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How to Calculate the ROI of Talent Assessment
Talent assessments provide significant value to your business, from helping you select the best-fit candidates to identifying workforce capabilities. But can you put a specific dollar amount on that value? You need to know how to calculate ROI for the assessments you invest in.
Your rate of return on your investment is measured by determining the relationship between the cost of your investments and your net gain. ROI compares your investment gains against investment costs, and the difference between them reveals your returns or losses.
Here’s how to calculate ROI on performance testing and talent assessments in your hiring process.
Set Talent Assessment Objectives
Before you can calculate your returns, you need to define clear goals. You’re investing in talent assessments to create an impact. Meeting clear objectives makes it easier to determine the impact your investment has.
Why Are You Implementing Talent Assessments in Hiring?
List specific goals for your assessment program. Many companies implement talent assessment to improve the quality of hire, for example, or cut hiring costs and time to hire in their recruiting process.
Layout clear objectives for implementing assessments in hiring, then set a baseline by quantifying the state of those metrics before investing in assessments.
When Else Will You Use Talent Assessments?
Talent assessments are primarily used in talent acquisition to select the best-fit candidates for the role and the organization. But assessments can deliver significant value across the employee life cycle, too.
Assessments can help you identify your workforce capabilities and opportunities for improvement. Obtaining assessment results before implementing a new training program will provide a benchmark for measuring learning. Employee assessments can help individuals find the best possible path in your company. To calculate the true ROI on talent assessment, you need to factor in each of these benefits.
Calculate the Cost of Your Investment
To understand your net ROI, you first need to calculate your costs.
Financial Costs of Talent Assessment
Before you can calculate your return, you need to put a number on your costs. Most assessments and testing suites follow a subscription model. You’ll pay a set amount per month as a licensing fee to continue using the software.
Under a licensing model, maintenance costs are covered, and your vendor should provide access to subject-matter expertise to support the use of assessments. Include any additional costs, including taxes or other fees, in your final costs.
Basic ROI Formula
The starting point for calculating ROI metrics is a relatively simple formula. ROI is your net return divided by the cost of your investment, and then multiplied by 100. Using this formula, you can calculate year-over-year growth and show ROI on performance testing platforms.
A basic spreadsheet can simplify ROI, but larger organizations can use financial software to support calculations more efficiently. Work with your finance team to define your costs and calculate your ROI. It’s important to have these numbers available to demonstrate the value of assessment software to your peers in the C-suite. To calculate growth for a specific period, weigh the cost of your investment against gains made within that specific period (a year, for example).
Quantify the Benefits of Your Investment
Investments early in the employee life cycle are challenging to quantify because you might not see immediate returns. But you can evaluate aggregated data to identify correlations between assessments and positive talent metrics.
Here are some of the most important metrics to measure when calculating ROI on assessments.
Decreased Costs of Hiring
An effective assessment program minimizes the time spent screening and selecting candidates. Because test results clarify who the best candidates are, recruiters save time shortlisting candidates to move further down the hiring funnel.
When recruiters can spend their time on higher-impact projects, reducing time means saving money, improving your return on the cost of labor.
To find out what your assessment program saves you in time and money, calculate the cost per hire before and after implementing assessments.
Enhanced Employee Engagement
Most large organizations measure employee engagement on an annual basis. Review historical engagement data to understand the trends before and after implementing your assessment program.
Isolating the data by recent hires who took assessments during the hiring process (as opposed to those you hired before implementing assessment software) can help you arrive at a granular conclusion.
Improvements in Retention
Retention and turnover are regularly measured and are frequently cited metrics. Most companies already record this data to report in leadership meetings. Look at retention metrics from before and after implementing your assessment program to see correlations between assessments and retention.
Turnover is typically one of a company’s largest expenses, so this is an important metric to record and present to leadership.
Additional Benefits Derived From Your Objectives
Return to your comprehensive list of objectives for your assessment program, including using them post-hire. It’s much harder to calculate the financial gains of items such as improved internal mobility. However, reviewing historical hiring data can give you a sense of the cost of hiring someone externally versus moving employees around within the company.
Your assessment vendor should provide resources for helping you quantify the benefits your company derives from implementing assessments. Work with an industrial-organizational (IO) psychologist or people analytics professional, either in-house or on your assessment provider’s team, to determine the financial benefits of assessments for your company.
Evaluate Predictive Validity
To achieve any ROI, the selection instruments you use must accurately measure what they propose to measure. If an assessment doesn’t measure what it intends to measure, you’re throwing away money on a tool that won’t improve your selection decisions.
In 1939, the Taylor-Russell approach was developed for assessing an instrument’s predictive validity. To this day, IO psychologists use an adapted version of the Taylor-Russell method to calculate the predictive validity of employment-screening tools on the market.
What Is Predictive Validity?
Validity refers to how well a test or assessment measures what it’s supposed to measure. Predictive validity refers to how effectively a test or assessment accurately predicts future behaviors.
To calculate ROI on assessment software, you must be able to evaluate it for predictive validity.
The purpose of assessing candidates is to predict behaviors that will lead to success in the role and your company. If the assessments you’ve invested in aren’t fulfilling this critical need, your return will be low or nonexistent.
Minimum Benchmark and Base Rate
Before calculating predictive validity, you need to set standards for passing each test. Minimum benchmark refers to the lowest score that is considered passable. Candidates who score higher than that value will be moved to the next stage.
Base rate refers to the number of candidates suitable for the specific job. Candidates who fall below this line are considered poor performers, and candidates who rise above it are considered high performers.
Using Taylor-Russell Tables
Taylor-Russell tables provide a practical model for identifying the number of passing candidates and good performers an instrument will select. The table determines how many passing candidates will be good performers, thus demonstrating the instrument’s predictive validity.
The average predictive validity for assessment tools is 0.65, so anything below that would not provide a good ROI.
Taylor-Russell tables can also provide insights into the number of false negatives the test identifies. False negatives refer to candidates who were rejected by the instrument but would have made good employees.
Too scrupulous an assessment may screen out qualified candidates as false negatives. In a tight labor market, you can’t afford to have your assessment tools working against your interests, so be sure to confirm predictive validity before selecting an assessment tool.
Test Predictive Validity Before Committing
Assessment providers should be willing and able to work with you to demonstrate their instrument’s predictive validity. Find an assessment vendor who will work with you to determine predictive validity before committing to the product.
Top-tier vendors will conduct studies — before you make your final decision — to ensure their product does what it claims to do.
This is especially important for custom-designed assessments. Work with your vendor’s IO psychologist to design and test assessments for the best possible outcomes so you can be sure you’re achieving an appropriate ROI.
Continue Measuring Your Rate of ROI
Knowing how to calculate ROI on assessments is a valuable tool in HR’s arsenal. HR leaders must demonstrate the value of existing and potential investments in talent management products and software.
HR has historically been perceived as a cost center rather than an opportunity to manage investments more strategically. You’ll need to articulate your case by demonstrating the strategic financial value of your assessments. When you show how to calculate ROI to your peers in leadership, you can demonstrate how talent assessment improves the bottom line — and cement HR’s position as a strategic growth function.
Aon | Assessment Solutions
Aon's assessment solutions provides clients with powerful tools and insights to help them make better talent decisions at every stage of the employee lifecycle. This includes pre-hire assessments, identifying future leaders, screening for digital skills and agility, and AI-enabled solutions.