MEASURING RETURN ON INVESTMENT IN TRAINING
11-12 FEBRUARI 2004
on a Training Course
The term, return on investment (ROI), readily becomes apparent when discussing the return on education and training. A recent study conducted in the United States reveals that as many as 67% of the companies listed in the Training Top 100 of Training Magazine calculate a return on their investment in education and training. What is the benefit of ROI to a sales manager and what is required in order to produce a simple calculation of the ROI in the case of a sales training course?
by Diederick Stoel
|In performance-based organisations budgets are assigned to those departments
which can demonstrate the added value of their expenditure. A training manager
who wishes to be certain of his educational budget next year, will need to
show that his training plan is profitable, preferably with the aid of a ROI
calculation. Yet how does one calculate the ROI on a training course? This
article will help formulate the answer. It briefly sketches two simple
methods which are used by many instructors throughout the world. It will
become clear to you that careful consideration can save you a great deal of
money, an immediate yield even before the sales training has begun and even
before you have produced the final calculation.
Imagine that you spend R250,000 on a course. It yields R350,000. Your net profit is R100,000. This represents a ROI of 40%, namely, R100,000 divided by R25,000 multiplied by 100%. We will be making R0.40 on every rand we invest. This is a simple calculation and therefore easy to perform. However, before we can do this calculation, we will first need to crack a few tough nuts. We can readily list the costs involved but how does one calculate the income? Do we also know that the yield which is evident to us, has been produced by the training?
In order to clarify this, we will monitor the situation prevailing at the car company of Donkersloot, a dealer selling make C vehicles and the proud owner of six branches in the Johannesburg and Capetown regions. You will see the impact of training expressed in money and how this impact can be separated from all the other effects.
Table 1 Donkersloots’ plan
Donkersloot has thought carefully about its objective in terms of results: secure more orders from sales consultations in the course of which price-based objections are made. In addition, Donkersloot has established a link between the features of this training and the results which it expects (Table 1). The plan appears to be sound. Let us take a look at how Donkersloot’s idea pans out in practice. July was a top month for the Johannesburg branches. Figure 1 shows the sales figures for the three branches in the Johannesburg area. These figures rose sharply in the month following the training. If we analyse the trend, we can see how sharply it is reversed: 45 additional vehicles compared with the previous six months. This represents an increase of 45%. Yet can we ascribe this reversal of the trend directly to the training? The financial assistance scheme has also contributed to this success. By the same token, we might also have achieved identical results without any training. This raises the following challenge for us.
responsible for success?
For the sake of certainty, let us check how our fellow make C car dealers performed in July. We have prepared the list shown in Table 2 based on the breakdown that is published in the national daily newspapers every month.
You can see that the financial assistance scheme also had a national impact. In July 28.3% more make C cars were sold compared with the previous six months. This corresponds to the results achieved by the three ‘control’ branches. Our theory is standing its ground for the moment. The extra increase appears to be due to the training. Yet how sure can we be that this is the case? We will return to this at the end of the article. Let us have a look at what the ROI amounts to so far. First let us consider some facts. Sales of fifteen additional cars represents extra earnings of R240,000. The cost of the course, including analysis, development and evaluation, is R150,000. The ROI can be calculated as follows. R240,000 minus R15o,000 amounts to a net profit of R90,000. Dividing R90,000 by R150,000 and multiplying it by 100% produces a ROI of 60%.
It would appear that the cost of the course has been recouped within a month. Donkersloot is even left with R90,000. This is a nice sum to use to pay the instructor and the course developer in August. Based on these figures, the company proceeds with its training.
At the end of such a session, which need not last longer than one and a half hours, you will have isolated the course’s impact.The focus group estimates that the training accounted for 31% of the success and is 71% certain of this on average. In the opinion of those people who understand these matters, the added value generated by the course amounts to no less than 22% (71% of 31%). For the sake of caution, we will calculate the ROI based on 22% of the net profit, hence 22% of 45 additional vehicles multiplied by a profit margin of €1,600. This represents a yield of R158,470 thanks to the training. If we compare this income to the cost involved – R150,000 – it is the focus group’s view that the ROI amounted to at least 5.6%. In this example the focus group has also come to the conclusion that Donkersloot recouped the cost of the training in one month.
A control group’s findings are much more precise. We will ignore the statistical reasons for this here but the data reveals that we can say with 95% certainty that the ROI for the course varies between 48% and 75%. The variation in accuracy is shown in Figure 3. The truth literally lies in the middle.
In this article you have briefly seen how you can calculate the ROI for a sales training course. You also know what you will need for this purpose: a sales administration system, reliable sources, a healthy dose of common sense and a proper sense of perspective.
Table 3 Focus group results
In addition, you have seen what a ROI calculation can produce. With the aid of systematic evaluation you will discover your training ‘darlings’ and ‘disasters’. Large profits can be achieved by utilising your ROI calculations to improve your training programmes. This will ensure that you will later emerge from the recession with your sales team more rapidly than your competitors. Here is one last tip: have your sales staff express their view of the ROI of their training after they have attended a course, as in the case of the focus group. You will then not only have an indication of your anticipated return but you will also be facing in the right direction, namely, looking forward to profit!
Diederick Stoel is the managing director of ProfitWise in Amsterdam, the Netherlands, which specialises in making education and training profitable.