MBA 635 Week 6 Discussion

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PowerPoint Presentation for Managing Performance through Training and Development

Adapted by

Alan Saks

University of Toronto

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Chapter 11

Training Costs and Benefits

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Learning Outcomes

After reading this chapter, you should be able to:

Explain why training and human resource professionals should calculate the costs and benefits of training programs in their organization

Calculate the various costs of training programs

Compare and contrast cost-effectiveness evaluation and cost-benefit evaluation

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Learning Outcomes

Conduct a net benefit analysis, benefit–cost ratio, return on investment, and utility analysis

Explain what “credibility” means when estimating the benefits of training programs

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Introduction

Organizations are concerned about the costs and benefits of their training and development programs

Information on costs and benefits of training programs is an important part of training evaluation

Some experts consider the calculation of return on investment (ROI) to be Level 5 in Kirkpatrick’s model of training evaluation

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It is possible to calculate the benefits of training programs in monetary terms and the return on training investments

Information on the costs and benefits of training programs is an important part of training evaluation

Some experts consider calculation of return on investment to be Level 5 in Kirkpatrick’s model

Training and the Bottom Line

Effectiveness of training depends on costs and benefits

Costing is complex and time consuming, yet increased pressure exists to demonstrate financial value of HR and training programs

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Without information on the cost of training, it is difficult to determine the monetary value of training

Although some may wish to avoid evaluating the costs of training, it is increasingly important to take the time to evaluate the costs and benefits of training

Training and the Bottom Line

HR must learn how to calculate and demonstrate results of training investments

Shows the value of training programs to the organization

Justifies share of budget for training and protects budgets during economic downturns

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Organizations want to know the return on their training investments; in times of declining budgets, the training function faces increased pressure to justify the costs of training programs

A survey of CEOs found that 96 percent wanted to see learning and development tied to business impact data and 74 percent wanted to see ROI data

If training can be shown to be an investment rather than a cost, training budgets are less likely to be slashed during economic downturns

It also allows HR and training professionals to be on an equal footing with other functions in an organization

Only 15 percent of organizations in Canada perform Level 5 evaluations—most (86 percent) are evaluated at Level 1

Training and the Bottom Line

Improves its status and influence within the organization

Calculating the costs and benefits of training programs is necessary for viewing training as an investment

It places human resource and training professionals on an equal footing with other functional areas in an organization

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Organizations want to know the return on their training investments; in times of declining budgets, the training function faces increased pressure to justify the costs of training programs

A survey of CEOs found that 96 percent wanted to see learning and development tied to business impact data and 74 percent wanted to see ROI data

If training can be shown to be an investment rather than a cost, training budgets are less likely to be slashed during economic downturns

It also allows HR and training professionals to be on an equal footing with other functions in an organization

Only 15 percent of organizations in Canada perform Level 5 evaluations—most (86 percent) are evaluated at Level 1

Training and the Bottom Line in Canadian Organizations

Only 20 percent of organizations conduct Level 5 (cost–benefit analysis) evaluations and only 19 percent of courses are evaluated at this level

In order to calculate the effect of training and development on the bottom line, you must calculate the costs and benefits of training and development programs

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Organizations want to know the return on their training investments; in times of declining budgets, the training function faces increased pressure to justify the costs of training programs

A survey of CEOs found that 96 percent wanted to see learning and development tied to business impact data and 74 percent wanted to see ROI data

If training can be shown to be an investment rather than a cost, training budgets are less likely to be slashed during economic downturns

It also allows HR and training professionals to be on an equal footing with other functions in an organization

Only 15 percent of organizations in Canada perform Level 5 evaluations—most (86 percent) are evaluated at Level 1

Costing Training Programs

Costing is the process of identifying all expenditures used in training.

Five main cost categories:

Direct

Indirect

Developmental

Overhead

Trainee compensation costs

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One approach to costing is to calculate the costs according to stages of the training process (cost of needs analysis, training design, delivery, and evaluation) listed on a costing worksheet

Another approach is to categorize the costs according to the nature or kind of costs: direct, indirect, developmental, overhead, and trainee compensation costs

Costing Training Programs: Direct Costs

Linked directly to a particular training program

Includes the trainers’ salary and benefits, equipment rental, course materials, instructional aids, food and refreshments, and the cost of travel to and from the training site

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Includes the trainers’ salary and benefits, equipment rental, course materials, instructional aids, food and refreshments, and the cost of travel to and from the training site

Costing Training Programs: Indirect Costs

Support training activities and are not directly related to a particular training program

Includes clerical and administrative support, trainer preparation and planning, training materials that have already been sent to trainees, and the cost of marketing training programs

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Includes clerical and administrative support, trainer preparation and planning, training materials sent to trainees, and the cost of marketing the training programs

These costs would still be incurred even if the program were cancelled; unlike direct costs, these costs cannot be recovered

Costing Training Programs: Developmental Costs

Costs incurred in the development of a training program

Includes the cost of doing a needs analysis, the cost of developing instructional media such as video, the design of training materials, and the cost of evaluating a training program

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Development costs are incurred in the development including the cost of doing a needs analysis, the cost of developing instructional media (such as videotapes), the design of training materials, and the cost of evaluating a training program

Costing Training Programs: Overhead Costs

Incurred by the training program but not associated with any particular training program

Costs required for the general operation of the training function, such as the cost of maintaining training facilities (e.g., heat and lighting) and equipment, and the salaries of clerical and administrative support staff

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Incurred by the training department, but not connected with any particular program such as cost of maintaining training facilities (utilities), equipment, salaries of clerical and administrative support

A portion of these costs must be allocated to each training program

Costing Training Programs: Trainee Compensation

Cost of the salaries and benefits paid to trainees while they are attending a training program

Might also include the cost of replacing employees while they are in training

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Salaries and benefits paid to trainees while they are attending a training program

May also include the cost of replacing employees while they are in training

Employees must be paid while they are not working and this is a cost to the training program

Benefits of Training Programs

The benefits of a training program can be calculated in monetary or non-monetary terms

Two types of benefit evaluation:

Cost-effectiveness evaluation

Cost–benefit evaluation

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The benefits of a training program can be calculated in monetary or non-monetary terms

When calculated in monetary terms, it is referred to as a cost-effectiveness evaluation

Cost-Effectiveness Evaluation

Involves comparing the monetary cost of training to the benefit of training in monetary terms

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The benefits of a training program can be calculated in monetary or non-monetary terms

When calculated in monetary terms, it is referred to as a cost-effectiveness evaluation

Cost–Benefit Evaluation

Compares the cost of training in monetary terms to the benefits of training in non-monetary terms

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Cost–benefit evaluation compares the cost of training in monetary terms to the benefits in non-monetary terms

These benefits include organizational outcomes such as the rate of turnover, absenteeism, customer satisfaction, and so on

Such benefits may have a financial effect on the performance of an organization even though they might not be described in monetary terms

Benefits of Training Programs

Once we know the cost of a training program as well as the benefit in monetary terms, it is possible to determine several benefit calculations:

Net benefit

Benefit–cost ratio (BCR)

Return on investment (ROI)

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One simply subtracts the cost of the program from the financial benefits

The program cost $18,000 and the benefits were $20,000 = net benefit of $2,000

Net Benefit

The estimated value of the benefit minus the cost of the training program

To conduct a net benefit analysis one simply subtracts the cost of a training program from its financial benefit:

Training Benefit – Cost of the program

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One simply subtracts the cost of the program from the financial benefits

The program cost $18,000 and the benefits were $20,000 = net benefit of $2,000

Benefit-Cost Ratio (BCR)

The benefit divided by the cost of the training program

To conduct a net benefit analysis one simply divides the benefit of a training program by the cost:

Training Benefit/Cost of the program

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The benefit–cost ratio is derived by dividing the benefit from the cost

If the program cost $18,000 and the benefits were $20,000 (20,000 divided by 18,000), this yields a benefit–cost ratio of 1.11

Return on Investment (ROI)

The most popular approach for determining the financial benefits of a training program is the return on investment

A comparison of the cost of a training program to its benefits by dividing the net benefit by the cost of the training program

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Many companies in Canada do not calculate the ROI of their training program (only 15 percent calculate ROI)

This is in part due to the difficulty and complexity involved in the process

Return on Investment

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For example, if a program cost $100,000 and the financial benefit is $300,000, the ROI is calculated as follows: $300,000 – $100,000 divided by $100,000 = 2

In other words, there is a return of $2.00 for every $1.00 spent on training (1:2)

It is also described as a 200-percent ROI

Calculating the Financial Benefits of Training and Development Programs

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Utility Analysis

A method to forecast the financial benefits that result from human resource programs such as training and development

Involves procedures in which the effectiveness of a training program is translated into dollars and cents

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Utility analysis looks at procedures in which the effectiveness of a training program is translated into dollars and cents

Utility Analysis

Factors involved in utility analysis:

Effect size

Standard deviation of job performance

Number of employees trained

Time that the training benefits will last

Utility is equal to the multiplication of all of these factors minus the cost of the training program (cost per employee × number of employees trained)

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Effect size is the difference in job performance between employees who are trained and those who do not receive training (the larger the effect, the greater its utility)

Standard deviation of job performance has to do with how much of a difference there is in the job performance of untrained employees and the monetary value of this difference (supervisors can be asked to estimate the dollar value of performance)

The third factor is the number of employees trained—the greater the number of employees trained, the greater the utility

The fourth factor is the length of time that the training benefits will last

Utility Analysis

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Utility = multiplication of all factors (effect size × standard deviation of job performance × number of employees trained) × time that the training benefits will last MINUS the cost of the training program

Break-Even Analysis

Finding the value at which benefits equal costs and utility is equal to zero

It is most meaningful to conduct a break-even analysis for the effect size or the standard deviation

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An extension of this is the break-even analysis—find the value at which benefits equal costs and utility = zero

Divide the cost of the training program by the multiplicative function of the other factors

It can be useful as it helps reduce the uncertainty associated with the estimates of the various parameters used to calculate utility

Break-Even Analysis

Divide the cost of the training program by multiplicative function of all factors except the one you are predicting:

Break-even effect size = Cost/(N)(T)(SDy)

Break-even analysis helps reduce the uncertainty associated with the estimates of the various parameters used to calculate utility

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An extension of this is the break-even analysis—find the value at which benefits equal costs and utility = zero

Divide the cost of the training program by the multiplicative function of the other factors

It can be useful as it helps reduce the uncertainty associated with the estimates of the various parameters used to calculate utility

Credibility of Benefit Estimates

Not an exact science

Assumptions and judgments are made when estimating the monetary benefits of a training program

The process works only if managers and clients accept the assumptions

Data must be accurate and the process believable

Use internal and external experts

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Not a pure science

Assumptions and judgments are made

The process works only if managers and clients accept the assumptions

Data must be accurate and the process believable

However, all approaches are dependent to some extent on some assumptions and expert opinions

Summary

Noted the importance of calculating the costs and benefits of training and development programs

Described how to cost training programs and five cost categories

Reviewed how to calculate the benefits of training programs and the difference between cost-effectiveness evaluation and cost–benefit evaluation

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Summary

Described how to calculate the financial benefits of training and development programs using net benefit, benefit–cost ratio (BCR), and return on investment (ROI)

Described how to calculate utility analysis and break-even analysis

Emphasized the importance of credibility when estimating the benefits of training and development programs

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Key Terms

Benefit–cost ratio (BCR)

Break-even analysis

Cost–benefit evaluation

Cost-effectiveness evaluation

Costing

Developmental costs

Direct costs

Indirect costs

Net benefit

Overhead costs

Return on investment (ROI)

Trainee compensation

Utility analysis

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