Calculating ROI on Training

By Dennis Rees

In the previous two issues of Simpact, we discussed the need to understand the Strategic objectives of your company before you can form an opinion of where training will result in “Revenue.” Generally, there is no difference between the analysis of ROI on capital investments and investments in training.

We also discussed the importance of planning how your company might implement strategic imperatives using initiatives broken into discrete projects designed specifically for that strategic purpose. We then turned our thoughts to designing the strategic imperatives so that training appears as a portion of the initiative in the correct and most effective place.

Finally, we reviewed specific steps to make absolutely certain that training is aligned with your company’s strategy, and that it is working in concert with all other departments of your organization to ensure success of strategy implementing initiatives.

We are now ready to turn our analysis to the actual parts and pieces that will allow us to calculate ROI on training.

REVENUE:
To estimate revenues or avoided costs (benefits) of training, it is necessary to understand the estimate of benefit your company will receive from a fully implemented strategy. For example, suppose your strategy is to open 1,000 new points of distribution during the next five years with the estimated benefit to increase net revenue from operations by $50,000.00 per location; it is easy to see that the total benefit would be fifty million dollars per year. In addition, and no less important in producing revenue, are costs that can be avoided by proper training. Examples of these revenues (avoided costs) might be better customer satisfaction resulting in market basket penetration, avoidance of mistakes causing rework returns and fewer sales, increases in productivity of the workforce, and many others depending on the particular training being contemplated.

COST / EXPENSE:
Costs associated with training are more easily estimated. Costs are the actual dollars spent on such things as travel, venues, materials, courseware development, and salaries for students and instructors and replacement workers while students are in training.

COMPUTATION:
Now, company strategy may work at some level without training at all. If this is the case, an incremental approach must be used to estimate how much of the benefit might be achieved without training, and how much more would be achieved with full and robust training as well as any effort in-between if applicable.

If none of the benefit of the strategy can be achieved without training, your job is easier. Training would then become a part of the whole, and the entire project would be held up to the particular investment standards of the corporation to see if the ROI meets those investment criteria. Training and development are not entirely off the hook, however, as you must be confident that the particular training curriculum you have proposed is as efficient and effective as possible before the budget is provided to plan for the final calculation. In most practical ways, this secondary test of efficiency and effectiveness requires the same ROI analysis as the incremental approach mentioned above.

If some of the benefit can be achieved without the effort of training, it must be estimated using your best judgment about the allocations involved. If, for example, 75 percent of the benefit can be achieved without training, then only 25 percent of the revenue would be “as a result of” the training you have proposed. This means that all of the expenses of the training curriculum must be compared to the incremental revenue that would be achieved as a result of the training to see if hurdle rates are met.

You must also analyze situations when training can be developed and delivered in a variety of ways. When facing this issue, you must treat each possible training scenario as a separate project, and then compare one project to another to see which has the greatest Cost/Benefit or ROI. This process is done using exactly the same computational and analytical principles as the overall models you will use to determine whether training is appropriate, and if so, how much training is optimal.

I do not want to give you the impression that it is not complicated because most of the time it is! This is why we have so many discussions about training ROI, and why there is a general distrust of the numbers and unwillingness to try to establish ROI as a measure of training efficacy.

We must adopt the same approach as the capital allocation models in use at every major corporation in the country. It is essential that you include people with computational and analytical skills to take part in the discussion of ROI. In some instances, a model representative of the exact process or training you are trying to implement must be created to estimate revenues and expenses. In other instances, you can “fill in the blanks” by using generic models that provide acceptable approximations of your particular project.

In the end, you must do your best to understand all of the variables that will determine success in implementing initiatives designed to enable strategy. To the extent that these variables are connected to the provision of training, you should include them in your calculations of ROI on training and the associated decisions that must be made given this information.