CALCULATING ROI FOR TRAINING:
IT IS MUCH EASIER THAN YOU THINK
South African organisations are spending millions of rands on training their human capital. But how much value does this training add to the organisation? Does it affect the bottomline of the business? Most training managers will not be able to answer these questions affirmatively due to the fact that very few of them are measuring the impact of training. Well, now in the human capital paradigm it is essential to quantify the value of human capital, and indeed the development of human capital.
Return on investment (ROI) is a measure of the monetary benefits obtained by an organisation over a specified period in return for a given investment in a training programme. In other words, it is the extent to which the benefits (outputs) of training exceed the costs (inputs).
Because the Skills Development Act and Skills Development Levies Act require employers to invest in staff training, managers are increasingly demanding not only accountability for these delays but also greater articulation of how training interventions benefit their companies in terms of financial impact. The pressure to measure ROI is increasing in South African organisations.
Measuring the return on investment of training programmes is a powerful way to show top management the value of training investments in financial terms. ROI answers the question: "For every rand invested in training, how many rands does the employer get back?"
Many training departments have not made the extra effort to show the payoff of their training programmes. The good news is that ROI can be determined through a scientific and professional approach to measurement. There are great rewards for such an evaluation.
The interesting thing about ROI is that all training managers know that ROI must
be shown, yet no one is doing it. The following excuses will probably made:
- Training managers do not know how to calculate ROI.
- They make excuses that ROI is difficult to determine for certain types of training such as soft skills.
- ROI is too complicated.
- It is too much effort to determine ROI.
- They are so busy with all their training programmes, that there is not time to calculate ROI.
- They are scared that if ROI is calculated, it will show that their training adds no value and that they will be at risk to lose their jobs!
Despite the above hesitation on the part of training managers, there are a number of trends that have increased the interest and use of ROI for training programmes in South African organisations:
- Owing to the promulgation of the Skills Development Act, training budgets are growing.
- Additional training and development programmes are being implemented as part of companies' employment equity plans and workplace skills plans.
- Top management is exerting pressure on the training function to show accountability in terms of tangible business benefits.
- Most training programmes have shown very little improvement in organisational performance.
- Many companies are moving in the direction of outsourcing some or most of their training, with the result that training practitioners are beginning to realise that measuring the ROI of training can justify their existence in the organisation.
- Companies aspiring to achieve world-class status have to develop quantifiable measurements for people management and human resource development. To achieve a business excellence award such as the South African Excellence Foundation Award it is imperative to show evidence of people development measurements and benchmarks as a component of overall business improvement.
The idea with ROI is to measure the impact of training on organisational performance metrics such as higher productivity, better quality products/services, reduced costs, lower labour turnover, reduced absenteeism and increased market share.
Let us say that the ROI from a sales training programme is calculated at 233%. This means that for every rand spent, there has been a return of R2,33 in net benefit, after all costs are factored in. The exact form of that benefit depends on the objectives of the learning programme. For example, if the training addressed selling skills, then one key benefit should be an increase in sales.
Evaluating training programmes in terms of ROI enables training practitioners to provide line management with hard evidence about the direct financial impact they receive from training investments. Your ability as a training manager or training consultant to calculate and report on ROI to line management will have a major impact on your credibility in your organisation or the organisations you are consulting with.
After the data has been collected, it must be converted into monetary values. According This requires a direct conversion of hard data such as quantity, quality, cost or time. This is a much easier task for learning programmes where the data is apparent, such as technical training. For 'soft' data the process is more complicated, because it is not always possible to provide a direct measurement for a soft skills programme, such as a conflict management course. The next step is to calculate the costs for the programme. The ROI formula is the annual net programme benefits divided by programme costs, where the net benefits are the monetary value of the benefits minus the costs of the programme. The ROI formula is as follows:
Doing the above calculation will answer the important question: Did the financial value of the training results exceed the cost for the training programme? If there is a positive ROI, the training practitioner can clearly show the financial benefits of the training intervention. If not, he or she is in trouble!
Implementing a ROI exercise in a company is usually a major paradigm shift on the part of training practitioners. Most of them would previously have focused on reaction evaluation and learning evaluation. Very few would have done a behaviour evaluation, and there is even less chance that they would have done any ROI projects! In the light of this, it is important to follow guidelines for the effective implementation of an ROI exercise:
- Build capacity for ROI by doing thorough research and benchmarking.
- Train training staff to understand ROI.
- Quantify information before the training in order to obtain a baseline (e.g. number of accidents, customer complaints, etc.).
- Set specific targets for evaluation at all levels
- Decide on specific measurements.
- Allocate resources for ROI.
- Develop a culture of measurement and accountability among training staff.
- Start with only one course as a pilot programme to practise ROI skills.
- Focus on individual programmes to simplify the process.
- Communicate results to training staff and the whole organisation.
- Celebrate ROI success stories in a very visible way.
- Design improvement plans for training programmes in order to increase ROI.
- Once ROI results are available, use the data to market future learning programmes.
To calculate ROI for training is much easier than you think. A simple process approach can be used as the one indicated earlier. What is important, is that training practitioners must commit themselves to collecting all the necessary data - information that can be measured. Once these results are available, companies will be able to determine the financial value of training. This process can assist them to make important decisions about various training interventions, such as the value of leadership development, internal vs external training, e-learning vs traditional training etc. ROI provides the training manager and skills development facilitator with an opportunity to measure what they do and to make better decisions based on facts and quantifiable information.
South African Forum of the American Society for Training & Development: (011)
793 4515 e-mail: firstname.lastname@example.org
Knowlede Resources - First South African ROI book: (011) 880 8540 www.kr.co.za
ROI Online: www.roionline.co.za
American Society for Training and Development: www.astd.org
Fastrak-consulting (ROI): www.fastrak-consulting.co.uk
School for Champions (ROI): www.school-for-champions.com/training/roi.htm
This article is published by Writestuff Publishing (2003). All About Human Capital Management.