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Calculating ROI for training in the lodging industry: Where is the bottom line?
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Hospitality Management 26 (2007) 485–498 www.elsevier.com/locate/ijhosman
Discussion paper
Calculating ROI for training in the lodging industry: Where is the bottom line? Kimberly J. Harris College of Business, Florida State University, Talahassee, FL2305-2541, USA
Abstract The challenge of measuring the effectiveness and efficiency of training has long been a hurdle for human resource and training professionals in the lodging industry. The reporting of a department’s financial performance is a basic expectation of leaders responsible for their share of operational goals of a property. The management of revenue, yield, assets, and total quality are all part of the mix; however, for many leaders in human resource and training experts in the lodging industry, justification for expenditures and financial performance expectations are rarely requested. r 2006 Published by Elsevier Ltd. Keywords: Training; Return-on-investment; Revenue management; Yield management; Asset management; Total quality management; Financial accountability
1. Introduction The purpose of this discussion paper is to encourage discussion, debate, and ultimately stimulate interest in the subject of return-on-investment (ROI) in the lodging industry. Of specific focus is the expectation of a return on the investment in the human resources employed by this industry as correlated with training given and performance received, respectively. The methods for tracking ROI for human capital management have been a long-time practice for training experts in other industries. According to two popular ROI theorists, Donald Kirkpatrick (1994) and Jack Phillips (1996), existing models are not only readily available but easily implemented. Research reveals that popular models are used successfully by Fortune 500 companies as well as small business owners; however, are E-mail address: [email protected]. 0278-4319/$ - see front matter r 2006 Published by Elsevier Ltd. doi:10.1016/j.ijhm.2005.12.001
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largely absent in the lodging industry. The American Society of Training and Development (ASTD) offers information on ROI in the form of workshops, guidebooks, consulting referrals, and a myriad of instructional texts and videos to aid those seeking to understand the concepts and apply the theories. Despite the many options available, most training and human resources experts in the lodging industry do not calculate ROI. In an era when lodging companies are slowly recovering from a suffering US economy, department leaders are expected to justify their costs, make decisions that will have a positive impact to the bottom line, and develop strategies as to how their teams will help move the company forward in terms of growth and quality. However, the majority of those responsible for delivering training to employees in the lodging industry are not required to track performance as it relates to controlling costs and increasing revenue. In recent interviews with several human resource directors, most said that top executives do not expect an ROI, bottom-line report (Harris and Kline, 2005). 1.1. Reasons for failing to calculate ROI Barriers to obtaining valid and reliable information to be used in the calculation of the percentage and lack of interest in the process are the two most popular reasons for failing to calculate ROI (Harris and Kline, 2005; Flynn, 1998; Philips and Phillips, 2002). Experts report that no ROI method is completely sound and for some departments, calculating ROI is not practical (Ambrosio, 2001; Brooks, 1999; Brown, 2001). However, as an opposing opinion, calculating some sort of financial analysis is expected and considered invaluable for HR to justify their existence (Koch, 2002; Millis, 2002; Blandy et al., 2000). 2. Literature review Human capital is somewhat of a moving target when it comes to applying financial investment and return numbers to training given, learning achieved and performance realized. Tracking modified behavior and the value of an individual’s modification may be the desire of every human resource director responsible for the development of their human resources; however, the reality of this endeavor is quite another matter. According to Brown (2001), calculating the ROI figure has no constant value, is difficult to summarize, and is an invalid percentage or ratio due to the time value of information. 2.1. Calculating ROI is a waste of timeyor is it? Some human resource professionals believe it is not only impossible but a waste of time to calculate ROI for their human development programs (Flynn, 1998; Online Learning Magazine, 2001). Others believe that a modified ROI calculation can be achieved for planning training programs, discovering employee audience needs, and improving performance on a general level (Fitz-enz, 2000; Millis, 2002; Worthern, 2001). A popular model supported by the American Society for Training and Development (ASTD) is that of Donald Kirkpatrick and subsequent edits to the model by Jack Phillips, known as the Kirkpatrick Model. This model is considered the basic framework upon which Phillips later added an additional level of analysis, or the financial returns level critical to the ROI calculation. This model is comprised of five levels, all of which are interdependent,
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sequential as to process, and if financial strategic planning is in place from the beginning, the calculation achieved in level five is residual information. Regardless of technique, technology, or other challenge discussed to capturing the information and analyzing its impact, failure to calculate the figure to give a benchmark, or indication of the ROI of employees is to fall short of business expectations (Davidson, 1998; Stone and Watson, 1999; Webb, 1999; Setaro, 2000). 2.1.1. Basic formula for ROI calculation The formula for calculation ROI is easy enough to digest and appears as a percentage; however, it is the data that identifies benefits and costs that remain ambiguous, and is said, the ‘devil is in the details’: Benefits Costs 100 . Costs Parry (1996) stated that the data was difficult to track, the outcome too subjective, and the process of obtaining valid data too time consuming for managers to collect. However, the advantages of valuating cost-versus-benefit data far outweigh the disadvantages (Lachnit, 2001; Goldwasser, 2000). According to Feldman (1995), Reigel and Umbreit (1995), and Kimes (2001) measurement of quality is basic to predicting profitability. According to a study conducted by Harris and Kline (2005), HR executives from top lodging companies reported that they did not calculate ROI, but rather relied on customer feedback cards and turnover rates to ‘guesstimate’ the value of their department to the overall bottom line of the organization. Calculating the ROI of training promotes justification of current and future budgets, improved training program selection, tracking of costs verses impact, prediction of increased revenue based on improved service and product selection, decreases in accidents, turnover, and absenteeism, and improved benefit package selection (Rowden, 2001; Phillips, 1996). The theory of tracking training and the costs versus benefits of associated activities is that training improves knowledge and knowledge improves delivery of all hospitality business-related activities (Soriano, 1999; Partlow, 1996; Breiter and Bloomquist, 1998; Baldacchino, 1995). According to this organization specializing in HR and training, wellknown corporations such as Delta Airlines, FEDEX, Dell Computers, General Motors, and AT&T are successfully using the five levels of the ROI evaluation process as presented by Kirkpatrick and Phillips (Kirkpatrick, 1996; Phillips, 1994). Calculations of yield, revenue, asset, and total quality management (TQM) are analyses well known in the lodging industry. The tracking of cost versus benefits are realized in these calculations, monitoring of expenditures as related to revenue, the quality output of input, and the management of assets to produce the expected level of gains are common to managers who must report on their investment decisions. ROIð%Þ ¼
2.2. Piecing together the plethora of contributing theories Conducting evaluations of fund allocation management is a departmental responsibility, including usage of fund expenditures for human resource development (Upchurch et al., 2002). Asset management, often the task of a revenue manager, is an integrated effort to predict yield, of which human resources can impact significantly when considering funds
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invested into hiring, training, maintaining, and promoting the ‘products’ of hospitality businesses. Kimes (1989) and Oberwetter (2001) provide explanations communicating revenue management involves the prediction of yield based on the management of room sales and customer booking behaviors; however, not mentioned is the impact of the human element in these activities and the importance of training, proper position assignment, and the human element in product selection and consumption. Revenue management is a residual of the human ability to attract, satisfy, and then manage the experiences of the customer. Otherwise, the discussion of asset management, whether discussed as yield, revenue or otherwise, is moot (Tracey and Tews, 1995). The mechanics of revenue management and analysis of yield cannot be explained without the inclusion of the ROIs expected from the human resources dedicated to these functions (Harris and Brown, 1998).
3. An overview of popular return-on-investment related theories A brief overview of the theories of yield, revenue, asset, and TQM theories is presented for review. The summaries state that each approach uses both historical as well as predictive operational and financial data to make decisions, predict activity, and justify goal setting. Consideration by HR departments for using similar approaches, or a mixedapproach model, could assist in developing a manageable ROI.
3.1. Yield and revenue management Yield management was discussed by Upchurch et al. (2002) as a medley of revenue factors, demand indicators, benchmarking activities, forecasting factors, and supply and demand maximization factors. These researchers stated that yield management was an exercise in providing customers with expected levels of service and product quality while at the same time, producing the highest level of revenue per transaction. Yield and revenue management have this goal in common and rely on the human and physical plant usage required to produce yield or revenue targets. Revenue and yield rely on fluctuations for marketing purposes, projected static numbers, and seasonal market demands to run specials and offer package deals. Unpredicted demand also effects yield and revenue as does the following variables common to the revenue manager (Upchurch et al., 2002, pp. 68–69): The individual responsible for revenue enhancement must have at their disposal a myriad of factors that exert a significant impact upon the yield management process. Some of the more influential factors that come into play are historical demand, noshows, the property’s walk-ins, and consumer cancellation patters. Furthermore, the revenue manager must also be knowledgeable of the property’s booking behavior, arrival and departure patterns for each segment, specifically transient, corporate travelers, association regulars, and any other relevant consumer market segments. Finally, policies must exist regarding operational procedures, such as over-booking, in order to correctly predict performance.
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From this viewpoint, yield and revenue is impacted by the quality of training and the individual skills, knowledge, and abilities of those responsible for the management of dependent activities. In common with the ROI calculations is the need for information from a variety of resources. There are no apparent barriers posed by those responsible for yield and revenue management regarding the attainment of information needed to calculate yield or revenue from a variety of profit or otherwise operational segments. While the task requires the analysis of information that must be accurate, up-to-date, and readily available, access is a matter of compliance. 3.2. Asset management Feldman (1995) uses the term ‘asset management’ (p. 36) to describe the responsibilities of the person who consults with both the owner of a property and the management company hired to conduct operations to ensure goals are met for both. Working primarily for the owner, the asset manager investigates the management company’s procedures, communication methods, and business decisions, serving as a go-between to provide an unbiased and professional review of the company’s ability to make the property a success. Feldman further explained that the interpretation of an asset manager was vague and the expectations of such a manager from clients, operators, and asset managers themselves varied. It is this confusion that may have lead to the demise of the label, since little has been published in the hospitality research journals regarding this position since or possibly, is referred to on a more general basis, whether employed internally or externally, as ‘financial advisor’, ‘revenue manager’, or ‘chief financial officer (CFO)’. Obviously, the asset manager, if so employed, is involved in making critical financial return decisions by analyzing the activities of management and providing advice. Based on the quality of advice given and the data to which this manager has access, the figures can be used in calculating ROI in terms of revenue realized and costs incurred. This person can also be evaluated based on their value to the company in terms of incoming dollars for which they are immediately responsible as well as costs. 3.3. Total quality management Yet another theory of comparison is that related to statistical calculations related to quality. Jones (1988) gives a thorough discussion as to the approach to quality output as related to the physical plant, amenity and services provided, policies and procedures implemented, and the level of training of employees. This article is one of the few that includes the human factor in both calculating and predicting quality, which in turn, is used to influence yield and revenue management. The tangibility and intangibility of hospitality services, of which product use by customers must experience, is mentioned as a venue for categorizing final output, or revenue. Can an intangible be calculated to a definite number, predictable as a figure, and reliable as a solid and dependable return? Jones further raises the question of the meaning of ‘return’ by the changes in customers as a result of quality service and a repetition of their business or that of their friends based upon this experience. The discussion ensues to add another author’s opinion by saying (p. 105):
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Sasser et al. (1978) themselves purpose the idea of the service/product continuum along which most service and most products would lie. Foxall (1983) argues that ‘those who argue for clear-cut distinctions between services and products have actually demonstrated no more than if some services are located at or near one end of various continua, then some ‘products’ can be logically placed at or near the opposing poles’. A model for calculating both quality and productivity was presented as a three-stage framework wherein stage one is monitoring productivity processes; stage two is managing capacity or consumer take-up, followed by the third and final stage wherein the impact on consumers is measured as quality output. Jones further argues the weaknesses of this model on truly being able to realize a valid predictor in terms of revenue. He states that the first stage cannot be depended upon to produce a competitive edge since processes are easily copied by competitors. The second stage is also difficult to measure, since consumers control their consumption. The final stage is equally undependable since quality is intangible. Again, the comparison between TQM fails to add solidarity to theory that ROI can be easily calculated, and the theories of yield and revenue management do not entail all of the factors needed to calculate ROI; however, the figures obtained from TQM analyses have a place in the ROI calculation. Jones finally states that processes and productivity can be continually improved by implementing up-to-date technology and by continually keeping associates trained to be efficient and effective deliverers of service. This is where the variability can be tracked, controlled, and predicted.
4. Using operational and performance data to calculate ROI in the lodging industry Evaluating ROI is, according to developers of popular models, easy to calculate, easy to manage, and critical if departments are to justify their existence. Both Kirkpatrick and Phillips begin their explanations of ROI by stating that complete accuracy in ROI calculations is not possible. The variability of the human factor, timeliness of information, and accuracy of all information always includes error, and thus the confidence level of any calculation related to yield, revenue, asset, or quality management is a guesstimate; however, it is important to calculate. The framework of Kirkpatrick and Phillips model is based on a series of questions to reach the ultimate ROI calculation. The Graph 1 depicted by Adelgais (2001) summarizes the questions in a pyramid. This pyramid is further summarized by the five Levels of Evaluation, which are: Kirkpatrick and Phillips ROI model levels: Level Level Level Level Level
I: Training action and reaction (pre and post test scores) II: Learning (tracking follow-up test scores, on the-job performance data) III: Behavior (job applications and behavior measurement) IV: Business results (business impact of programs) V : Calculation of ROI (cost versus benefit analysis)
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ROI-Will We Make Money? Will It Matter? Will They Use It? Did They Learn It? Did They Like It?
Graph 1. The ROI Pyramid of Questions.
Since the very calculation of ROI is not exact, the value must be placed on the estimates. Phillips reminds that cost allocations, transfer pricing, inventory adjustments, depreciation, and many other financial calculations are indeed subjective, but necessary to give a benchmark of success or prediction of failure. The calculation of ROI is no different and considered viable as a framework for analyzing costs related to the human factor in conducting business. Donald Kirkpatrick (1975) was one of the first researchers to study the variables to be included in the calculation of cost-benefit analysis as related to the human resources department and more specifically, training. His effort focused on the variability of human learning processes and the tracking of performance as it related to every function of an employee and the impact these functions had on costs verses benefits derived. From his perspective, the human element was paramount, but unfortunately, the most neglected financial variable in all equations in business accountability. The characteristics of the levels appear below: Table 1. By all accounts, Phillips states that, regardless of the ease of analyzing the information, it is the effort and willingness of all involved to share this information serving as the main barriers for calculation. The benefits of knowing the ROI of training and development of human resources is obvious, giving financial data tethered to training program implementation and delivery, current duties and incomes of associates being trained, overhead costs associated with program acquisition and evaluation, and depreciation of the program over time as the basics that a human resource director should be committed, and required, to submit. Measuring contributions of associates, isolating problems and strengths of training programs, and proving that training is beneficial if impact is measured in comparison to the success of an organization summarizes the need to calculate this percentage. Barriers, however, seem to be the crux of non-compliance and again, the lack of request for such information. Additional barriers mentioned by Phillips (1997) include lack of skills by human resource staff to understand and gather the information, cost of time and interest in the ROI process, inadequate and invalid needs assessments, fear of failure or losing credibility if numbers are reported that are not impressive, and false assumptions.
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Table 1 Characteristics of evaluation levels Level
Brief description
1. Reaction & planned action
Measures participant’s reaction to the program and outlines specific plans for implementation Measures skills, knowledge, or attitude changes Measures changes in behavior on the job and specific applications of the training material Measures business impact of the program Compares the monetary value of the results with the costs for the program, usually expressed in a percentage.
2. Learning 3. Job applications 4. Business results 5. Return on investment (added by Jack Phillips)
According to Phillips (1997), ROI will always be an estimate and is much easier to calculate if the following criteria are required of the evaluation process (p.7): The The The The The The The The The The
ROI process must be simple process must be economical with the ability to be implemented easily assumptions, methodology, and techniques must be credible process must be theoretically sound and based on accepted practices process must account for other factors that influence variables process must be appropriate with a variety of HRD programs process must have the flexibility to be applied to pre- and post-programs process must be applicable with all types of data process must include the costs of the program process must have a successful track record in a variety of applications
The above offers enough ambiguity that calculation could be accomplished to a degree that the information is isolated that is considered static as opposed to variable, offering both the predicable and the unpredictable. Level Four of the Kirkpatrick/Phillips plan focuses on attaching benefits to training; however, this is the level at which most human resource executives admit to leaving the process. While decreased turnover, positive feedback from guests, reduced expenses due to mistakes, increased sales, decreased comps are all indicators of quality impact, it is difficult to identify training as a measurable factor. Associates’ personality, work ethic, past experience, willingness to learn, learning level, interest in duties assigned, and attitude are factors that affect performance, making training and application of skills, knowledge and abilities difficult to adequately measure. 4.1. Calculating ROI for HR must be simplified Parry (1996) criticizes the Kirkpatrick/Phillips model by stating that level four is the most challenging and gives a list of reasons as to why most human resource directors and training professionals will not and cannot calculate ROI. With a list of negatives, Parry offers the opinion that ROI is still worth calculating states that HR departments can start by focusing on tracking training program costs and returns that are considered of critical importance. He suggests tracking costs that are recognizable, available, and easy to
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calculate and manage activities that can be counted, measured, and timed. As for those activities that cannot be gauged, feedback from meetings and interactions with both associates and guests are logged and analyzed. 4.2. An additional approach: the human scorecard Fitz-enz (2000) offers a combined framework that takes into account the theories of Kirkpatrick, Phillips, and Parry. The Human Capital Scorecard and other similar works state that there must be balance when valuing human capital and attaching monetary figures to their cost versus benefit. In this theory, human capital is viewed little differently than other types of capital. Fenz-enz presents a four-quadrant categorization to managing associate valuation and does not include strict accounting applications to the variables, but valuates based on levels of job satisfaction and employee morale to influence the four quadrant categories. It is this influence that drives the dollar values, or cost versus benefits of human capital. The framework is as follows (p. 111): Table 2. The above framework requires the application of ‘cost, time, quantity, and quality measures to the extent practical and possible’ (p. 111). The theory goes on to explain that acquisition, maintenance, retention, an development can be easily quantified; however, the last variable in the category of DEVELOPMENT slips in the illusive training ROI, and explains this only as a variable that must be generalized, offering results that are accepted as ‘better than nothing’ information, and that the general understanding of resource commitment and the reasons why selections were made must be reported. The scorecard offers a visual review of cost tracking, but does little to offer a suggestion as to measuring benefits of human capital. Robert Kaplan and Dave Norton (1996) presented a similar ‘scorecard’ model in which a top-down approach is taken to develop a strategy to reduce barriers that effect the ROI calculation. As related to training, the basic assumption is that time is money. Obstacles that pose problems are poorly designed statistical analyses, poorly written reports, poor quality data, and slow response to information. Performance, according to these
Table 2 Sample human capital scorecard Acquisition Cost per hire Time to fill jobs Number of new hires Quality of new hires Retention Total separation rate Percentage of voluntary separations; exempt and nonexempt Exempt separations by service length Percentage of exempt separations among toplevel performers Cost of turnover
Maintenance Total labor costs as percentage of operating expense (includes contingent labor cost) Average pay per employee Benefits cost as percentage of payroll Average performance score compared to revenue per FTE Development Training cost as percentage of payroll Total training hours provided Average number of hours of training per employee Training hours by function Training hours by job group Training ROI
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Table 3 Perspectives for the human balance scorecard Financial perspective Sales revenues Return on investment Return on gross capital employed Cost ratios
Customer perspective Market Share Customer loyalty Customer profitability Customer spend
Learning and growth Labor turnover Number of patents registered Employee productivity Data from employee surveys
Internal processes Reject rates Cycle time Customer complaints
researchers, is tied to quality training; training which makes an organization run efficiently and effectively. The HBS requires an organization to divide their focus into four panes, each of which offers measurement data. The bottom line is not of focus, but the overall achievement of strategies through four perspectives which are (1) financial perspective, (2) customer prospective, (3) internal perspective, and (4) innovative and learning perspective. The perspectives offer the following measurements (http://www.hrpractice.co.za/hrp003.htm): Table 3. The scorecard is somewhat of an anomaly since it is not a measurement device at all, but a strategy in leadership. While the quality of the information may not be 100% valid, the value in the scorecard procedure is that, at least, the information is known and provides a venue for quality estimations. 4.3. Implications for calculating human resource ROI the lodging industry Implications for the presented information are many-fold and again, simply a possibility for the lodging industry. The calculation of revenue, yield, asset, and TQM have, and continue to give, data upon which business decisions for financial and physical allocations are decided. The benefits for the lodging industry for requesting where revenue is directed, expenditures, yield or results of those decisions and the correct focus on priorities of both financial distribution and effort are critical to not only the lodging industry, but all industries if they are to survive. The calculation of ROI for the HR department and especially training is no different. The failure to at least calculate, with expected but limited error, should be required of HR and training experts for the purpose of prioritizing training, making sound training program and implementation decisions, budget planning for future training, and evaluation of the effectiveness of the training offered. To train because it is the ‘right thing to do’ is not good enough. Simons and Hinkin (2001) provide proof of this statement in their article on the single issue of turnover and the impact it has on hotel profits. Companies with HR departments offering training that is carefully selected retention programs, and an evaluation as to how turnover impacts sales, market value, and profitability are those that understand the relationship between productivity and profit.
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5. Summary The activity of calculating costs, benefits, and managing revenue is commonplace in many businesses, including those in the hospitality industry. The focus on revenue alone has gained popularity in the last decade, influencing some universities to offer concentrations within the hospitality major on the topic. Marriott International serves as an example of a lodging company employing managers with such training. Revenue managers are tasked with the challenge of generating, strategically planning, and consulting with both owners and operators as to the current status and plans for asset management. Revenue management is not an entry-level position, but a senior-level executive slot occupied by those who have experience in retail, marketing, food and beverage and banquet operations, event management, lodging, human resources, and overall property management. Revenue managers understand accounting, finance, and economics, the analysis of a profit and loss statement, and have the ability to forecast for future investments. Information provided by revenue managers and those responsible for tracking yield serve an important role in providing data needed for ROI calculations. Yield management seeks to control input and output enough to realize the greatest results with calculated and tightly controlled investment. TQM breaks down the activities of an operation, including the management of revenue and yield, and seeks to hone tasks, guest and associate interactions, and the environment to the point of focusing on improving performance and controlling error. The calculation of revenue, yield, or TQM is without error; however, the tracking of information is easier to accomplish since unpredictability is either at a minimum or, at least, can be somewhat controlled. Regardless, the information provides important details as to the efficiency and effectiveness of product use, acquisition, and impact. The calculation of ROI, with respect to training, involves the variable of humans with all of their likes, dislikes, beliefs, talents, skills, abilities, disabilities and histories. While tracking scores on performance tests, pay, time off, benefits, and other measurable information is an achievable accounting activity, attaching monetary figures to the level of success or failure of an organization based on human performance and reaction to training is impossible. To ‘value’ an employee is an estimate, a benchmark based on guess and one that includes error. Pressure continues to build for human resource directors to justify their investments in training and to valuate their existence with more gusto than simply providing humans trained to the point of maintaining day-to-day business. What can be done with more focus and tenacity is (1) selecting training programs that are immediately applicable to jobs for which people are hired, (2) conducting pre-training evaluations that yield some general level of learning level and understanding before training begins, (3) delivering pre- and post-testing for all training programs delivered, and (4) tracking efficiency and effectiveness of individuals who have received training for performance improvement plans. Evaluations of this nature can include positive behavior change, motivation to improve and be promoted, reduction in mistakes or time taken to complete a task, and quality of work performed. It is further recommended and considered qualitatively important that efforts be made to improve the hiring process. Houston’s Restaurants, as an example, is a company well known for its probationary hiring programs that require prospective managers to intern in
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stores for a period of time without a commitment of a full-time position as a manager. The company understands that recruits, over a period of time, prove potential, or not. Work habits, interpersonal skills, ability to learn, and commitment to the job is proven over time, not a 30 min interview flanked by calls to references, and a review of a resume. More time devoted to the acquisition of certain personality types, desired attitudes, and leadership qualities need more attention and will thus yield more positive returns on the human investment. The human factor has been and will most likely continue to be the influencing variable that cannot be corralled, remaining the category serving as the thorn in ROI calculations; however, the cost verses benefits of human capital, even if not entirely complete, can be measured with the understanding that a certain amount of error is to be expected. 6. Invitation for discussion During a recent presentation at the I-CHRIE Conference in Las Vegas, Nevada in July 2005, debate on the issue of ROI and subsequent discussion on this issue was welcomed by the author of this paper and co-author of the presentation, Sheryl Kline of Purdue University. It was suggested that a round-table discussion of the issues and usable data be pursued at the 2006 I-CHRIE Conference. Also recommended to the study presented, which included interviews with HR executives representing top lodging organizations, was a think-tank approach to developing a model that could be tested among a pilot group. Also discussed was the timeliness of information and technology that would make data available to a variety of departments so that mining or ‘capturing’ of the data could be possible by HR departments for ROI purposes. The absence of preand posttests used for training programs, quality evaluative tools used to rank the effectiveness of training programs, and issues related to accounting for individual differences of employees were noted as missing links to effective ‘valuation’ and performance tracking. The author invites further discussion, debate, and the reference of other studies on the topic ROI in the lodging industry. Of particular interest to the author is the application of ROI in the training and human resource functions and the application of methods presented. For those interested in co-authoring or otherwise teaming on the subject presented, please contact Kimberly J. Harris, Ed. D. directly at 850-644-8246 or via email at [email protected]. References Adelgais, S., 2001. Return on investment: an evaluative framework. http://coe.sdsu.edu/eet/Articles/roi/start.htm Ambrosio, J., 2001. What to count? Computerworld, July 16. http://websurveyor.net/wsb.dll/7764/pricingsurvey. htm Baldacchino, G., 1995. Total quality management in a luxury hotel: a critique of practice. International Journal of Hospitality Management 14 (1), 67–78. Blandy, R., Dockery, M., Hawke, A., Webster, E., 2000. Does training pay: evidence from Australian Enterprises. National Center for Vocational Educational Research, Case Study 009. Breiter, D., Bloomquist, P., 1998. TQM in American hotels. The Cornell Hotel and Restaurant and Administration Quarterly 39 (1), 26–33. Brooks, C., 1999. The beauty of performance measurement. International Personnel Management Association Assessment Council. http://www.ipmaac.org/acn/dec99/pracexch.html
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Brown, B.L., 2001. ERIC Clearinghouse on Adult, Career, and Vocational Education. http://www.jsr.cc.va.us/ critical_needsROI.pdf Davidson, L., 1998. Measure what you bring to the bottom line. Workforce, September. Feldman, D.S., 1995. Asset management: here to stay. The Cornell Hotel and Restaurant and Administration Quarterly 36 (5), 36–51. Fitz-enz, J., 2000. The ROI of Human Capital. AMACOM (American Management Association), New York. Flynn, G., 1998. The nuts & bolts of valuing training. Workforce 11 (2), 80–85. Goldwasser, D., 2000. Beyond ROI. Training 38 (1), 82–90. Harris, P.J., Brown, J.B., 1998. Research and development in hospitality accounting and financial management. International Journal of Hospitality Management 17 (2), 161–181. Harris, K.J., Kline, S.F., 2005. Measuring return on investment of training in the lodging industry: a pilot study. In: Proceedings of the International Council on Hotel, Restaurant, and Institutional Education Conference, ICHRIE Conference Proceedings, Las Vegas, NV. Jones, P., 1988. Quality, capacity, and productivity in service industries. International Journal of Hospitality Management 7 (2), 104–112. Kaplan, R.S., Norton, D.P., 1996. The Balanced Scorecard: Translating Strategy into Action. Harvard Business School Press, Cambridge, MA. Kimes, S.E., 1989. The basics of yield management. The Cornell Hotel and Restaurant and Administration Quarterly 30 (3), 15–19. Kimes, S.E., 2001. How product quality drives profitability. The Cornell Hotel and Restaurant and Administration Quarterly 42 (3), 25–28. Kirkpatrick, D., 1975. Evaluating Training Programs. ASTD, Alexandria, VA. Kirkpatrick, D., 1994. Evaluating Training Programs: The Four Levels. Berret-Koehler, San Francisco. Kirkpatrick, D., 1996. Techniques for evaluating training programs. Training & Development Journal 33 (6), 78–92. Koch, C., 2002. Why doesn’t your ROI measure up? Do the math. Darwin Magazine, March. http:// www.learnativity.com/roi-learning.html Lachnit, C., 2001. Training proves its worth. Workforce 80 (9), 52–56. Millis, M., 2002. Is training worth it? ROI gives answers. Return on Investment in Training-Learnativity.com. http://www.learnativity.com/roi-learning.html Oberwetter, R., 2001. Building blockbuster business. Operations Research Management Science. http:// lionhrtpub.com/orms/orms-6-01/oberwetter.html Online Learning Magazine, May, 2001, 5(5). Parry, S.B., 1996. Measuring training’s ROI. Training & Development 50 (5), 72–78. Partlow, C., 1996. Human resources practices of TQM hotels. The Cornell Hotel and Restaurant and Administration Quarterly 37 (5), 67–77. Phillips, J., 1994. Measuring Return on Investment. Vol. 1. ASTD, Alexandria, VA. Phillips, J., 1996. Return on investment: a step-by-Step Manual for Calculating the Financial Return. Gulf Publishing, Houston. Phillips, J., 1997. Return on Investment in Training and Performance Improvement Programs. Elsevier Publishing, New York. Phillips, P., Phillips, J., 2002. The Bottom Line in ROI: Basics, Benefits, & Barriers to Measuring Training & Performance Improvement. The Center for Effective Performance, Atlanta. Reigel, C.D., Umbreit, W.T., 1995. When the budget ax falls: a tale of survival. The Cornell Hotel and Restaurant and Administration Quarterly 36 (4), 80–86. Rowden, R.W., 2001. Exploring methods to evaluate the return from training. American Business Review 19 (1), 6–12. Simons, T., Hinkin, T., 2001. The effect of employee turnover on hotel profits. The Cornell Hotel and Restaurant and Administration Quarterly 42 (4), 65–68. Soriano, D.R., 1999. Total quality management: applying the European model to Spain’s urban hotels. The Cornell Hotel and Restaurant and Administration Quarterly 40 (1), 54–59. Setaro, J.L., 2000. Is it worth the cost? Calculating the ROI for training, September 15. http:// www.courses.com.mt/pdf/trainingROI.pdf Stone, J., Watson, V., 1999. http://www.careeredgeonline.com/measuring_training_roi_and_impac.htm Tracey, J.B., Tews, M.J., 1995. Training effectiveness: accounting for individual characteristics. The Cornell Hotel and Restaurant and Administration Quarterly 36 (6), 36–42.
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Upchurch, R.S., Ellis, T., Seo, J., 2002. Revenue management underpinnings: an exploratory review. International Journal of Hospitality Management 21 (1), 67–83. Webb, W., 1999. Show me the return. Inside Technology Training, November. http://www.learnativity.com/ roi-learning.html Worthern, B., 2001. Measuring the ROI of training. CIO Magazine, February 15. http://www.cio.com/archive/ 021501/index.html
Hospitality Management 26 (2007) 485–498 www.elsevier.com/locate/ijhosman
Discussion paper
Calculating ROI for training in the lodging industry: Where is the bottom line? Kimberly J. Harris College of Business, Florida State University, Talahassee, FL2305-2541, USA
Abstract The challenge of measuring the effectiveness and efficiency of training has long been a hurdle for human resource and training professionals in the lodging industry. The reporting of a department’s financial performance is a basic expectation of leaders responsible for their share of operational goals of a property. The management of revenue, yield, assets, and total quality are all part of the mix; however, for many leaders in human resource and training experts in the lodging industry, justification for expenditures and financial performance expectations are rarely requested. r 2006 Published by Elsevier Ltd. Keywords: Training; Return-on-investment; Revenue management; Yield management; Asset management; Total quality management; Financial accountability
1. Introduction The purpose of this discussion paper is to encourage discussion, debate, and ultimately stimulate interest in the subject of return-on-investment (ROI) in the lodging industry. Of specific focus is the expectation of a return on the investment in the human resources employed by this industry as correlated with training given and performance received, respectively. The methods for tracking ROI for human capital management have been a long-time practice for training experts in other industries. According to two popular ROI theorists, Donald Kirkpatrick (1994) and Jack Phillips (1996), existing models are not only readily available but easily implemented. Research reveals that popular models are used successfully by Fortune 500 companies as well as small business owners; however, are E-mail address: [email protected]. 0278-4319/$ - see front matter r 2006 Published by Elsevier Ltd. doi:10.1016/j.ijhm.2005.12.001
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largely absent in the lodging industry. The American Society of Training and Development (ASTD) offers information on ROI in the form of workshops, guidebooks, consulting referrals, and a myriad of instructional texts and videos to aid those seeking to understand the concepts and apply the theories. Despite the many options available, most training and human resources experts in the lodging industry do not calculate ROI. In an era when lodging companies are slowly recovering from a suffering US economy, department leaders are expected to justify their costs, make decisions that will have a positive impact to the bottom line, and develop strategies as to how their teams will help move the company forward in terms of growth and quality. However, the majority of those responsible for delivering training to employees in the lodging industry are not required to track performance as it relates to controlling costs and increasing revenue. In recent interviews with several human resource directors, most said that top executives do not expect an ROI, bottom-line report (Harris and Kline, 2005). 1.1. Reasons for failing to calculate ROI Barriers to obtaining valid and reliable information to be used in the calculation of the percentage and lack of interest in the process are the two most popular reasons for failing to calculate ROI (Harris and Kline, 2005; Flynn, 1998; Philips and Phillips, 2002). Experts report that no ROI method is completely sound and for some departments, calculating ROI is not practical (Ambrosio, 2001; Brooks, 1999; Brown, 2001). However, as an opposing opinion, calculating some sort of financial analysis is expected and considered invaluable for HR to justify their existence (Koch, 2002; Millis, 2002; Blandy et al., 2000). 2. Literature review Human capital is somewhat of a moving target when it comes to applying financial investment and return numbers to training given, learning achieved and performance realized. Tracking modified behavior and the value of an individual’s modification may be the desire of every human resource director responsible for the development of their human resources; however, the reality of this endeavor is quite another matter. According to Brown (2001), calculating the ROI figure has no constant value, is difficult to summarize, and is an invalid percentage or ratio due to the time value of information. 2.1. Calculating ROI is a waste of timeyor is it? Some human resource professionals believe it is not only impossible but a waste of time to calculate ROI for their human development programs (Flynn, 1998; Online Learning Magazine, 2001). Others believe that a modified ROI calculation can be achieved for planning training programs, discovering employee audience needs, and improving performance on a general level (Fitz-enz, 2000; Millis, 2002; Worthern, 2001). A popular model supported by the American Society for Training and Development (ASTD) is that of Donald Kirkpatrick and subsequent edits to the model by Jack Phillips, known as the Kirkpatrick Model. This model is considered the basic framework upon which Phillips later added an additional level of analysis, or the financial returns level critical to the ROI calculation. This model is comprised of five levels, all of which are interdependent,
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sequential as to process, and if financial strategic planning is in place from the beginning, the calculation achieved in level five is residual information. Regardless of technique, technology, or other challenge discussed to capturing the information and analyzing its impact, failure to calculate the figure to give a benchmark, or indication of the ROI of employees is to fall short of business expectations (Davidson, 1998; Stone and Watson, 1999; Webb, 1999; Setaro, 2000). 2.1.1. Basic formula for ROI calculation The formula for calculation ROI is easy enough to digest and appears as a percentage; however, it is the data that identifies benefits and costs that remain ambiguous, and is said, the ‘devil is in the details’: Benefits Costs 100 . Costs Parry (1996) stated that the data was difficult to track, the outcome too subjective, and the process of obtaining valid data too time consuming for managers to collect. However, the advantages of valuating cost-versus-benefit data far outweigh the disadvantages (Lachnit, 2001; Goldwasser, 2000). According to Feldman (1995), Reigel and Umbreit (1995), and Kimes (2001) measurement of quality is basic to predicting profitability. According to a study conducted by Harris and Kline (2005), HR executives from top lodging companies reported that they did not calculate ROI, but rather relied on customer feedback cards and turnover rates to ‘guesstimate’ the value of their department to the overall bottom line of the organization. Calculating the ROI of training promotes justification of current and future budgets, improved training program selection, tracking of costs verses impact, prediction of increased revenue based on improved service and product selection, decreases in accidents, turnover, and absenteeism, and improved benefit package selection (Rowden, 2001; Phillips, 1996). The theory of tracking training and the costs versus benefits of associated activities is that training improves knowledge and knowledge improves delivery of all hospitality business-related activities (Soriano, 1999; Partlow, 1996; Breiter and Bloomquist, 1998; Baldacchino, 1995). According to this organization specializing in HR and training, wellknown corporations such as Delta Airlines, FEDEX, Dell Computers, General Motors, and AT&T are successfully using the five levels of the ROI evaluation process as presented by Kirkpatrick and Phillips (Kirkpatrick, 1996; Phillips, 1994). Calculations of yield, revenue, asset, and total quality management (TQM) are analyses well known in the lodging industry. The tracking of cost versus benefits are realized in these calculations, monitoring of expenditures as related to revenue, the quality output of input, and the management of assets to produce the expected level of gains are common to managers who must report on their investment decisions. ROIð%Þ ¼
2.2. Piecing together the plethora of contributing theories Conducting evaluations of fund allocation management is a departmental responsibility, including usage of fund expenditures for human resource development (Upchurch et al., 2002). Asset management, often the task of a revenue manager, is an integrated effort to predict yield, of which human resources can impact significantly when considering funds
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invested into hiring, training, maintaining, and promoting the ‘products’ of hospitality businesses. Kimes (1989) and Oberwetter (2001) provide explanations communicating revenue management involves the prediction of yield based on the management of room sales and customer booking behaviors; however, not mentioned is the impact of the human element in these activities and the importance of training, proper position assignment, and the human element in product selection and consumption. Revenue management is a residual of the human ability to attract, satisfy, and then manage the experiences of the customer. Otherwise, the discussion of asset management, whether discussed as yield, revenue or otherwise, is moot (Tracey and Tews, 1995). The mechanics of revenue management and analysis of yield cannot be explained without the inclusion of the ROIs expected from the human resources dedicated to these functions (Harris and Brown, 1998).
3. An overview of popular return-on-investment related theories A brief overview of the theories of yield, revenue, asset, and TQM theories is presented for review. The summaries state that each approach uses both historical as well as predictive operational and financial data to make decisions, predict activity, and justify goal setting. Consideration by HR departments for using similar approaches, or a mixedapproach model, could assist in developing a manageable ROI.
3.1. Yield and revenue management Yield management was discussed by Upchurch et al. (2002) as a medley of revenue factors, demand indicators, benchmarking activities, forecasting factors, and supply and demand maximization factors. These researchers stated that yield management was an exercise in providing customers with expected levels of service and product quality while at the same time, producing the highest level of revenue per transaction. Yield and revenue management have this goal in common and rely on the human and physical plant usage required to produce yield or revenue targets. Revenue and yield rely on fluctuations for marketing purposes, projected static numbers, and seasonal market demands to run specials and offer package deals. Unpredicted demand also effects yield and revenue as does the following variables common to the revenue manager (Upchurch et al., 2002, pp. 68–69): The individual responsible for revenue enhancement must have at their disposal a myriad of factors that exert a significant impact upon the yield management process. Some of the more influential factors that come into play are historical demand, noshows, the property’s walk-ins, and consumer cancellation patters. Furthermore, the revenue manager must also be knowledgeable of the property’s booking behavior, arrival and departure patterns for each segment, specifically transient, corporate travelers, association regulars, and any other relevant consumer market segments. Finally, policies must exist regarding operational procedures, such as over-booking, in order to correctly predict performance.
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From this viewpoint, yield and revenue is impacted by the quality of training and the individual skills, knowledge, and abilities of those responsible for the management of dependent activities. In common with the ROI calculations is the need for information from a variety of resources. There are no apparent barriers posed by those responsible for yield and revenue management regarding the attainment of information needed to calculate yield or revenue from a variety of profit or otherwise operational segments. While the task requires the analysis of information that must be accurate, up-to-date, and readily available, access is a matter of compliance. 3.2. Asset management Feldman (1995) uses the term ‘asset management’ (p. 36) to describe the responsibilities of the person who consults with both the owner of a property and the management company hired to conduct operations to ensure goals are met for both. Working primarily for the owner, the asset manager investigates the management company’s procedures, communication methods, and business decisions, serving as a go-between to provide an unbiased and professional review of the company’s ability to make the property a success. Feldman further explained that the interpretation of an asset manager was vague and the expectations of such a manager from clients, operators, and asset managers themselves varied. It is this confusion that may have lead to the demise of the label, since little has been published in the hospitality research journals regarding this position since or possibly, is referred to on a more general basis, whether employed internally or externally, as ‘financial advisor’, ‘revenue manager’, or ‘chief financial officer (CFO)’. Obviously, the asset manager, if so employed, is involved in making critical financial return decisions by analyzing the activities of management and providing advice. Based on the quality of advice given and the data to which this manager has access, the figures can be used in calculating ROI in terms of revenue realized and costs incurred. This person can also be evaluated based on their value to the company in terms of incoming dollars for which they are immediately responsible as well as costs. 3.3. Total quality management Yet another theory of comparison is that related to statistical calculations related to quality. Jones (1988) gives a thorough discussion as to the approach to quality output as related to the physical plant, amenity and services provided, policies and procedures implemented, and the level of training of employees. This article is one of the few that includes the human factor in both calculating and predicting quality, which in turn, is used to influence yield and revenue management. The tangibility and intangibility of hospitality services, of which product use by customers must experience, is mentioned as a venue for categorizing final output, or revenue. Can an intangible be calculated to a definite number, predictable as a figure, and reliable as a solid and dependable return? Jones further raises the question of the meaning of ‘return’ by the changes in customers as a result of quality service and a repetition of their business or that of their friends based upon this experience. The discussion ensues to add another author’s opinion by saying (p. 105):
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Sasser et al. (1978) themselves purpose the idea of the service/product continuum along which most service and most products would lie. Foxall (1983) argues that ‘those who argue for clear-cut distinctions between services and products have actually demonstrated no more than if some services are located at or near one end of various continua, then some ‘products’ can be logically placed at or near the opposing poles’. A model for calculating both quality and productivity was presented as a three-stage framework wherein stage one is monitoring productivity processes; stage two is managing capacity or consumer take-up, followed by the third and final stage wherein the impact on consumers is measured as quality output. Jones further argues the weaknesses of this model on truly being able to realize a valid predictor in terms of revenue. He states that the first stage cannot be depended upon to produce a competitive edge since processes are easily copied by competitors. The second stage is also difficult to measure, since consumers control their consumption. The final stage is equally undependable since quality is intangible. Again, the comparison between TQM fails to add solidarity to theory that ROI can be easily calculated, and the theories of yield and revenue management do not entail all of the factors needed to calculate ROI; however, the figures obtained from TQM analyses have a place in the ROI calculation. Jones finally states that processes and productivity can be continually improved by implementing up-to-date technology and by continually keeping associates trained to be efficient and effective deliverers of service. This is where the variability can be tracked, controlled, and predicted.
4. Using operational and performance data to calculate ROI in the lodging industry Evaluating ROI is, according to developers of popular models, easy to calculate, easy to manage, and critical if departments are to justify their existence. Both Kirkpatrick and Phillips begin their explanations of ROI by stating that complete accuracy in ROI calculations is not possible. The variability of the human factor, timeliness of information, and accuracy of all information always includes error, and thus the confidence level of any calculation related to yield, revenue, asset, or quality management is a guesstimate; however, it is important to calculate. The framework of Kirkpatrick and Phillips model is based on a series of questions to reach the ultimate ROI calculation. The Graph 1 depicted by Adelgais (2001) summarizes the questions in a pyramid. This pyramid is further summarized by the five Levels of Evaluation, which are: Kirkpatrick and Phillips ROI model levels: Level Level Level Level Level
I: Training action and reaction (pre and post test scores) II: Learning (tracking follow-up test scores, on the-job performance data) III: Behavior (job applications and behavior measurement) IV: Business results (business impact of programs) V : Calculation of ROI (cost versus benefit analysis)
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ROI-Will We Make Money? Will It Matter? Will They Use It? Did They Learn It? Did They Like It?
Graph 1. The ROI Pyramid of Questions.
Since the very calculation of ROI is not exact, the value must be placed on the estimates. Phillips reminds that cost allocations, transfer pricing, inventory adjustments, depreciation, and many other financial calculations are indeed subjective, but necessary to give a benchmark of success or prediction of failure. The calculation of ROI is no different and considered viable as a framework for analyzing costs related to the human factor in conducting business. Donald Kirkpatrick (1975) was one of the first researchers to study the variables to be included in the calculation of cost-benefit analysis as related to the human resources department and more specifically, training. His effort focused on the variability of human learning processes and the tracking of performance as it related to every function of an employee and the impact these functions had on costs verses benefits derived. From his perspective, the human element was paramount, but unfortunately, the most neglected financial variable in all equations in business accountability. The characteristics of the levels appear below: Table 1. By all accounts, Phillips states that, regardless of the ease of analyzing the information, it is the effort and willingness of all involved to share this information serving as the main barriers for calculation. The benefits of knowing the ROI of training and development of human resources is obvious, giving financial data tethered to training program implementation and delivery, current duties and incomes of associates being trained, overhead costs associated with program acquisition and evaluation, and depreciation of the program over time as the basics that a human resource director should be committed, and required, to submit. Measuring contributions of associates, isolating problems and strengths of training programs, and proving that training is beneficial if impact is measured in comparison to the success of an organization summarizes the need to calculate this percentage. Barriers, however, seem to be the crux of non-compliance and again, the lack of request for such information. Additional barriers mentioned by Phillips (1997) include lack of skills by human resource staff to understand and gather the information, cost of time and interest in the ROI process, inadequate and invalid needs assessments, fear of failure or losing credibility if numbers are reported that are not impressive, and false assumptions.
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Table 1 Characteristics of evaluation levels Level
Brief description
1. Reaction & planned action
Measures participant’s reaction to the program and outlines specific plans for implementation Measures skills, knowledge, or attitude changes Measures changes in behavior on the job and specific applications of the training material Measures business impact of the program Compares the monetary value of the results with the costs for the program, usually expressed in a percentage.
2. Learning 3. Job applications 4. Business results 5. Return on investment (added by Jack Phillips)
According to Phillips (1997), ROI will always be an estimate and is much easier to calculate if the following criteria are required of the evaluation process (p.7): The The The The The The The The The The
ROI process must be simple process must be economical with the ability to be implemented easily assumptions, methodology, and techniques must be credible process must be theoretically sound and based on accepted practices process must account for other factors that influence variables process must be appropriate with a variety of HRD programs process must have the flexibility to be applied to pre- and post-programs process must be applicable with all types of data process must include the costs of the program process must have a successful track record in a variety of applications
The above offers enough ambiguity that calculation could be accomplished to a degree that the information is isolated that is considered static as opposed to variable, offering both the predicable and the unpredictable. Level Four of the Kirkpatrick/Phillips plan focuses on attaching benefits to training; however, this is the level at which most human resource executives admit to leaving the process. While decreased turnover, positive feedback from guests, reduced expenses due to mistakes, increased sales, decreased comps are all indicators of quality impact, it is difficult to identify training as a measurable factor. Associates’ personality, work ethic, past experience, willingness to learn, learning level, interest in duties assigned, and attitude are factors that affect performance, making training and application of skills, knowledge and abilities difficult to adequately measure. 4.1. Calculating ROI for HR must be simplified Parry (1996) criticizes the Kirkpatrick/Phillips model by stating that level four is the most challenging and gives a list of reasons as to why most human resource directors and training professionals will not and cannot calculate ROI. With a list of negatives, Parry offers the opinion that ROI is still worth calculating states that HR departments can start by focusing on tracking training program costs and returns that are considered of critical importance. He suggests tracking costs that are recognizable, available, and easy to
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calculate and manage activities that can be counted, measured, and timed. As for those activities that cannot be gauged, feedback from meetings and interactions with both associates and guests are logged and analyzed. 4.2. An additional approach: the human scorecard Fitz-enz (2000) offers a combined framework that takes into account the theories of Kirkpatrick, Phillips, and Parry. The Human Capital Scorecard and other similar works state that there must be balance when valuing human capital and attaching monetary figures to their cost versus benefit. In this theory, human capital is viewed little differently than other types of capital. Fenz-enz presents a four-quadrant categorization to managing associate valuation and does not include strict accounting applications to the variables, but valuates based on levels of job satisfaction and employee morale to influence the four quadrant categories. It is this influence that drives the dollar values, or cost versus benefits of human capital. The framework is as follows (p. 111): Table 2. The above framework requires the application of ‘cost, time, quantity, and quality measures to the extent practical and possible’ (p. 111). The theory goes on to explain that acquisition, maintenance, retention, an development can be easily quantified; however, the last variable in the category of DEVELOPMENT slips in the illusive training ROI, and explains this only as a variable that must be generalized, offering results that are accepted as ‘better than nothing’ information, and that the general understanding of resource commitment and the reasons why selections were made must be reported. The scorecard offers a visual review of cost tracking, but does little to offer a suggestion as to measuring benefits of human capital. Robert Kaplan and Dave Norton (1996) presented a similar ‘scorecard’ model in which a top-down approach is taken to develop a strategy to reduce barriers that effect the ROI calculation. As related to training, the basic assumption is that time is money. Obstacles that pose problems are poorly designed statistical analyses, poorly written reports, poor quality data, and slow response to information. Performance, according to these
Table 2 Sample human capital scorecard Acquisition Cost per hire Time to fill jobs Number of new hires Quality of new hires Retention Total separation rate Percentage of voluntary separations; exempt and nonexempt Exempt separations by service length Percentage of exempt separations among toplevel performers Cost of turnover
Maintenance Total labor costs as percentage of operating expense (includes contingent labor cost) Average pay per employee Benefits cost as percentage of payroll Average performance score compared to revenue per FTE Development Training cost as percentage of payroll Total training hours provided Average number of hours of training per employee Training hours by function Training hours by job group Training ROI
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Table 3 Perspectives for the human balance scorecard Financial perspective Sales revenues Return on investment Return on gross capital employed Cost ratios
Customer perspective Market Share Customer loyalty Customer profitability Customer spend
Learning and growth Labor turnover Number of patents registered Employee productivity Data from employee surveys
Internal processes Reject rates Cycle time Customer complaints
researchers, is tied to quality training; training which makes an organization run efficiently and effectively. The HBS requires an organization to divide their focus into four panes, each of which offers measurement data. The bottom line is not of focus, but the overall achievement of strategies through four perspectives which are (1) financial perspective, (2) customer prospective, (3) internal perspective, and (4) innovative and learning perspective. The perspectives offer the following measurements (http://www.hrpractice.co.za/hrp003.htm): Table 3. The scorecard is somewhat of an anomaly since it is not a measurement device at all, but a strategy in leadership. While the quality of the information may not be 100% valid, the value in the scorecard procedure is that, at least, the information is known and provides a venue for quality estimations. 4.3. Implications for calculating human resource ROI the lodging industry Implications for the presented information are many-fold and again, simply a possibility for the lodging industry. The calculation of revenue, yield, asset, and TQM have, and continue to give, data upon which business decisions for financial and physical allocations are decided. The benefits for the lodging industry for requesting where revenue is directed, expenditures, yield or results of those decisions and the correct focus on priorities of both financial distribution and effort are critical to not only the lodging industry, but all industries if they are to survive. The calculation of ROI for the HR department and especially training is no different. The failure to at least calculate, with expected but limited error, should be required of HR and training experts for the purpose of prioritizing training, making sound training program and implementation decisions, budget planning for future training, and evaluation of the effectiveness of the training offered. To train because it is the ‘right thing to do’ is not good enough. Simons and Hinkin (2001) provide proof of this statement in their article on the single issue of turnover and the impact it has on hotel profits. Companies with HR departments offering training that is carefully selected retention programs, and an evaluation as to how turnover impacts sales, market value, and profitability are those that understand the relationship between productivity and profit.
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5. Summary The activity of calculating costs, benefits, and managing revenue is commonplace in many businesses, including those in the hospitality industry. The focus on revenue alone has gained popularity in the last decade, influencing some universities to offer concentrations within the hospitality major on the topic. Marriott International serves as an example of a lodging company employing managers with such training. Revenue managers are tasked with the challenge of generating, strategically planning, and consulting with both owners and operators as to the current status and plans for asset management. Revenue management is not an entry-level position, but a senior-level executive slot occupied by those who have experience in retail, marketing, food and beverage and banquet operations, event management, lodging, human resources, and overall property management. Revenue managers understand accounting, finance, and economics, the analysis of a profit and loss statement, and have the ability to forecast for future investments. Information provided by revenue managers and those responsible for tracking yield serve an important role in providing data needed for ROI calculations. Yield management seeks to control input and output enough to realize the greatest results with calculated and tightly controlled investment. TQM breaks down the activities of an operation, including the management of revenue and yield, and seeks to hone tasks, guest and associate interactions, and the environment to the point of focusing on improving performance and controlling error. The calculation of revenue, yield, or TQM is without error; however, the tracking of information is easier to accomplish since unpredictability is either at a minimum or, at least, can be somewhat controlled. Regardless, the information provides important details as to the efficiency and effectiveness of product use, acquisition, and impact. The calculation of ROI, with respect to training, involves the variable of humans with all of their likes, dislikes, beliefs, talents, skills, abilities, disabilities and histories. While tracking scores on performance tests, pay, time off, benefits, and other measurable information is an achievable accounting activity, attaching monetary figures to the level of success or failure of an organization based on human performance and reaction to training is impossible. To ‘value’ an employee is an estimate, a benchmark based on guess and one that includes error. Pressure continues to build for human resource directors to justify their investments in training and to valuate their existence with more gusto than simply providing humans trained to the point of maintaining day-to-day business. What can be done with more focus and tenacity is (1) selecting training programs that are immediately applicable to jobs for which people are hired, (2) conducting pre-training evaluations that yield some general level of learning level and understanding before training begins, (3) delivering pre- and post-testing for all training programs delivered, and (4) tracking efficiency and effectiveness of individuals who have received training for performance improvement plans. Evaluations of this nature can include positive behavior change, motivation to improve and be promoted, reduction in mistakes or time taken to complete a task, and quality of work performed. It is further recommended and considered qualitatively important that efforts be made to improve the hiring process. Houston’s Restaurants, as an example, is a company well known for its probationary hiring programs that require prospective managers to intern in
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stores for a period of time without a commitment of a full-time position as a manager. The company understands that recruits, over a period of time, prove potential, or not. Work habits, interpersonal skills, ability to learn, and commitment to the job is proven over time, not a 30 min interview flanked by calls to references, and a review of a resume. More time devoted to the acquisition of certain personality types, desired attitudes, and leadership qualities need more attention and will thus yield more positive returns on the human investment. The human factor has been and will most likely continue to be the influencing variable that cannot be corralled, remaining the category serving as the thorn in ROI calculations; however, the cost verses benefits of human capital, even if not entirely complete, can be measured with the understanding that a certain amount of error is to be expected. 6. Invitation for discussion During a recent presentation at the I-CHRIE Conference in Las Vegas, Nevada in July 2005, debate on the issue of ROI and subsequent discussion on this issue was welcomed by the author of this paper and co-author of the presentation, Sheryl Kline of Purdue University. It was suggested that a round-table discussion of the issues and usable data be pursued at the 2006 I-CHRIE Conference. Also recommended to the study presented, which included interviews with HR executives representing top lodging organizations, was a think-tank approach to developing a model that could be tested among a pilot group. Also discussed was the timeliness of information and technology that would make data available to a variety of departments so that mining or ‘capturing’ of the data could be possible by HR departments for ROI purposes. The absence of preand posttests used for training programs, quality evaluative tools used to rank the effectiveness of training programs, and issues related to accounting for individual differences of employees were noted as missing links to effective ‘valuation’ and performance tracking. The author invites further discussion, debate, and the reference of other studies on the topic ROI in the lodging industry. Of particular interest to the author is the application of ROI in the training and human resource functions and the application of methods presented. For those interested in co-authoring or otherwise teaming on the subject presented, please contact Kimberly J. Harris, Ed. D. directly at 850-644-8246 or via email at [email protected]. References Adelgais, S., 2001. Return on investment: an evaluative framework. http://coe.sdsu.edu/eet/Articles/roi/start.htm Ambrosio, J., 2001. What to count? Computerworld, July 16. http://websurveyor.net/wsb.dll/7764/pricingsurvey. htm Baldacchino, G., 1995. Total quality management in a luxury hotel: a critique of practice. International Journal of Hospitality Management 14 (1), 67–78. Blandy, R., Dockery, M., Hawke, A., Webster, E., 2000. Does training pay: evidence from Australian Enterprises. National Center for Vocational Educational Research, Case Study 009. Breiter, D., Bloomquist, P., 1998. TQM in American hotels. The Cornell Hotel and Restaurant and Administration Quarterly 39 (1), 26–33. Brooks, C., 1999. The beauty of performance measurement. International Personnel Management Association Assessment Council. http://www.ipmaac.org/acn/dec99/pracexch.html
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