The ROI of Leadership/Executive Coaching

By Bob Corbett

In this article we will discuss the use of Return On Investment (ROI) to assess, i.e., quantify, the effectiveness and value of the Leadership/Executive Coaching process:

1. What is ROI?
2. Why is ROI Important?
3. How is ROI measured?
4. How can ROI be used to measure Executive Coaching effectiveness?
5. How and with whom should Coachee progress be shared?
6. How should course corrections in Coachee development be handled?
7. What are the benefits of credible ROI metrics to value Coachee progress?
8. Can ROI be used to measure the effectiveness of qualitative results, i.e., to value the effectiveness of an Executive Coaching intervention?

1. What is ROI?

Return on Investment (ROI) is a financial measure typically used by organizations to retroactively quantify the effectiveness of a management decision, for example, the purchase of equipment to improve output and productivity. ROI is also used to prospectively value the effectiveness of proposed management decisions; for example, evaluating the proforma results of a planned capital expenditure before making a go/no go decision. Business results by their nature are typically tracked on a weekly, monthly, quarterly and annual basis.

Organizations have long struggled to use ROI to measure qualitative, i.e., behavior based, results. This is due in part to the fact that executives achieve results through others rather than through individual efforts. Therefore a good leader can bring the right knowledge, energy, skills and commitment to an assignment and not appear immediately successful because of the many moving parts he or she must manage, i.e., it takes time to get peers and direct reports on the same page and moving in the same direction to achieve an objective.

2. Why is ROI an Important Consideration?

Organizations considering the implementation of an Executive Coaching strategy and process typically ask: “How do you know if coaching is working and how do you measure success to determine if the investment was worth it?” Said another way: “How do you value the effectiveness of an Executive coaching process?”

ROI is an important consideration in determining the effective allocation of budget dollars. Department executives compete for finite budget dollars to fund important tactical and strategic actions including, daily operations, technological improvements, capital purchases, and leadership development. Consequently a budget proposal to senior management to fund coaching for key executives competes against other funding requests.

A key senior management criterion for budget allocations is the comparative magnitude of the anticipated benefits derived from proposed funding decisions, i.e., “What’s the likely benefit (gain) to be realized from this investment versus competing budget proposals?”

To be funded the anticipated benefits of improving an executive’s knowledge, skills and behaviors through the coaching process must provide a line of sight to the organization’s business agenda. For example, the plans, actions, learning objectives and anticipated benefits of the coaching process for an executive accountable to oversee the successful implementation of a critical organization initiative should clearly tie to the objectives and actions required to successfully implement that initiative.

Alternatively, the coaching process and anticipated benefits for an executive accountable to provide functional support to the implementation of a critical organization initiative, should tie indirectly to the general management of that initiative’s implementation, but directly to the successful completion of his or her segment of its implementation.

3. How is ROI measured?

The formula to calculate ROI is: ROI = Gain From Investment – Cost of Investment / Cost of Investment. Translated, ROI equals the net gain or loss from the investment divided by the cost of the investment. Technically a net gain, i.e., the assessed monetary benefit from the investment, is any amount greater than the cost of the investment.

ROI can be readily used to quantify the benefits of financial expenditures contributing to organization results including, production growth/loss, revenue growth/loss, profit growth/loss, cycle time reduction/increase, and customer call time reduction/increase.

Financial expenditures and results are easily isolated, counted and tracked, and then plugged into the ROI calculation. Unfortunately, aside from coaching fees, the elements of behavioral change from a coaching process don’t lend themselves as readily to this kind of monetization and calculation.

4. How can ROI be used to measure Executive Coaching effectiveness?

Coaching focuses on skill growth, behavioral change and continuous learning; elements generally described as qualitative or behavioral based. Behavioral results are more difficult to measure because of the evolutionary nature of behavioral change and subjective nature of the measurement process. Behavioral effectiveness requires time for those who work with an executive on a frequent basis to directly observe his or her progress in the development and demonstrated command of desired skills and behaviors.

The role of an executive coach is to help an executive coachee identify, learn and demonstrate a command of the skills and behaviors that the organization values. But measuring the effectiveness of an Executive Coaching intervention is a challenge because the objective measurement of behavior change is not as easy as counting the number of units produced on a production line. It’s also challenging because, unlike financial results, changes in skills and behaviors are learned and their command demonstrated over time rather than weekly or monthly. However, valuing an Executive Coaching intervention is achievable provided the demonstrated skills and behaviors are linked to the achievement of a measurable organization objective.

Evaluating the change in an executive’s skill set and behaviors requires collecting feedback from superiors, peers, direct reports and customers (i.e., a 360 assessment process). Then the executive’s progress is tracked over a protracted period of time, i.e., over a minimum of three to six months; and then reevaluated through a final 360 reassessment. The evaluation results in a measurement of what the executive has learned based on the demonstrated use of his or her newly honed skills and behaviors to achieve organization objectives.

Consequently, to calculate ROI and value the effectiveness of a coaching intervention, the Cost of Investment element of the calculation can be easily defined, i.e., the executive coach fees, but the Gain From Investment element is not. But, if the executive’s newly developed skills and behaviors are linked to a measurable organization objective and its achievement, then the intervention’s effectiveness may be estimated. In the absence of a link to a measurable objective the effectiveness of a coaching intervention should be valued subjectively; and based on the observations and feedback of those who frequently work directly with the executive rather than through an ROI calculation.

5. How and with whom should Coachee progress be shared?

Initially, development feedback should be collected by the Coach from the Coachee’s stakeholders, i.e., his or her manager, peers, direct reports and customers, to establish a baseline measure of the Coachee’s skill set and behaviors against which developmental progress will be compared.

Next the Coach helps the Coachee prepare a plan and corresponding actions to develop and demonstrate a command of the desired skills and behaviors. Over the ensuing three to six months of the coaching engagement the Coach will hold the Coachee accountable to execution his or her development plan and demonstrate a command of their new skills and behaviors. The Coach also helps the Coachee prepare to solicit periodic feedback from stakeholders on his or her developmental progress.

Developmental progress discussions with stakeholders are critical and should be direct, i.e., either face-to-face or by phone. During these dialogues with stakeholders the Coachee should actively listen to stakeholder feedback. This will allow the Coachee to make the course corrections necessary to demonstrate a command of new skills and behaviors and achieve his or her development plan objectives.

6. How should course corrections in Coachee development be handled?

If stakeholder feedback indicates that progress is not consistent with expectations, then the Coach will help the Coachee identify appropriate course corrections, i.e., changes in the Coachee’s development plan and the related actions to achieve the plan. Course corrections significantly increase the likelihood that the Coachee will successfully develop the critical skills and behaviors valued by the organization and his or her stakeholders.

Therefore the individual development plan is a living document that is revised from time-to-time to help the Coachee acquire the skills and behaviors required to meet or exceed the expectations of stakeholders, as well as, the tactical and strategic challenges of his or her role in the organization. Changes in the objectives and actions of the development plan should be shared with stakeholders to confirm that their feedback was heard and acted on.

7. What are the benefits of credible metrics to value Coachee progress?

Credible metrics are those that provide a line of sight between the coaching intervention and the resulting value or benefit(s) provided to the organization and stakeholders through the demonstrated use of the Coachee’s enhanced skills and behaviors. Ideally the line of sight should be linked directly to the achievement of a measurable organizational objective where the benefits of the Coachee’s newly honed skills and behaviors can be observed by stakeholders and quantified through estimation.

In the absence of a relevant organizational objective the line of sight should be linked to stakeholder feedback from a 360 assessment and the Coachee’s ability to act on that feedback in a timely matter. In this case valuing the benefits of the coaching intervention is more subjective and limited to observations and feedback by stakeholders on the Coachee’s developmental progress. Stakeholders will also value the intervention based on their perception of whether the Coachee’s use of his or her enhanced skills and behaviors is adding value to the organization.

8. Can ROI be used to measure the effectiveness of qualitative results, i.e., to value the effectiveness of an Executive Coaching intervention?

I believe that the answer is yes provided the executive develops a command of the skills and behaviors in his or her development plan and provided the objectives of the development plan can be clearly tied to the achievement of a measurable organization objective.

For this purpose the modified ROI calculation should be: ROI = Estimated Gain – Cost of Coaching Intervention / Cost of Coaching Intervention; where the Estimated Gain reflects the subjective estimated dollar impact of the coaching intervention on the achievement of a measurable organization objective.

All quantitative change is attributable at least in part to qualitative efforts, i.e., the effective use of leadership skills and behaviors to manage people and processes, to achieve organization objectives. In other words results and skills and behaviors are inextricably linked – you cant’ have one without the effective application of the others.