Review No. 9

Here's an article by Rick Humphress and Dr. Zane L. Berge on the use of net present value (NPV) in justification of Human Performance Interventions (HPI):

In this article, Humphress and Berge (2006) have collaborated to examine what they consider the proper method for analyzing the net present value (NPV) inherent in any Human Performance Intervention (HPI) embodied in a proposal. The authors look at the appropriate NPV equations that HPI professionals should use to garner the often scarce capital resources they need to support their efforts. Humphress & Berge look at “six primary HPI interventions, identify the primary measurable benefit that can accrue to the organization from each action, and discuss the ways to quantify these benefits in the field” (p. 13).

First, the authors identify net present value as the best formula for calculating return on investment (ROI) because it “uses all the cash flows [positive and negative] for the project discounted to the present time” (p. 13). It relies on actual figures or estimates for five elements: project benefits, project costs, project life span, discount rates for all future cash flows, and estimated salvage value at the end of the project. Project benefits and costs elements also include the time frames in which they will occur. After the cash flows have been discounted and added, the result will either be a positive NPV or a negative NPV. According to the authors, all projects with a positive NPV should be accepted and all projects with a negative NPV should be rejected.

Humphress and Berge (2006) compare this method to the more commonly used Kirkpatrick’s (2006) four levels (Reaction, Learning, Behavior, and Results) and the broadened perspective of Phillips’ (as cited in Craig, 1996) Level 5 – Return on Investment (ROI). The authors identify the key difference between NPV and ROI as the time component included in NPV.

The authors also examine quality initiatives from the perspective of skill and information training. They acknowledge that any business “can be defined by the everyday individual activities that the constituent parts perform on its behalf” (p. 16) also known in quality circles as the production process. Humphress and Berge (2006) state the claim that “good processes are value-creating assets” and that “training has a direct causal effect” on processes. Thus, training, according to the authors, has a direct link to quality initiatives.

The authors segue into a discussion of three quality initiatives prevalent in business today: IS0 9000, SEI CMM, and Six Sigma. This review will focus on the first of these. They identify the purpose of ISO 9000 as helping “companies effectively document the quality system elements to be implemented to maintain an efficient quality system. They acknowledge the use of ISO 9000 by major organizations such as the federal government to discriminate among suppliers for purposes of procurement. “This certification is becoming ‘table stakes’ for firms to even play in the game” (2006, p. 16)

Humphress and Berge (2006) also note that in addition to increased efficiency and profits, quality initiatives such as ISO 9000 can actually generate revenue by opening the door to contracts that specifically require said certification. This will again be dependent on additional training.

While the authors do not appear to identify a significant positive correlation between quality initiatives and NPV, they do see a relationship between quality initiatives and training. They also identify a strong positive relationship between NPV and training. Thus, it would appear there is also a secondary relationship between quality initiatives and NPV.

References:

Craig, R. (Ed.), (1996). The ASTD training and development handbook: A guide to human resources development (4th ed.). New York: McGraw-Hill.

Humphress, R. & Berge, Z. L. (2006, August). Justifying human performance improvement interventions. Performance Improvement, 45(7), 13-22. Retrieved from EBSCOhost database.

Kirkpatrick, D. L. & Kirkpatrick, J. D. (2006). Evaluating training programs: The four levels, 3rd ed. San Francisco: Berrett-Koehler Publishers, Inc.