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Using Return on Investment for Training Programs
Submitted by sanjay on Thu, 04/26/2012 - 11:40
Return on Investment (ROI) is a metric commonly used in business and financial circles to compare competing investments. The use of ROI is growing in the training industry, but has recently become controversial; industry thought leader, Jane Bozarth recently said ROI is “evaluation by autopsy.”
Leading E-Learning blogger David Kelly states in his blog post "Why We Should Stop Talking About ROI in Training" that "for as long as Return on Investment, or ROI, has been a prevalent concept in business, it’s also been a fixture of workplace learning and performance. But no longer a welcome one. [sic] What started as a concept that had value — namely, the need for the work of trainers to be more linked to business performance — has in many ways devolved into something more dangerous — a cliché."
ROI in the Business World
In financial terms ROI is a simple (and some would say simplistic) performance ratio used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. The formula for calculating it is a ratio of benefits to cost:
For example, you can invest $1,000 in a bond today. In a year the bond company will write you a check for $1,100. What’s the ROI?
Another example: You bought stock two years ago for $1,200. Alas, you sold it today for $800. What’s the ROI?
Which of those two investments would you prefer? Simple, huh? Perhaps too simple. The high-finance types use ROI only as a first, simple measure of an investment because it is missing two critical factors — risk and time.
Note there is no evaluation of the risk of investment between the stock or the bond. Also not considered is how long it takes to make (or lose) money. Still, unless you want to drag out your HP-12c and dig into more complex math with a greater number of variables (IRR, PV, NPV, FV, cap rate, Payback time, etc.), ROI can be a good first financial measure of an investment.
Challenges on Using ROI for Training Programs
I’ve committed the cardinal sin of high school classroom problems - I’ve given you all the data. If you could tell me today the stock that I bought for $1,200 is going to be worth $800 in two years, I wouldn’t buy it, but real life isn’t that easy.
To calculate ROI you just need two numbers - Total Benefits and Total Cost. Again, simple right? Unfortunately, the devil is in the details.
When evaluating training programs you can often get fairly precise data on the Total Cost. Normal input costs are:
- Personnel costs for the people creating the training (SME, Project Manager, Graphic Artist, Instructional Designer, and E-Learning Developer time can be measured and priced.) - always make sure it’s the fully loaded cost
- Personnel costs for the students while taking the training
- IT costs (classroom setup hosting, etc.)
There are numerous templates to calculate training program costs, such as the one from the ROI Institute.
Calculating the benefit of a training program and translating it into monetary terms is more challenging. The challenges come from:
- Determining the business impact of training. For example, how do you measure the business impact of leadership training?
- Isolating the impact of the training in a complex business environment. Did sales go up 5% because of the sales training, because of a better marketing program, or a change in the economy?
- Coming up with a methodology to convert results to a monetary value. For example, if there is a 10% drop in accidents after safety training, can you put an accurate number on the percent change?
Dr. Jack Phillips of the ROI Institute suggests that only 5% of programs should be evaluated at Level 5 - ROI. According to Phillips, “Leaders in the learning community often think they either have to do ROI on everything or not at all.” But it’s best to only spend time and effort calculating ROI on a program that is expensive, important, or strategic. Something specifically designed to add business value — Phillips says.“… that kind of project needs an ROI occasionally just to show that it’s working.”
In my view, ROI is only one measure of the success of a training program and should not be the only measure. Financial metrics should never be the only metric in any business endeavor (customer satisfaction and quality being examples of other metric categories). As with any metric you have to first evaluate whether the metric is appropriate — having a single, narrow measurement focus can result in decision-making errors.
For many training programs, there are other metrics that are easier to use. For example, for a safety program it is far easier to measure the accident rate. However, when it is an appropriate measure ROI can be a powerful tool to convince a manager to fund a training program over a competing investment.
Oh, one more thing, is ROI “evaluation by autopsy” as Ms. Bozarth suggests? Yes! Most of the time it is difficult to calculate ROI for training before the training is delivered. ROI tends to be a backward looking metric. Is that bad? No. Some of the most commonly used metrics in business are backwards looking — revenue, net profit, etc. Backward looking metrics should never be the only metrics used to run a business, but they provide an important tool for assessment and improvement.
Training ROI Resources
- Investopedia Definition of Return
- Why we should talking about ROI in Training by David Kelly
- Relevance trumps ROI by Bill Sullivan
- Measuring what Matters by Jack Phillips, chairman of The ROI Institute
- Trainchat Wrapup Where ROI fits into Training
- How to Evaluate E-Learning by Jane Bozarth
Post by Sanjay Nasta