Determining Return on Investment Assignment
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Determining Return on Investment Assignment
Return on investment (ROI) is an important training outcome. This section discusses how to calculate ROI through a cost-benefit analysis. Cost-benefit analysis in this situation is the process of determining the economic benefits of a training program using accounting methods that look at training costs and benefits. Training cost information is important for several reasons: 46
- To understand total expenditures for training, including direct and indirect costs
- To compare the costs of alternative training programs
- To evaluate the proportion of money spent on training development, administration, and evaluation, as well as to compare monies spent on training for different groups of employees (exempt versus nonexempt, for example)
- To control costs
There is an increased interest in measuring the ROI of training and development programs because of the need to show the results of these programs to justify funding and to increase the status of the training and development function. 47 Most trainers and managers believe that there is a value provided by training and development activities, such as productivity or customer service improvements, cost reductions, time savings, and decreased employee turnover. ROI provides evidence of the economic value provided by training and development programs. However, it is important to keep in mind that ROI is not a substitute for other program outcomes that provide data regarding the success of a program based on trainees’ reactions and whether learning and transfer of training have occurred.
Typically, ROI is used to show a training program’s cost effectiveness after it has been delivered. However, ROI is also useful for forecasting the potential value of a new training program, choosing the most cost-effective training method by estimating and comparing the costs and benefits of each approach, and making decisions about whether to fund and offer training programs in the future. 48
Consider the use of ROI at LensCrafters. LensCrafters brings the eye doctor, a wide selection of frames and lenses, and the lens-making laboratory together in one location. 49 LensCrafters has convenient locations and hours of operations, and it has the ability to make eyewear on-site. Emphasizing customer service, the company offers a one-stop location and promises to make eyewear in one hour. Dave Palm, a training professional at LensCrafters, received a call from a concerned regional manager. He told Palm that although company executives knew that LensCrafters employees had to be well trained to design eyewear and that employees were satisfied with the training, the executives wanted to know whether the money that they were investing in training was providing any return. Palm decided to partner with the operations people to identify how to link training to measurable outcomes such as profitability, quality, and sales. After conversations with the operations employees, he decided to link training to waste from mistakes in quality and remakes, store performance and sales, and customer satisfaction. He chose two geographic regions for the evaluation study and compared the results from these two regions with results from one that had not yet received the training. Palm found that all stores in the two regions that received training reduced waste, increased sales, and improved customer satisfaction. As a result, LensCrafters allotted its training department more financial273resources—$10 million a year for training program development and administration—than any other optical retail competitor. Because the training department demonstrated that it does contribute to business operations, it also received money to develop a multimedia-based training system.
The process of determining ROI begins with an understanding of the objectives of the training program. 50 Plans are developed for collecting data related to measuring these objectives. The next step is to isolate, if possible, the effects of training from other factors that might influence the data. Last, the data are converted to a monetary value and ROI is calculated. Choosing evaluation outcomes and designing an evaluation that helps isolate the effects of training were explained earlier in this chapter. The following sections discuss how to determine costs and benefits and provide examples of cost-benefit analysis and ROI calculations.
Because ROI analysis can be costly, it should be limited only to certain training programs. ROI analysis is best for training programs that are focused on an operational issue (measurable identifiable outcomes are available), are linked to a companywide strategy (e.g., better customer service), are expensive, are highly visible, have management interest, are attended by many employees, and are permanent. 51 At Deloitte, the tax and auditing firm, managers don’t require analysis of ROI for many training programs. 52 Because knowledge is the product at Deloitte, investment in training is seen as an important part of the business. Deloitte makes money through the billable hours that its consultants provide to clients. Training helps prepare the consultants to serve clients’ needs. ROI is primarily calculated for courses or programs that are new or expensive. For example, ROI analysis was conducted for a simulation designed to help new employees learn more quickly how to service clients. At Deloitte, use of the simulation has resulted in new hires being 30 to 40 percent faster in serving clients—resulting in an ROI of over $66 billion after subtracting program costs.
Determining Costs
One method for comparing costs of alternative training programs is the resource requirements model. 53 The resource requirements model compares equipment, facilities, personnel, and materials costs across different stages of the training process (needs assessment, development, training design, implementation, and evaluation). Use of the resource requirements model can help determine overall differences in costs among training programs. Also, costs incurred at different stages of the training process can be compared across programs.
Accounting can also be used to calculate costs. 54 Seven categories of cost sources are costs related to program development or purchase, instructional materials for trainers and trainees, equipment and hardware, facilities, travel and lodging, salary of trainer and support staff, and the cost of lost productivity while trainees attend the program (or the cost of temporary employees who replace the trainees while they are away from their jobs). This method also identifies when the costs are incurred. Onetime costs include those related to needs assessment and program development. Costs per offering relate to training site rental fees, trainer salaries, and other costs that are realized every time the program is offered. Costs per trainee include meals, materials, and lost productivity or expenses incurred to replace the trainees while they attend training. For example, consider the costs for virtual training compared to instructor-led training. Aetna has moved274from face-to-face instructor-led classroom training to virtual training for its sixteen-week program for new customer service representatives. 55 The cost to bring a trainer to locations without one onsite was more than $27,000. The comparable costs for the same training program conducted virtually are approximately $3,000.
Determining Benefits
To identify the potential benefits of training, the company must review the original reasons that the training was conducted. For example, training may have been conducted to reduce production costs or overtime costs or to increase the amount of repeat business. A number of methods may be helpful in identifying the benefits of training:
- Technical, academic, and practitioner literature summarizes the benefits that have been shown to relate to a specific training program.
- Pilot training programs assess the benefits from a small group of trainees before a company commits more resources.
- Observance of successful job performers helps a company determine what successful job performers do differently than unsuccessful job performers.56
- Trainees and their managers provide estimates of training benefits.
For example, a training and development consultant at Apple Computer was concerned with the quality and consistency of the training program used in assembly operations. 57 She wanted to show that training was not only effective but also resulted in financial benefits. To do this, the consultant chose an evaluation design that involved two separately trained groups—each consisting of twenty-seven employees—and two untrained groups (comparison groups). The consultant collected a pretraining history of what was happening on the production line in each outcome that she was measuring (i.e., productivity, quality, and labor efficiency). She determined the effectiveness of training by comparing performance between the comparison and training groups for two months after training. The consultant was able to show that the untrained comparison group had 2,000 more minutes of downtime than the trained group did. This finding meant that the trained employees built and shipped more products to customers—showing definitively that training was contributing to Apple’s business objectives.
To conduct a cost-benefit analysis, the consultant had each employee in the training group estimate the effect of a behavior change on a specific business measure (e.g., breaking down tasks will improve productivity or efficiency). The trainees assigned a confidence percentage to the estimates. To get a cost-benefit estimate for each group of trainees, the consultant multiplied the monthly cost-benefit by the confidence level and divided by the number of trainees. For example, one group of 20 trainees estimated a total overall monthly cost benefit of $336,000 related to business improvements and showed an average 70 percent confidence level with that estimate. The calculation is as follows: 70 percent multiplied by $336,000 gave a cost-benefit of $235,200. This number was divided by 20 ($235,200/20 trainees) to give an average estimated cost benefit for each of the trainees ($11,760). To calculate ROI, follow these steps: 58
- Identify outcomes (e.g., quality, accidents).
- Place a value on the outcomes.275
- Determine the change in performance after eliminating other potential influences on training results.
- Obtain an annual amount of benefits (operational results) from training by comparing results after training to results before training (in dollars).
- Determine the training costs (direct costs + indirect costs + development costs + overhead costs + compensation for trainees).
- Calculate the total benefits by subtracting the training costs from benefits (operational results).
- Calculate the ROI by dividing operational results by costs. The ROI gives an estimate of the dollar return expected from each dollar invested in training.
Example of a Cost-Benefit Analysis
A cost-benefit analysis is best explained by an example. 59 A wood plant produced panels that contractors used as building materials. The plant employed 300 workers, 48 supervisors, 7 shift superintendents, and a plant manager. The business had three problems. First, 2 percent of the wood panels produced each day were rejected because of poor quality. Second, the production area was experiencing poor housekeeping, such as improperly stacked finished panels that would fall on employees. Third, the number of preventable accidents was higher than the industry average. To correct these problems, the supervisors, shift superintendents, and plant manager attended training in (1) performance management and interpersonal skills related to quality problems and poor work habits of employees, and (2) rewarding employees for performance improvement. Training was conducted in a hotel close to the plant. The training program was a purchased videotape, and the instructor for the program was a consultant. Table 6.11 shows each type of cost and how it was determined.
TABLE 6.11 Determining Costs for a Cost-Benefit Analysis
Direct Costs Instructor $ 0 In-house instructor (12 days @ $125 per day) 1,500 Fringe benefits (25% of salary) 375 Travel expenses 0 Materials ($60 × 56 trainees) 3,360 Classroom space and audiovisual equipment (12 days @ $50 per day) 600 Refreshments ($4 per day × 3 days × 56 trainees) 672 Total direct costs $ 6,507 Indirect Costs Training management $ 0 Clerical and administrative salaries 750 Fringe benefits (25% of salary) 187 Postage, shipping, and telephone 0 Pre- and post-training learning materials ($4 × 56 trainees) 224 Total indirect costs $ 1,161 Development Costs Fee for program purchase $ 3,600 Instructor training Registration fee 1,400 Travel and lodging 975 Salary 625 Benefits (25% of salary) 156 Total development costs $ 6,756 Overhead Costs General organizational support, top management time (10% of direct, indirect, and development costs) $ 1,443 Total overhead costs $ 1,443 Compensation for Trainees Trainees’ salaries and benefits (based on time away from job) $16,969 Total training costs $32,836 Cost per trainee $ 587 The benefits of the training were identified by considering the objectives of the training program and the type of outcomes the program was to influence. These outcomes included the quality of panels, housekeeping in the production area, and the accident rate. Table 6.12 shows how the benefits of the program were calculated.
TABLE 6.12 Determining Benefits for a Cost-Benefit Analysis
Source: Adapted from D. G. Robinson and J. Robinson, “Training for impact,” Training and Development Journal (August 1989): 30–42.
Once the costs and benefits of the program are determined, ROI is calculated by dividing return or benefits by costs. In this example, ROI was 5.72. That is, every dollar invested in the program returned almost $6 in benefits. How can the company determine if the ROI is acceptable? One way is for managers and trainers to agree on what level of ROI is acceptable. Another method is to use the ROI that other companies obtain from similar types of training. Table 6.13 provides examples of ROIs obtained from several types of training programs.
TABLE 6.13 Examples of ROIs
Industry Training Program ROI Bottling company Workshops on managers’ roles 15:1 Large commercial bank Sales training 21:1 Electric and gas utility Behavior modification 5:1 Oil company Customer service 4.8:1 Health maintenance organization Team training 13.7:1 Health medical services Coaching for Leaders 2:1 Source: Based on Top 125 Rankings 2015, training (January/February 2015): 62–101. J. J. Philips, “ROI: The search for best practices,” Training and Development (February 1996): 45.
Recall the discussion of the new manager training program at the Mayo Clinic. 60 To determine Mayo’s ROI, the human resource department calculated that one-third of the eighty-four employees retained (twenty-nine employees) would have left Mayo as a result of dissatisfaction. The department believed that this retention was due to the impact of the training. Mayo’s cost of a single employee turnover was calculated to be 75 percent of average total compensation, or $42,000 per employee. Multiplying $42,000 by the twenty-nine employees retained equals a savings of $609,000. However, the cost of the training program needs to be considered. If the annual cost of the training program ($125,000) is subtracted from the savings, the new savings amount is $484,000. These numbers are276based on estimates, but even if the net savings figure were cut in half, the ROI is still over 100 percent. By being able to quantify the benefits delivered by the program, Mayo’s human resource department achieved greater credibility within the company.
Other Methods for Cost-Benefit Analysis
Other more sophisticated methods are available for determining the dollar value of training. For example, utility analysis is a cost-benefit analysis method that involves assessing the dollar value of training based on estimates of the difference in job performance between trained and untrained employees, the number of individuals trained, the length of time a training program is expected to influence performance, and the variability in job performance in the untrained group of employees. 61 Utility analysis requires the use of277a pretest/post-test design with a comparison group to obtain an estimate of the difference in job performance for trained versus untrained employees. Other types of economic analyses evaluate training as it benefits the firm or the government using direct and indirect training costs, government incentives paid for training, wage increases received by trainees as a result of completion of training, tax rates, and discount rates. 62
Practical Considerations in Determining ROI
As mentioned earlier in the chapter, ROI analysis may not be appropriate for all training programs. Training programs best suited for ROI analysis have clearly identified outcomes, are not onetime events, are highly visible in the company, are strategically focused, and have effects that can be isolated. In the examples of ROI analysis in this chapter, the outcomes were very measurable. That is, in the wood plant example, it was easy to see changes in quality, to count accident rates, and to observe housekeeping behavior. For training programs that focus on soft outcomes (e.g., attitudes or interpersonal skills), it may be more difficult to estimate the value.
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Showing the link between training and market share gain or other higher-level strategic business outcomes can be very problematic. These outcomes can be influenced by too many other factors not directly related to training (or even under the control of the business), such as competitors’ performance and economic upswings and downturns. Business units may not be collecting the data needed to identify the ROI of training programs on individual performance. Also, the measurement of training can often be very expensive. Verizon Communications employs over 200,000 people. 63 The company estimates that it spends approximately $5,000 for an ROI study. Given the large number of training programs that the company offers, it is too expensive to conduct an ROI for each program.
Companies are finding that, despite these difficulties, the demand for measuring ROI is still high. As a result, companies are using creative ways to measure the costs and benefits of training. 64 For example, to calculate ROI for a training program designed to cut absenteeism, trainees and their supervisors were asked to estimate the cost of an absence. The values were averaged to obtain an estimate. Cisco Systems tracks how often its partners return to its website for additional instruction. A. T. Kearney, a management consulting firm, tracks the success of its training by how much business is generated from past clients.
Success Cases and Return on Expectations
One way to establish the value of training and overcome the difficulty of evaluating training using a design that can rule out and isolate its effects on results is to rely on return on expectations or success cases. Return on expectations (ROE) refers to the process through which evaluation demonstrates to key business stakeholders, such as top-level managers, that their expectations about training have been satisfied. 65 ROE depends on establishing a business partnership with business stakeholders from the start of a training program through its evaluation.
Rather than relying on ROI, Verizon Communications uses training ROE. Prior to training, the senior managers who are financially accountable for the training program are asked to identify their expectations regarding what the training program should accomplish, as well as a cost estimate of the current issue or problem. After training, the senior managers are asked whether their expectations have been met, and they are encouraged to attach a monetary value to those met expectations. The ROE is used as an estimate in an ROI analysis. Verizon Communications continues to conduct ROI analysis for training programs and courses in which objective numbers are available (e.g., sales training) and in which the influence of training can be better isolated (evaluation designs that have comparison groups and that collect pretraining and post-training outcomes).
Success cases or stories refer to concrete examples of the impact of training that show how learning has led to results that the company finds worthwhile and the managers find credible. 66 Success cases do not attempt to isolate the influence of training, but rather to provide evidence that it was useful. Both Agilent Technologies, a high-tech measurement equipment company, and Standard Chartered Bank, an international bank, use success stories. 67 Agilent provides senior managers with the use of specific example, written by trainees, of what they are doing better and differently as they apply what they learned to their work. For example, a manufacturing engineer realized that, as a result of attending a training program, they could expand their area of influence outside of their own team to solve a financial reporting problem. Through expanding the area of influence, the engineer is now more aware and in control of expenses, which has improved the bottom line
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