In the modern workplace, skill management has become a critical component of successful human resource management. As organizations strive to stay competitive in an increasingly dynamic business environment, the need to optimize the skills and competencies of their workforce has never been more crucial.
While the benefits of such software are evident, understanding the return on investment (ROI) is essential to justify the expenditure. In this article, we will explore the process of calculating the ROI for a skill management software, offering insights into the value it can bring to your organization.
Understanding ROI: The Basics
ROI, or Return on Investment, is a key financial metric used to evaluate the efficiency or profitability of an investment. In the context of skill management software, ROI measures the financial returns generated by the software relative to its costs. A positive ROI indicates that the software is delivering more value than it costs, making it a worthwhile investment.
This article from the Project Management Institute (PMI) provides a detailed framework for calculating ROI, which can be adapted for skill management software.
This formula requires two primary inputs: the total financial benefits derived from the software and the total costs associated with it.
Estimating Benefits
The benefits of using skill management in Teammeter can be both direct (easily quantifiable) and indirect (less tangible but still valuable).
Increased Productivity
One of the primary benefits of skill management software is the potential increase in team productivity. By identifying skill gaps in hard skills or soft skills, you can improve the quality of recruiting and training, leading to a measurable boost in output:
- People with better qualifications make better decisions.
- The jobs are completed faster and with better quality.
- As knowledge is better distributed within employees, there is a lower risk of production breakdown in case of staff absence.
Example: For a team of 10 people, productivity is increased by 10% and each employee earns €60,000 annually, the benefit would be €60,000.
Reduced Turnover Costs
Skill management software contributes to higher employee retention by providing clear pathways for career development and skill enhancement. Reduced turnover translates into savings on recruitment, hiring, and training of new employees.
Example: If turnover is reduced by 5%, and the cost to replace an employee is €20,000, with a workforce of 200, this could mean savings of €200,000 annually.
Training Efficiency
A skill management software fosters knowledge transfer within the organization, reducing the need for unnecessary or redundant training programs. This leads to cost savings and ensures that training budgets are spent where they are most needed.
Example: 10% of training budget saved by year
Risk Reduction
In highly regulated industries, skill management software ensures that employees maintain necessary certifications and training, thereby reducing the risk of human errors and non-compliance penalties.
Example: Avoiding a €100,000 fine by ensuring compliance through timely training.
The Costs of Skill Management Software
The first step in calculating ROI is to identify all the costs associated with implementing and maintaining the skill management software. These costs can be categorized into initial costs and ongoing costs.
Integration Costs
To avoid redundant information maintained in several systems, skill management software needs to be integrated in your IT Landscape. For instance, Teammeter can be integrated with your systems in your IT landscape:
- Synchronization of employee data with your HRIS System. For instance, SAP or Personio.
- Use of your Identity Management system for Single-Sign-On
- Synchronization of training data with your Learning Management System (LMS) to map skills with trainings and get training certificates.
- Integration with your internal job marketplace to map job vacancies with skill definitions.
While Teammeter provides many out-of-the box connectors, there is configuration effort to ensure a smooth integration with your systems.
Training Costs
To ensure effective adoption, employees and administrators will need to be trained on how to use the software. Training costs can include instructor-led sessions, online courses, or internal training resources.
Teammeter provides a free onboarding in the enterprise package as well as training videos and documentation.
License Costs
Most skill management tools are provided as Software as a Service (SaaS). For many products, there is an initial setup cost and then a monthly or annual subscription cost. Teammeter does not invoice initial costs other than the integration costs.
Administration Costs
The use of the software itself requires time and, therefore, must be considered in the calculation. Managing skills requires some administration and evaluation effort:
- People need to perform self assessment and provide feedback for an accurate skill assessment.
- Teams need to update their skill requirements to make skill gaps visible.
- The Employee updates their learning path with planned and achieved training courses.
- The skill catalog must be maintained to become the company’s internal language representing qualifications.
Example:
- Each employee takes 10 minutes to update their profile one time per quarter.
- The skill catalog administrator reviews the skill catalog one during one hour, one time per month.
Step 3: Calculating the ROI
Now that you have an overview of financial benefits and expenses, you can calculate the Return of Investment.
Example Calculation
Let’s consider a hypothetical of a department of 100 employees with an average cost per employee of 60k EUR.
We make a calculation of the benefits and costs of skill management for one year:
- Financial benefits
- Productivity Increase: +3% = 180k
- Reduced Turnover: -10% = 60k
- Improved Training Efficiency: +10% = 5k
- Risk reduction: 5k
- Total: 250k
- Costs
- Training: 2 hours for new Employees = 0.6k
- Software Licenses: 5 EUR / Employee / Month = 6k
- Administration: 0.5 hours / Employee / Month = 17k
- Total: 24k
- Return on Investment (ROI) = 250 / 24 = 1041%
Conclusion
Calculating the ROI of skill management software is an essential step in justifying the investment and ensuring that it aligns with your organization’s strategic goals. By carefully identifying costs, estimating financial benefits, you can make informed decisions about the value of skill management software.
As shown in this quick calculation, the benefits of systematic skill management are obvious, with a 10x return on investment.
The skill matrix is Teammeter is a tool designed to help organizations efficiently track, assess, and develop employee skills. As we have an intensive experience of introducing our Software Teammeter to customers, we can help you make a detailed calculation of the ROI of skill management in your context.