Calculating return on investment started out in the manufacturing sector, where it was easy to measure the time to complete a particular task and the number of items produced by employees or machines. It then moved into the more complex field of investment banking where it is still being used quite extensively.
ROI is today an essential part of every area of business:
- it is used to evaluate the cost/benefit of purchasing new technology;
- for outsourcing certain processes that are not considered an organization’s core business;
- for construction or renting of new facilities;
- or for health and fitness programs for employees.
Actually, people use it nowadays even when considering making expensive personal investments.
Cutting costs – a manager’s nightmare
There’s no secret that when the idea of cutting expenses arises, training budgets tend to be the first to suffer. Learning is important but most often than not it is not obvious enough for executives that it brings monetary value to the organization.
The Kirkpatrick model of training evaluation has the fourth level that is aiming to measure the results but it only takes things as far as checking if the information taught is being transferred on the job.
Although it’s easily to infer that if the participants take what they learned and use it in their daily jobs this will lead to increased performance and thus better results for the business, it may not be enough to convince a CFO to continue investing in L&D.
Calculating the ROI of training – ensuring the L&D budget
It is indeed more challenging to calculate the return on investment where training is concerned but it is not impossible.
We will take a look at two techniques that can convert assessed behavior into metrics that can help calculate ROI.
Conducting thorough 360-degree evaluations
This particular kind of evaluation allows multiple observers (360-degree) to rate a common set of observed competencies, usually on a scale:
- Has the ability to coach others in skill.
- Is capable of performing the skill independently.
- Is able to perform the skill with some guidance.
- Understands the skill (at a conceptual level).
- Shows limited ability in the skill.
- Has no ability in the skill.
This sort of measuring can be used to establish what the baseline skill set is prior to training and can be used after the learning path is completed to determine the impact on the individual’s actual job performance.
In order for it to result in a metric that can be used for an ROI calculation, a group of seniors and experts should assign an appropriate value to the skill. Then, based on how particularly valuable the skill is, what the improvement has been, the position (and remuneration) of the employee who has been trained and the cost of the training, there can be a fairly accurate assessment of how long it takes for the investment to be recovered.
Rather than simply asking the learner to take a test in order to check if they have mastered the content delivered in a training session, a more authentic way of measuring results can be employed.
You can do this by asking the employee to come up with a project or product to demonstrate his new skill. If that’s not possible, a case study or a well-designed role-play can be used instead. Of course it’s a lot more work than simply giving out the same test to all participants in one session — but observing them first hand can help put a more relevant number on how well each individual is doing.
Speaking the language of money
And since we are talking about numbers, with the data from the 360-degree evaluations, you will be able to forecast how a particular acquired skill will impact the individual’s actual job performance.
For example, let’s take the case of Bill, a junior project manager earning $45,000 per year.
Bill has just completed an eight-hour course on Intermediate Excel skills. A good mastery of Excel is paramount to Bill’s daily activity and thus gets a rating of 4 for “Importance of skill on the Job.”
Before the training session, Bill used Excel 12.2 hours per week. After the course, Bill continues to use Excel 12.2 hours each week, but at a much higher level of efficiency, that is the equivalent of using Excel 16.8 hours per week.
This gives us all the numbers we need to calculate the ROI of Bill’s eight hours of training, which cost the company $60, and the payback period.
First we need to convert Bill’s salary. To do the math, we need to convert Bill’s salary into an hourly rate:
$45,000/1,950 hours = $23.07 per hour
In order to calculate the true cost of the training, we are going to add the eight hours that Bill spent off of his job while training to the $60 that the company paid for the program:
(8 x $23.07) + $60 = $244.56
To get to the economic benefit, we need to take Bill’s hourly rate and multiply it by his virtual weekly gain:
$23.07 x 4.6 = $106,22
Before we calculate the ROI and payback period, let’s project Bill’s economic benefit from the training for three months, or 13 weeks:
$106.22 x 13 = $1,380
We now have all of the data to do our calculations.
Bill’s Excel course has yielded an economic benefit over three months of $1,135 ($1,380 – $245), and using the formula below we get a ROI of 336 percent.
If you are still reading this and not bored into oblivion by this display of numbers and percentages, what I meant to illustrate is that if you are asked for specific numbers, they can be obtained fairly easy.
However, if you are looking for numbers that are indeed impressive and will guarantee a generous learning budget, you’ll need to make sure that the goals of the training units are in line with the objectives of the company. This way, everybody is guaranteed substantial gain.