Calculating ROI in Training

Written for China Staff, by Chris Barclay, Head Coach, ALTEC

It is paradoxical that executives who proclaim, “people are our greatest asset” have often viewed training as simply a necessary expense, instead of an investment in human capital. This is due to the role human resource departments have played in creating programs to meet changing business needs without accountability for how the programs affect the organization’s bottom line. But more and more, performance improvement professionals are being held accountable to justify training by looking not only at how it impacts performance, but the resultant benefits to the organization relative to costs. That is, human resource departments must be able to calculate not only much money it costs to turn an average performer in to an exemplary one, but the monetary value of this benefit to the organization.This article looks at  Return on Investment (ROI) calculation as a means to provide such information, allowing an organization to weigh costs and benefits to determine what it must spend in order to meet its business goals and be competitive.

What gets measured gets attention

Training is one of many business tools that an organization can take to improve its performance and profitability. When money is tight, training budgets are among the first to be sacrificed. Only by thorough, quantitative analysis can training departments make the case necessary to resist these cuts. This is where calculating return on investment is essential for sponsors of training programs and vendors to be able to define training success in terms of how programs impact areas such as productivity and profitably for the organization. Increasingly, there is a need to look beond the simple evaluation process of post-training surveys and focus on measuring the costs and benefits of how programs affect organizational performance. As competition for financial resources with organizations grows and the pace of change increases, companies can no longer rely on the post-training “happy sheet” as the primary measure of training success.

There is a paradigm shift occurring in the training and performance improvement field from activity based to results based measurement. In this highly competitive business environment many executives are beginning to question the value of support programs, including training, relative to their cost. This is especially true for soft skills training, which may bring many intangible benefits, but poses challenges for organizations in the measurement of how these benefits impact the organization financially. To be truly effective, training must identify the business goals up front and not simply conduct a needs analysis to identify human performance issues.

Human resource professionals typically evaluate performance improvement as the measure of training sucess. The concept of the Cost of Non-Conformance, (CONC) coined by quality guru Phillip Crosby, expands upon this measure by comparing the improvement potential between current performance and ideal performance. That is, what is the difference in terms of cost to the organization, between what performance is now and what it should be. Some jobs are easier to quantify and as a result, it’s easier to assign a dollar value to them. But for many jobs, there are too many variables and difficulties in measuring and assigning a dollar value to the performance. The elaborate measurement systems you need may not be in place, or the data you need may be hard to come by. These types of jobs could include secretaries, design engineers, managers, architects, computer programers, materials expediters, etc. They are all somewhat problematic when it comes to establishing the dollar value of the performance.

How it has been...
Training professionals rely on a familiar training process that begins with the training needs analysis (TNA). From the results, the they distinguish training from management needs and identify a performance gap – the difference between the level of current performance, and desired performance. The instructional objectives of the training program are then based on developing competencies to satisfy participants, payers and senders by finding the most cost-effective way to close this gap. The program designer creates test items for each instructional objective, and after the program, success is measured by how well trainees have met them. Post-training evaluations are typically measuring whether participants met instructional objectives, not performance objectives. That is, the training focuses on measuring performance in the classroom, not on the job. Successful ROI measurement depends on first identifying business goals and using them to drive instructional design. This is an essential skill for performance improvement professionals in today’s accountability-based environment.

The evaluation process must be part of the overall intervention strategy, that goes beyond the first two Kirkpartick levels of reaction and learning that post-training evaluation typically measures. While these are important because, if participants react negatively to a course, they are less likely to transfer what they learned to their work and more likely to give bad reports to their peers, evaluations must be able to provide information to management such as: Is there an improvement in performance on the job? What is the change in on-the-job behavior and what impact does this have on the business goals? Do the benefits of improved performance outweigh the costs? This is the realm of ROI measurement and is an essential business tool for performance improvement professionals. Moreover, training programs should be continuously improved to provide better value and increased benefits for an organization. Without formal evaluation which includes ROI, the basis for changes can only be subjective.

Applications of ROI in Training & Development

Training is one of many interventions used to improve organizational effectiveness. These days there are many alternative approaches available to training departments, including a variety of classroom, on-the-job, online and self-study methods. Using comparative evaluation techniques, organizations can make rational decisions about the most cost-effective methods. ROI allows organizations to evaluate training sucess beyond simply positive participant feedback by looking at the relationship between costs and performance change. Costs can include the indirect components of collective trainee time, salaries and venue, as well as program design and development, and trainer fees. Another consideration is time; how long did it take to develop and deliver the program? How long did it take to achieve expected results? Finally, learning and retention, as measured by testing and ongoing observation and feedback on participant acquisition of learning or behavioral change is a critical measure of training success.

Defining the Problem

ROI is the “business metric” of  benefits to an organization in relation to the costs of  investment in training over a specific period. In other words, it is the extent to which the benefits (outputs) of training exceed the costs (inputs). Anyone in an organization who has a clearly defined training need must be able to justify funding for that need by stating in measureable terms what it will cost and what it will deliver for the investment as defined by the impact of performance change.  To begin the process of determining costs and benefits of a training project, look at the existing performance at which the training is targeted and ask: Where is it at now? How much can it be realistically improved? What is the difference between the current value of performance and the potential value of performance? How much will it cost to fix it? These questions will allow you to forecast what the return will be on the investment in dollars and the ROI percentage. Using this information, a training manager can clearly define the need, analyze alternatives, make intelligent decisions and present a persuasive argument for how the training approach of choice will be the most cost effective for the organization.

The ROI Process Model

For ROI calculations to work they must be be simple, theoretically sound and appropriate for a variety of programs. They need to take in to account a broad range of cost factors and be applicable with all types of data. The following is a five-step process model that can assist human resource professionals with the planning of training programs that provide management with measurable costs and benefits.

1. Collect Training Evaluation Feedback

There are numerous tools for this first step, including observation, interviews and surveys. The focus should be on analyzing the change in performance. The financial benefits of training can not be measured in terms of student reactions, nor the amount of learning that has been achieved; not even the extent to which behaviour may have changed. The real benefits come from improved performance – traditionally the hardest training outcome to forecast or measure. Therefore, it is important to be selective about what will be measured.

2. Isolate Areas of Impact to be Measured

A wide variety of indicators can be employed to measure the impact of training on performance – numbers of complaints, sales made, output per hour and so on.

3. Determine the Value of the Change in Output

These are indicators such as product output, customer satisfaction and repeat business, which are compared with pre-training benchmarks, or with a control group that has not received the training. Other measures include:

• Labor savingswhich occur as a result of the training, requiring less effort to achieve current levels of output. Savings are realized by a reduction in the amount of labor applied to a particular job, such as in reduced duplication of effort, less time spent correcting mistakes or faster access to information.
• Productivity increases where additional output can be achieved with the same level of effort. This implies that the organization requires or desires more output in this particular area. Some exampl Some examples are higher levels of skill leading to faster work, or higher levels of motivation leading to increased effort.
• Cost savings, achieved in a variety of ways, not only through savings in labor. The results are things like  fewer machine breakdowns, resulting in lower maintenance costs and lower staff turnover, reflected in lower recruitment and training costs.
• Increased income generation, which is possible as a direct result of training. These include a higher success rate in winning competitive bidding, leading to increased sales, sales referrals made by non-sales staff and new product ideas leading to successful product launches.

4. Calculate Porgram Costs

These include needs assessment expenses, equipment, purchase of materials and even evaluation costs. Then there are direct costs – those that would not be incurred if the training did not take place – such as trainer costs, which include timetimetime spent on design, development and delivery, plus travel and accommodation. There may be promotional costs involved, as well as administrative costs. Additionally, there's the cost of materials, facilities, direct participant expenses - travel, accommodation and meals.  Finally, and perhaps the most significant delivery cost relates to the participants’ collective time. It is only necessary to charge a participant’s cost against the program if training is undertaken in time that would otherwise be productive and paid for, so you only need to estimate the amount of travel and training that is undertaken in productive work. When an employee goes through a training program in work time, the organization does not only have to pay that person’s payroll costs, there is also the “opportunity cost” for that person to add value to the organization. When a salesperson is on a course, they are not bringing in new business. While participant costs are an indirect cost, any analysis of the true costs of training will include both direct and indirect costs.

 

5.   Determine ROI
The ROI calculation formula is quite straightforward.

ROI = (Benefit - Cost) / Cost X 100%

 

First calculate the Benefit/Cost Ratio: program benefits/program costs, and then the ROI: (benefits-costs)/program costs X 100.

One example:

     Cost per program (25 participants) = $88,500

     Benefits per program (1st year) = $230,000

     BCR = 2.61

     ROI = $142,125/88,500 X 100 = 161%

If this looks a little daunting at first sight, the two simplest figures to collect are costs, or sales. If you do not have cost or sales figures you can work out the potential benefits based on the trainee's gross salary/employment costs. So if a group of 10 managers costs the company $500,000, and we expect training to improve their performance by just 1%, this gives a benefit of $5000. This now indicates how much can be invested in their training to achieve an acceptable return

Payback Period

Another way at looking at ROI, is to calculate how many months it will take before the benefits of the training match the costs and the training pays for itself. This is called the payback period:

payback period = costs / monthly benefits

Payback period is a powerful measure. If the figure is relatively low – perhaps only a few months – then management will be that much more encouraged to make the training investment. As a measure, it also has the advantage of not requiring an arbitrary
benefit period to be specified. On the assumption that benefits will continue to accrue some time after the training, then the period that you specify is critical to the ROI figure you will obtain. You may like to specify a period that fits in well with your organization’s planning cycle – perhaps a year or two years. On the other hand, you may wish to calculate the period to correspond to the lifetime of the benefit, in which case you will need to know how long the average participant stays in a position in which they can continue to apply the knowledge and skills being taught.

Payback Period

Another way at looking at ROI, is to calculate how many months it will take before the benefits of the training match the costs and the training pays for itself. This is called the payback period:

payback period = costs / monthly benefits
Sample ROI Calculation Chart

Duration of training	33 hrs
Estimated student numbers	750
Period over which benefits are calculated	12 months
Costs
Design and development	$40,930
Promotion	$4,744
Administration	$12,713
Faculty	$86,250
Materials	$15,000
Facilities	$40,500
Students	$553,156
Evaluation	$872
Total cost	$754,165
Benefits
Labor savings	$241,071
Productivity increases	$675,000
Other cost savings	$161,250
Other income generation	$0
Total benefits	$1,077,321
Return on investment	143%
Payback period	8 months

Calculating the Cost of Nonconformance (CONC)
The CONC is calculated by subtracting the actual performance value from the potential performance value. When potential value of performance is extremely difficult to determine due to the number of variables or the lack of measurement systems data, one could use the cost of that performance as the benchmark - the labor dollars that it would cost to have 100% work proficiency (or whatever management deems acceptable). If we have a workforce of 100 metal workers, each earning $35,000.00 per year, our potential value is $3.5 million. This figure represents what it currently costs the organization for the potential of having 100% performance conforming to standards.

Calculating the Actual Value of Performers

To calculate the actual value of performance, multiply the number of performers by the average salary, multiplied by the average actual proficiency level. Although calculating the CONC using salary data as the benchmark can identify significant contributions, it doesn’t begin to capture all the other additional costs that might be incurred due to less than standard performance, such as

• Scrap/waste produced
• Extended or rework labor
• Extended or rework machine/equipment operating and maintenance costs
• Schedule slippages
• Lost opportunity for other work

 

The CONC is calculated by subtracting the actual performance value from the potential performance value as shown.

Number of Performers	Salary $	Work Proficiency	Performance Value
100	$35,000	100%	Potential $3.5 M
100	$35,000	60%	Actual $2.1 M

So, in this case, the CONC is $1.4 million annually.

That’s $1.4 million left on the "performance table," so to speak. If your training could get everyone to perform at the 100% level, $1.4 million would be the return to be compared against the investment required to make that happen. If 100% seems optimitstic, then consider the results if your training can get everyone to average or 75%, 80%, or 90%; respectively, you would still contribute $1.05 million, $1.12 million, or $2.26 million to the corporate bottom line! That’s the resulting "return" to the organization.

 

Conclusion

If the focus of your organization’s training programs is to help the business successfully achieve business results, then ROI evaluation must be seen as part of the higher level business activities, not just a training program or training intervention. You gain the credibility of your clients by focusing on what they want with the measures they use every day. By constantly comparing training costs with benefits or results, a case history can be built up to support your decisions and relay credibility to the existence of the training program. ROI calculations provide an excellent decision-making tool for senior management and those from whom you require buy-in. Start to analyze your training programs as if they were investments in human capital - using business metrics like ROI - and senior management will more likely support them. ROI, when properly calculated, makes a strong case for the endorsement of training programs that can demonstrate their contribution to an organization’s profitability.

 

 

 

 

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