Training ROI and the Organization's Strategic Connection

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LectureNotesTrainingROIandStrategicConnection.ppt
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Training Return on Investment

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Evaluating Training - ROI

  • Learning Objectives
    By the end of this unit, students will:

Determine benefits of a training program.

Calculate benefit/cost ratio.

Calculate return on investment (ROI).

Identify when ROI evaluation is not appropriate.

Use other methods to verify training value when ROI is not appropriate.

Objectives for the class.

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Return on Investment: Benefit-Cost Ratio

  • Benefit-Cost Ratio:

Aids in decision-making process.

Consistent analysis across programs.

Information difficult to obtain.

Increased competition for investment dollars requires organizations to decide whether to invest in training or to invest in something else. A well-designed benefit-cost ratio analysis can aid in the decision-making process by allowing several different investment options to be compared with each other. The problem is that some benefits derived from training can be intangible and difficult to quantify. How do you measure and put a dollar value on increased morale or better teamwork? Consequently, gathering and compiling the information needed for an accurate benefit-cost analysis can be a complicated task.

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Return on Investment: Benefit-Cost Ratio

  • As organizations tighten budgets and scrutinize costs, some wonder if the investment in training is worth it. Most trainers assess results by using at least some of Kirkpatrick’s four levels of evaluation. When management questions the value returned in exchange for the money spent, training directors must go further to justify the investment in time and money that training requires. Some suggest that there should be a fifth level in Kirkpatrick’s model: focusing on return on investment.

  • The most common method of measuring return on investment is to calculate a benefit/cost ratio for financial return. First, training managers must determine the total cost of the training. This includes both direct costs (printing, equipment rental, etc.) and indirect costs (overhead, productivity loss, etc.). Then a dollar value must be determined for the benefit of the training. This is where it gets difficult. If training has directly increased productivity, that may not be too difficult to calculate. For benefits that are less tangible, however, such as improved morale or better teamwork, assigning a dollar value can be difficult.

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Return on Investment

  • Return on Investment/Benefit-Cost Ratio:

Program Benefits

Benefit-Cost Ratio = ----------------------------

Program Costs

$2,500

Benefit-Cost = 2.5:1 -----------

$1,000

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Return on Investment: Benefit-Cost Ratio

  • Once we have total dollar figures for cost and benefit, the ratio is determined by dividing the value of the program benefits by the cost of the program. The resulting calculation is expressed as a ratio. The example in the slide indicates a training cost of $1,000 and a training benefit of $2,500, which computes to a benefit-cost ratio of 2.5:1. This means that for every $1 of cost invested, the organization derived a benefit of $2.50.

  • A 2.5:1 ratio would be a very worthwhile investment! But, any ratio that is less than 1:1 indicates a loss for the organization because the costs of the program outweighed the benefits. What is the ratio on the next slide?

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Benefit-Cost Ratio

Program benefits : $6,500

Program costs: $8,495

What is the benefit-cost ratio?

  • Use the same calculation process as before: benefits divided by the cost. $6,500 benefit divided by $8,495 cost results in a ratio of .765:1. Not a good return for the investment! This program returned only 76.5 cents for every dollar spent!

  • Maybe the organization should scrap this program. Or maybe not.

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Determining Benefits

  • Return on investment (ROI) is calculated much the same way as the benefit-cost ratio except that ROI is expressed as a percentage instead of a ratio. Using the same example as before, this time demonstrating a 250 percent return on investment.

  • A ROI of 100 percent would be the break-even point where costs and benefits are exactly equal. Any percentage less than 100 means the program has a net cost. In other words, the program cost more than the benefit received.

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What About ROI?

Return on Investment – ROI (%)

Program benefit: $2,500

----------- = 2.5 x 100 = 250%

Program cost: $1,000


ROI = 250%

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Determining Benefits

  • Measuring training benefits:

Benefits must consider training objectives.

Literature summaries of benefits of specific training.

Assessment of pilot training programs.

Observations of successful trainees.

Estimates from trainees and managers.

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Determining Benefits

  • As demonstrated in the previous slides, the math is easy. The difficulty comes in calculating the value of the training benefit. How should it be done?

  • First, to determine the benefits of the training, the organization must go back and review the original reasons that the training was conducted. What were the original objectives for the training program and were they accomplished? How should the accomplishments be measured?

  • In some cases, academic research is available, and a search of practitioner literature may summarize the benefits derived from specific training programs. For example, OSHA has a number of success cases that identify concrete examples of the effect of training on an organization’s bottom line.

  • Another method might be to conduct a pilot test. Pilot training programs can assess the value of the benefits derived from a small group of employees before the full-scale training program is implemented.

  • Observation of successful trainees compared with untrained employees can demonstrate the productivity impact of a specific training program.

  • Trainees and their managers can provide estimates of the benefits of training after completion of a program.

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Programs Best Suited for ROI Analysis

  • Training appropriate for ROI analysis:

Clearly identified outcomes.

Not one-time events.

Broad-based and highly visible in the organization.

Strategically focused.

Training effects can be isolated.

  • Remember from the Kirkpatrick model that the higher the level of evaluation, the more costly and difficult it will be to conduct the evaluation. Therefore, it is important to remember that ROI analysis may not be appropriate for all training programs.

  • Training programs best suited for ROI analysis must have clearly identified outcomes from which the benefit can be determined. They should be a reflection of the goals set in the organization’s strategic plan. These are broad-based across the organization and not one-time training events. The effects of training can be isolated to ensure that the benefit is not a reflection of other organizational factors.

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When ROI Isn’t Appropriate

  • Justifying training when ROI isn’t the answer:

Success cases.

Measuring the payback period.

The consequences of NOT training.

  • Focus on most important programs.
  • Make training a true business partnership.

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When ROI Isn’t Appropriate

  • When an ROI analysis is not practical or simply impossible for a particular training program, training managers will be challenged to find other ways to justify the value of the training. Smile sheets are good, but upper management wants to see real results that generate a positive business impact.

  • Success cases demonstrate business value through credible stories that show economic effect. This information can be gathered through short, behavior-based questionnaires that trainees complete after the training. These instruments are designed to examine transfer of training and to test some fundamentals regarding content or skills that the learning was supposed to deliver. The questionnaires may be used to interview a strategic sampling of the trainees to learn how they are applying the learning in their job and how that leads to business value for the organization.

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When ROI Isn’t Appropriate

  • Measuring the payback period of the training investment is a projection of how long it will take the organization to recover its investment in training. This is a simple calculation where the total training investment is divided by the annual savings generated by the training. For example, if the organization spent $100,000 on safety training and the safety training was expected to save $40,000 per year in safety expense and workers’ compensation insurance, the payback period would equal 2.5 years. If the training program had a three-year useful life, it would be a good deal. If the useful life of the training was only one year and it would then have to be done again, obviously this would not be a good investment.

  • What about the consequences of not training employees? If you can demonstrate that not training your workforce will make the organization less competitive, less productive, etc., you will have a stronger argument for the positive benefit of training. This is a likely argument in areas such as EEO compliance. In this case, you must identify a potential risk of loss for the organization, predict its business impact and compare that loss to the cost of training.

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Training and Organization Success

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Strategic Planning

Assessment

Design

Development

Implementation

Evaluation

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Full circle – Connection to strategy

  • This is where training comes full circle, back to the organization’s strategic plan. Senior management will always be looking for trainers to justify the expense of training. Consequently, training managers must remember to focus training on issues that are most important to the organization and that will achieve strategic objectives. In this way, trainers will become true partners in the organization’s success.

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