Shrinking departmental budgets dropping sales, and declining productivity are forcing companies to maximize every penny they spend especially in the area of employee training and development. This is where closely monitored investment metrics like ROI take center stage.
When Peter Drucker intuitively coined the term knowledge worker, he was acutely aware of the rise of workers as investable opportunities at par with machinery, real estate, and other capital goods. However, unlike other traditional commodities, people and their attendant performance tend to be difficult to measure and tricky to justify.
Training like other investments has costs attached to it. Without a credible and sensible argument to justify training costs, decision makers find themselves hard pressed to rally behind the initiative. A reliable tool such as Return on Investment popularly known as ROI is specifically designed to measure the value of training outcomes and so far has proven to be the best way to justify the costs of the training function. Using ROI further validates the oft-spoken line that people are the most valuable asset of the organization.
Here are some basic rules of applying ROI to training:
Determine the Pre - training Data
Knowing what the training program is trying to accomplish and what existing facts are available help establish the baseline information. This is commonly made up of hard and soft data. Hard data can be quantified and can easily be equated with monetary values. Examples are number of closed sales, repeat customers, and reduction of accidents.
Soft data tend to be subjective and intangible. They may come in the form of improved morale, more cohesive teamwork, and increased communication. Past departmental records and information from previous projects are rich sources for pre-training data.
Define the Learning Outcomes
Understanding a company’s present state helps trainers crystallize the end goal they wish to accomplish. Knowing the training objective - be it to enhance hard or soft skills - helps managers identify the necessary variables and their corresponding dollar value.
Outcomes are directly correlated with baseline data. They are two ends of the training continuum that provide the framework for the ROI equation. Whereas the baseline offers a starting point, outcomes provide the desired end state. Learning outcomes as a consequence of training can be assessed in the form of increased sales, low product rejects and improved output per hour.
Identify the Variables
The formulaic expression of ROI suggests that it is a mathematical model which means each variable must be accounted for in order for the formula to be effective. The direct and indirect components of the training process need to be recognized so that they can be given value. Some variables many consider include wages and salaries, instructional materials, travel expenses, and marketing.
Applying the ROI Formula
Here’s a quantifiable measure that helps ROI justify the value of training and provide dollar equivalence to learning in the workplace: The key is to take program costs and divide it into net program benefits, and multiply it by 100. The result is a percentage value which is the common expression of ROI.
While employee training can be fluid and hard to calculate, many companies have used the formula with leadership programs, supervisory training, and team development quite successfully. One classic example where ROI proved exemplary results was in the staff and graduate degree development program of Georgetown University’s Master program. Their empirical study revealed that using ROI practices helped them keep track of their graduates' promotions and salary performance when they hit the job market.
Improving the Bottom Line
Learning programs must ultimately enhance the profitability of organizations. While effective training sharpens a company's competitive edge, leaders and managers alike must keep an eye on the costs incurred in training programs and how they impact workforce learning and productivity.
Implementing a proven formula that precisely identifies inputs and compares costs with potential returns may just be the solution. This means observing detailed, sequential steps of the ROI process. This is what helps measure the results of employee performance and productivity to a reasonable degree of accuracy.
Since not all people in charge of training programs are savvy with figures or know the intricacies of cost-benefit analysis, a flourishing community of practice at ROI Institute offers a supportive environment for those who wish to incorporate the method in their work. Practitioners can access guides and aids from simple steps described here to more complex procedures.
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