The Myths and Realities of ROI
Training and development efforts are big business, with the amount of money spent increasing yearly. However, changes in the economy and declining profit margins are prompting many businesses to question the value of their training investments. Do businesses benefit from their expenditures on employee training or are they merely preparing their workers for jobs elsewhere? When workers bear the costs of such training, do they realize personal benefits or does the employer reap the only rewards? This publication examines myths and misconceptions about who pays and who reaps the return on investment (ROI) in training.
Investments in Training Are Assumed to Have Positive Returns
For years, companies have been operating under the assumption that they are reaping positive benefits from their training efforts. They train workers because they believe it strengthens the organization and serves as a retention tool. They accept training as a given expense, showing human capital investments as expenditures on their corporate balance sheets, not as assets that are expected to generate income. However, because intuition and casual estimates have formed the basis of many of their training investment decisions, many companies have little evidence to verify that they are realizing positive returns on these investments.
This practice of operating from an underlying belief in the value of training is not unique. A study of 15 countries in the Organization for Economic Cooperation and Development found that the majority of enterprises believe employee training is responsible for “productivity improvements, greater workforce flexibility, savings on material and capital costs, improved quality of the final product or service, and a more motivated workforce” (National Centre for Vocational Education Research 2001, p. 1). However, many companies have not measured the benefits and related them to the cost of training in a way that reveals the rate of return on a firm’s investment. Apparently there is no other workplace issue on which so much money is spent with as little accountability as training.
In today’s competitive and economically volatile market, business managers can no longer approve spending without substantial justification to support their spending decisions. They are asking their human resource managers to provide proof that their training programmes are resulting in positive returns or to face budget cuts.
The Only Way to Substantiate ROI
With increased pressure to justify their expenditures on training, human resource personnel are looking for ways to show improved bottom-line results from employee training investments. However, it is difficult to show a direct correlation between training and changes in sales volume, productivity, and other profit measures because there are many factors, besides training, that can influence these changes.
One of the problems with measuring training’s influence on worker productivity is that there are many areas of productivity that are intangible and difficult to quantify, such as ideas, abilities, experience, insight, motivation etc. Because evaluation methods can be expensive and time-consuming, the complexity and extent of the evaluation of training is a big decision.
The literature contains many references to Kirkpatrick’s model for measuring training and performance. Levels 1, 2, and 3, as identified by Kirkpatrick, measure reaction, learning, and behaviour, respectively. Level 4, the highest level, measures results through financial analysis. Measuring all programmes at this highest level is not necessary, according to many analysts. Only programs that address a high-risk business issue or have the greatest impact on the bottom line should receive this level of evaluation. For many organizations, measures of customer satisfaction, work climate, attendance, and morale may be sufficient to justify training expenses. And these measures can be easy and inexpensive for businesses to create, administer, tabulate, and interpret.
Organizations that are committed to putting forth the time, money, and effort required to ensure that training results are connected to a business need and result in a monetary benefit can employ several methods for doing this. One is to examine the consequences of not training; another is to analyze performance records. Probably the best-known method is a cost/benefit analysis, which can show the extent to which their training programs result in observable, measurable behaviour that contributes to the bottom line.
Here are 5 steps for measuring ROI :
1. Obtain data to demonstrate the changes in behaviour, e.g., that gathered through surveys, questionnaires, on-the-job observations, post-program interviews, focus groups, performance monitoring.
2. Isolate the effect of training, e.g., through the use of control groups, trend lines, forecasting models.
3. Convert the data to monetary value by focusing on a unit of measure, determining a value for that unit, calculating the change in performance data, determining the annual amount for the change, and calculating the total value of the improvement.
4. Tabulate the program costs: this is the value of the cost of taking people away from their jobs for the training, including salary and benefits.
5. Calculate the return on investment by dividing the net benefits by the costs times 100 percent.
When performed properly, studies of returns on investment can provide substantive information upon which to base training support. A study of the returns on training investments made by seven Australian work organizations shows that there are substantial financial rewards from a well-designed training program. The organizations in the study realized returns ranging from 30 to 7,000 percent.