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Considering the Return on Investment in Training

From “Gauging the Return on Employee Training” by Carole Goodson in Your Houston Business, Summer 2005.

According to the American Society of Training and Development, companies are spending upwards of $60 billion in employee training. You invest a lot in your employees, and if you offer employee training, you need to know that you’re getting a solid return on your investment. How can you assess the effects of training on individual employees and on your organization as a whole?

In 1959, Donald Kirkpatrick introduced a four-level model for the evaluation of training programs.1 This model focuses on the following questions regarding training: 1) How did participants perceive the training? 2) What did participants learn? 3) Do participants demonstrate an on-the-job performance change? 4) Did the training produce positive business results? Although an organizations interest may be on business results, all of these levels of evaluation are important. It is not possible to attribute positive changes in business results to a particular training program if it is not first ascertained that the participant has learned the task and is able to apply it to the job.3 Once confirmed, it is appropriate to evaluate results and in particular, examine the return on investment (ROI).

What do we mean by ROI?

An organization that conducts an ROI analysis on their training program views training as an organizational investment; the organization is seeking to determine if the benefits of training exceed the associated costs. ROI concepts, as applied to training, were developed and widely distributed by Jack Phillips who presents ROI as the ratio of business value to training costs: 3 ROI (%) = (Net Program Benefits/Program Costs) x 100

In this calculation, net program benefits are program benefits minus program costs where the benefits and costs are determined for a specified period of time. An ROI of 250% means that the company received $2.50 over the cost of the program for each dollar that was invested in the program. An ROI of 100% indicates a $1 gain for every dollar spent and is considered “break even.”

What considerations must be examined to establish the ROI of training?

Although the ROI formula can be simply stated and presented, it is not as simply applied, and there exist several factors and principles that must be considered in its application.

1. Be clear on your purpose. In any evaluation, the most important first step is to specify the purpose of the evaluation. Set performance objectives that identify the positive effects that result from successful training and clearly address what can and will be measured. The training objectives must be manageable, and the measurement methods must be apparent. These issues are usually addressed through an initial needs assessment.

2. Calculate training costs. Several approaches are available for cost calculations; whichever is selected, it should be consistent across programs to enable program comparisons. In addition, calculations should be inclusive of both direct and indirect costs. 3 Direct costs are those associated with the particular training program being evaluated, while indirect costs are frequently associated with overhead and would have been in place whether or not a particular training event occurred. Examples of direct costs include program design and development, participant travel, course materials, instructional space, instructional equipment, evaluation costs, and consultant fees. General administration, employee time, in-house trainers, and needs assessments are commonly listed as indirect costs.

3. Identify training benefits. Benefits are traditionally viewed as the most difficult ROI component to measure; however, clearly specified performance objectives facilitate the process. Tangible benefits, resulting in hard data, are desirable because they can be defined and measured. Examples of hard data include increased output, time on task, sales volume, profits, avoided expenditures, product waste, medical claims, and reduced cycle time, etc.

However, sometimes training program are directed at soft skills such as improvements in communications skills, leadership, employee work habits, the work environment, attitudes, employee initiative, or turnover. Converting intangible benefits to the dollar values necessary for ROI analysis is at best a challenge and often can not be credibly accomplished. However, some do attempt the process using methods that are subjective and may include dollar estimations of benefits from management, participants, clients, or experts.2

4. Isolate the effects of training. In any organization, multiple factors are present that impact organizational change. Thus, it can be difficult to attribute the change to the training process. Various evaluation designs exist that are helpful in isolating the effects of training. A common technique is to compare the results of employees who received training to a second group who did not, assuming that the intervening factors affect both groups and thus, any changes can be attributed to training. 1 Another process involves plotting results against time, beginning with data before the training occurs and continuing after the training to determine if changes have occurred. 3

5. Consider context. Contextual factors exit that need to be considered in determining ROI. For example, does cost and benefit information stem from sources that are perceived as reliable sources? Such sources are necessary to establish that the training evaluation is correct, fair and of value. While most consider human resource personnel as reliable in determining the costs of training, benefits are better compiled by supervisory personnel. 3 In addition, is the ROI analysis completed within a well defined and reasonable time frame? Appropriate timing means that the data is collected during the life of the training program, a process that is necessary for valid results.

Is ROI the right techniques for evaluating your training program?

ROI is best suited for those training programs that have clearly articulated business outcomes. ROI is effective when evaluating a program that produces hard data as a measure of tangible results. Some programs address only intangible benefits and thus, it is difficult, if not impossible, to assign a specific dollar value to the benefits. In these situations ROI is not usually recommended. 4 It is not uncommon for training to produce both tangible and intangible benefits. When both occur, an appropriate approach is to calculate the ROI using the hard results, and present any intangible benefits as additional documentation for the success of the training program.

Other techniques exist to analyze the business results of training.

In examining the effects of training on business results, ROI can be a potent tool, but it may be necessary to consider other procedures. A cost/benefit ratio (CBR) is a related process that involves the calculation of the ratio of the training benefits to the training costs. 3 Calculation of the CBR is particularly useful if you can’t reasonably isolate the effects of training. When ROI or CBR does not seem to fit, collect and analyze basic business results data, i.e. performance values such as increased sales, increased production, or reduced time on task. Although not as convincing, this approach will provide evidence of the value of the training. For additional detail and information regarding ROI and other approaches to evaluation, refer to Donald Kirkpatrick, 1) Evaluating Training Programs: The Four Levels and 2) Another Look at Evaluating Training Programs (ASTD); Jack Phillips, 3) Handbook of Training Evaluation and Measurement Methods; D.J. Basarab and D.K. Root, 4) The Training Evaluation Process.

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