Article contributed by Acxiom Information Security Services, Inc., December 2010
ROI Calculations: Time-Consuming, Necessary
Suppose a retail business is considering a move to a high profile, high-traffic location. The rent is expensive, but worth it, right? (More traffic = more customers = more sales.) No matter how logical it sounds, logic doesn’t pay the rent – or justify an expense. Likewise, while common sense says that screening every candidate as thoroughly as possible is just good business, quantifying what seems obvious requires extensive evaluation of your business practices. Background checks do pay off, but determining how much and how soon takes some work, and the answer will differ for every organization.
In order to measure return on investment (ROI), you have to assign a value to your employees and calculate the costs of losses associated with a variety of events. In some businesses (such as service and retail sales organizations), calculating an employee’s contribution to the bottom line is fairly straightforward. But every employee has some impact on your organization and possibly on shareholder returns.1 Assessing the value of employees who do not generate revenue can be more difficult. Take the simple, hypothetical case of a company with 60 employees and annual revenues of $6 million; you can say each employee contributes $100,000 to the bottom line.
Obviously, no real situation is so easily defined, and each item in an ROI calculation encompasses multiple variables. In addition to defining employee value, you must include the following in your calculations:
- Turnover rate and the number of applicants considered when filling open positions
- An amount assigned to cover the cost of an average accident or internal theft at your business (used to determine the value of avoiding such losses by reducing accidents, theft, or violence)
Factor in Costs, Losses to Gauge ROI
The next step is to make an educated guess regarding the amount of turnover, theft, and accidents you would likely incur if you did not utilize certain screening tools. Using historical data – yours or an industry average – can be helpful.2 After adding drug screening for current employees, for example, workplace accidents typically decrease.
An ROI picture is not complete without considering lost opportunity costs. Do you risk losing hardworking, honest, experienced employees when you bring in new hires who are less than fully investigated? (For this, factor in the worker’s lifetime value3 to your organization instead of considering the annual revenue attributed to the employee.) Every employer has to determine ROI based on its own individual operations and internal charges. Ask your screening provider for examples of how your industry often calculates ROI and monitors screening expenses to ensure the best use of resources.
What’s the Short Term Payoff?
Much like premium retail space, employee training programs and workplace wellness programs, background screening is an investment that is bound to pay off over time. Unfortunately, when employers increase candidate scrutiny, the immediate "payoff" is an increase in hits. In other words, the closer you look at your applicants, the more you’ll find not to like. Experienced employers know that the more red flags that go up during the hiring process, the better to just ask your legal department. Those who depend on background checks that erroneously give candidates an "all clear" report place themselves and their organizations at risk.
i What’s a service employee worth? Modern Distribution Management copyright 2009 Gale Media, Inc. All rights reserved. Accessed 7/14/10 here.
ii Jeong S. Normative Data for Employee Surveys – Worth the Spend? Systematic HR website copyright 2005-2010; posted October 28, 2009 and accessed 7/14/10 here.
iii Hill, G. Is It Time To Measure Employee Lifetime Value? Posted January 28, 2008 and accessed 7/14/10 here.