Literature and Research

L’Oréal Dedicated to Diversity 9

In 2004, L’Oréal USA became the first recipient of the Diversity Best Practices’ Global Leadership Award. Criteria to receive the award include creating an environment of inclusion and diversity through corporate diversity initiatives, chairing and supporting diversity councils, recognizing community, philanthropic and supplier diversity, and ensuring support of all levels throughout the company. L’Oréal’s chief diversity officer, Ed Bullock, tracks, monitors and benchmarks the progress of the company’s U.S. diversity programs. Focusing on different areas for diversity recruitment, the outcome has been very positive: more than 60% of general managers are women. Further, minority representation increased from 14% in 2001 to 16% in 2004. Globally, L’Oréal employs 50,500 people representing about 100 nationalities. Women, however, represent only one-third of management. Thus, the company’s training department has added diversity and inclusion training to the core curriculum of its leadership development programs in the United States and in France. Diversity is a management objective in annual performance reviews. In addition, through its Supplier Diversity Council, L’Oréal supports spending in women- and minority-owned businesses, which increased by 39% for 2003 over 2002. Finally, the organization benchmarks its progress in diversity management against Fortune 500 companies recognized as “Best in Class” for women and people of color.

Getting Results From Diversity Training: In Dollars and Cents 10

Measuring the effectiveness of training on diversity practices can be difficult. However, Nextel Communications Inc. effectively considered the return on investment for training that had traditionally been considered “intangible” in the context of human resource measurement. The organization developed diversity training for the specific business goal of improving employee retention, satisfaction and productivity through increased diversity awareness. All 13,000 Nextel employees took the diversity course. To measure training results, the company created training scorecards. Specifically, the training team determined what would be measured and evaluated, when, how and why. Every participant was provided with the objective of the program and what needed to be accomplished, including checklists of what to do after the diversity class. The training team tracked retention figures for a specific time frame and asked survey participants what percentage of increased retention results they attributed to the training as well as to other variables. Based on those survey results, the overall decrease in turnover was determined to be 2%, with the training contributing 10% to the change, thus directly retaining 36 people. Turnover costs at Nextel, based on 1999 survey data, average $89,000 per employee. By multiplying $89,000 by 36 (retained employees), it was determined that the diversity training saved Nextel $3,204,000. The conservative calculation of the program cost was $1,216,836, including design development costs, time spent developing the evaluation and time for participants to complete the survey. Thus, the net program benefits divided by the program costs and multiplied by 100 revealed an ROI of 163%. That is, for every dollar spent on diversity training, the company had a $1.63 net benefit.

The Diversity Mandate 11

In general, most professionals working in the library field are white. Until recently, the disparity of representation of minorities in library science had been overlooked. For example, there are approximately 9,177 Latinos in the population for every Latino public, academic and school librarian. Yet for every white, non-Latino librarian, there are about 1,830 white non-Latinos. Overall, leaders in library science agree that staffing libraries for diversity will be beneficial to the entire community. Two prominent initiatives to increase diversity in this profession resulted in positive changes in the number of information professionals from underrepresented racial and ethnic groups over the last 10 years. First, the ALA Spectrum Scholarship, initially funded in 1997 with $1.5 million, was designed to increase diversity enrollment by awarding a $5,000 scholarship to selected scholars and providing them with free registrations to annual library science conferences. Between1998 and 2003, 226 Spectrum Scholarships were awarded. Second, the Knowledge River at the School of Information and Library Resources (SILRS) at the University of Arizona was funded in 2001 with a grant from the Institute of Museum and Library Services. By January 2003, 39 Latino and Native American students were recruited for the master’s program at the SILRS.

In Closing

Effective diversity measures and evaluation processes that determine the ROI of diversity management can provide an organization with invaluable information to support key business imperatives--such as the impact of diversity training and areas of improvement needed for recruitment strategies. Further, diversity initiatives that receive public acknowledgment through awards (e.g., DiversityInc’s Top 50 Companies for Diversity) help attract bright talent and positively affect company brand and reputation.

Resources

American Institute for Managing Diversity, Inc.: http://aimd.org

American Society for Training and Development (ASTD): www.astd.org

DiversityInc: Top 50 Companies for Diversity: www.diversityinc.com

Human Capital Institute: www.humancapitalinstitute.org/hci/membership_corporate.guid

SHRM Diversity Home Page: http://shrm.org/hrdisciplines/Diversity/Pages/default.aspx

Endnotes

1Gates, S. (2004). Measuring more than efficiency: The new role of human capital metrics. Retrieved April 13, 2005, from www.conference-board.org .

2Jayne, M. E., & Dipboye, R. L. (2004). Leveraging diversity to improve business performance: Research findings and recommendations for organizations. Human Resource Management, 43, 4, 409-424.

3Digh, P. (2001, November). Creating a new balance sheet: The need for better diversity metrics. Retrieved April 13, 2005, from www.centeronline.org/knowledge/whitepaper.cfm?ID=813&ContentProfileID=122197&Action=searching .

4Ibid.

5Jayne, M. E., & Dipboye, R. L. (2004). Leveraging diversity to improve business performance: Research findings and recommendations for organizations. Human Resource Management, 43, 4, 409-424.

6Hubbard, E. E. (2004). The diversity scorecard: Evaluating the impact of diversity on organizational performance. Burlington, MA: Elsevier Butterworth.

7Ibid.

8Ibid.

9L’Oréal dedicated to diversity. (2005, February). Global Cosmetic Industry, 173, 2, 80.

10Kirkpatrick, D., Phillips, J. J., & Phillips, P. P. (2003, October). Getting results from diversity training: In dollars and cents. HR Focus, 80, 10-13.

11Adkins, D., & Espinal, I. (2004, April 15). The diversity mandate. Library Journal, 129, 7, 52-53.

Author: Nancy R. Lockwood, MA, SPHR, GPHR, SHRM Research Department 

Also in the Diversity Management series:

Part I: Diversity Management in a Global Context

Part III: Employing People With Disabilities

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