In Part I, we looked at different ways of assessing the return on investment (ROI) in training and why we should be investing in our people and measuring its value rather than seeing training as an expense.
In Part II, we look as the process of calculating the return and, in order to be able to calculate ROI, you must first make estimates or obtain measurements of the costs and benefits associated with a training programme. Thereafter, the calculation of ROI is a relatively simple process.
Forecasting and measuring costs
Design and development costs
The first category of cost to be considered is the design and development of the training programme, whether this comprises classroom events, self-study materials, simple coaching sessions, E-learning or a combination. You will need to consider:
- internal days of design and development
- costs of external designers and developers
- other direct design and development costs (purchase of copyrights, travel, expenses, etc.)
- outright purchase of off-the-shelf materials
Most organisations devote effort to promoting their training programmes.
- internal days of promotional activity
- costs of external agencies
- other direct costs of promotion (posters, brochures, etc.)
An allowance must be made for the time taken by the training department in administrating the training programme. This will typically be a factor of the number of students:
- hours of administration required per student
- direct administration costs per student (joining materials, registration fees, etc.)
The next category of costs relates to the delivery of the training, whether this is mediated by faculty (tutors, instructors, coaches, etc.) or is self-administered (workbooks, CBT, online training, etc.). Let’s start with the information needed to calculate faculty costs:
- the number of students who will be going through the programme
- hours of group training (whether classroom-based or delivered in real time, online)
- hours of one-to-one training (typically face-to-face, but could conceivably be conducted by telephone, video conferencing link or in real-time, online)
- hours of self-study training
- additional faculty hours (preparation time, the time needed to review or mark submitted work or the time needed to correspond by email or bulletin boards with online students)
- faculty expenses (travel, accommodation, subsistence, etc.).
Then there’s the cost of materials:
- cost per student of training materials (books, manuals, consumables, etc.)
- license cost per student for off-the-shelf materials
You will also need to allow for the cost of your training facilities, whether these are internal or external. Make sure to include the rental or notional internal cost of the following:
- training rooms
- open learning / self-study rooms
- equipment used
Probably the most significant delivery cost relates to the students themselves. It is only necessary to charge a student’s cost against the programme 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 time, i.e. not in slack time, breaks or outside work hours.
When an employee goes through a training programme in work time, the organisation is not only having to pay that person’s payroll costs, they are also losing the opportunity for that person to add value to the organisation. When a salesperson is on a course, they are not bringing in new business. Similarly, a production line worker is not creating products, a researcher is not developing new ideas and an accountant is not finding ways to save money.
If an employee can be easily replaced while they are undergoing training, then there is no lost opportunity – the cost is simply the employee’s payroll costs. In many cases, however, it is simply not practical to obtain a suitable replacement, so the output that the employee would have generated in the time that they are receiving training will be lost. In this case, the true cost of the employee being trained is the lost opportunity – the ‘opportunity cost’. The calculation of opportunity costs are greater than an employee’s payroll costs and need to be considered in any serious evaluation of costs.
Finally, don’t forget to include any direct student expenses – travel, accommodation and subsistence.
You also need to make an allowance for the time spent evaluating the training, whether this is an ROI analysis or some other method.
Forecasting and measuring benefits
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.
So, what do we do when faced with this difficulty – back away and focus our evaluation efforts on easier measures? No, we do the very best we can, because all other measures fail to reflect the financial reality that training must pay off – in hard cash.
If it is of any comfort, trainers are not alone in finding it difficult to calculate the benefits of what they do. Is it any easier to predict the benefits to be obtained from launching a new product, running an advertising campaign, initiating a research programme or changing the pay and benefits policy?
Let’s look at the major categories of benefits. Note that these categories are not necessarily mutually exclusive – in some respects they provide alternative ways of looking at the same underlying benefit.
Labour savings occur where, as a result of the training, less effort is needed to achieve current levels of output. We have to assume that savings are realised by a reduction in the amount of labour applied to a particular job, not by utilising the newly available time to achieve further output on the same job.
Labour savings will only be realised if the labour applied to a job can really be reduced, whether this comes as a result of redundancies, transfers of staff to new positions or re-allocations of work. If the time savings simply result in more slack, then there is no saving.
Examples of labour savings include:
- reduced duplication of effort
- less time spent correcting mistakes
- faster access to information
Productivity increases occur where, as a result of training, additional output can be achieved with the same level of effort. This implies that the organisation requires or desires more output in this particular area. If it does not, then it might be better to express the benefit as a cost saving.
Examples of productivity increases include:
- improved methodologies reducing the effort required
- higher levels of skill leading to faster work
- higher levels of motivation leading to increased effort
Other cost savings
Cost savings can be achieved in a variety of ways, not just through savings in labour, and this category allows you to take account of these. Examples include:
- fewer machine breakdowns, resulting in lower maintenance costs
- lower staff turnover, reflected in lower recruitment and training costs
- a reduction in bad debts
- Less down-time because knowledge sticks
- Less help-desk queries
Other income generation
In some job positions, it may be possible for new income to be generated as a direct result of training. Sometimes this can be satisfactorily recorded as a productivity increase, but there will be times when a more direct and specific analysis is required.
Make sure that you offset from the income any variable costs that are incurred as a result – it is the net contribution that you are looking for.
Examples of other income include:
- a higher success rate in winning competitive pitches, leading to increased sales
- sales referrals made by non-sales staff
- new product ideas leading to successful product launches
Calculating return on investment
Return on investment tells you the percentage return you have made over a specified period as a result of investing in a training programme. 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 organisation’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 student stays in a position in which they can continue to apply the knowledge and skills being taught.
It is relatively simple to calculate return on investment:
% ROI = (benefits / training costs) x 100
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.
Here’s an example of the final results for a ROI analysis:
- Duration of training 33 hrs
- Estimated student numbers 750
- Period over which benefits are calculated 12 months
- 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
- Labour 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
If you’ve been following through all of these steps, then you’ll have realised just how many calculations are involved in conducting a thorough analysis. What’s more, when you start to look at areas such as opportunity costs and productivity benefits, then there are some quite tricky concepts involved.
Making ROI work for you
It has become something of a cliché for senior management to claim that ‘people are our greatest asset’. Yet, much to the dismay of trainers, the effort they put in to developing this ‘human capital’ continues to be seen as an expense and not as an investment. It’s time to turn this around. Start to analyse your training programmes as if they were capital investments – using techniques like ROI – and senior management may start to change their attitude to training. And at a time when there are so many exciting new developments in training – not least online learning – you’re going to need management’s co-operation.