Some people view training only as an expense. On the other hand, while most executives intuitively know that training has value, few MBA programs explore how this might be calculated.
We know training can improve productivity, customer satisfaction, and sales, but how do we compute the return on each training investment? The answer is much more complex than can be explained in the space of this column, but perhaps an overview of the process might inspire some leaders to evaluate their training at deeper levels.
The rewards for doing so are plentiful. For example, in-depth analysis helps companies improve the design of their training, as well as decide which training methods provide the best impact for their companies. Also, calculating a training program's return on investment (ROI) can justify the costs of training and therefore validate training as a business tool.
Let's start with the fact that if one plans on calculating ROI for a training program, that decision is best made before the training starts, because preliminary data must be collected for comparison use down the road. Preliminary data collection is done with methods appropriate to the situation, but can include surveys, questionnaires, interviews, focus groups, observations, and tests.
If one of the factors being assessed will be performance, one best practice is to create a control group for the training. Control groups are employees who do not participate in the training, so that their post-training program performance serves as a baseline for the group of employees who participated in the training. That way, any difference in performance between the two groups can be attributed to the training with a high level of confidence.
It's also good to establish a timeline for how and when each level of evaluation will occur. Training and development guru Donald Kirkpatrick created the first evaluation model 40+ years ago, which has since been modified by ROI expert Jack Phillips to include the ROI component. The model advocated by Phillips for ROI has five levels. Here are the levels and what they measure:
Level 1: Reaction/Satisfaction : What are the participants' reactions to the learning and what do they plan to do with the material?
Level 2: Learning : What knowledge, skills, or attitudes have changed and by how much?
Level 3: Job Application: Was there any behavior change and did participants apply on the job what they learned in the training?
Level 4: Business Impact : Did the on-the-job application produce measurable results?
Level 5: ROI : Did the monetary value of the results exceed the cost of the program?
Phillips, author of over 20 books on ROI, says that when training programs are implemented they should create a chain of impact at several levels, ultimately ending in ROI. A chain of impact needs to occur as skills and knowledge are learned (Level 2) and applied on the job (Level 3) to produce business impact (Level 4).
Once a training program has been completed, data collection continues. Again, depending on the situation, it can involve follow-up surveys and questionnaires, additional on-the-job observation, post-program interviews and/or focus groups, program assignments and performance contracts, among others.
A second main task is isolating the effects of training. Control groups, as mentioned earlier, are probably the best way to attribute results to training. Also valuable is analyzing trends of pre- and post-training factors, such as employee turnover, grievances, sales, customer satisfaction, employee production, and the list goes on. Differences in pre- and post-training trends can often be attributed to the training with a high degree of confidence.
A third task needed before calculating ROI is converting all the collected data into monetary value. Performance output, improvements in quality, and myriad other factors can be converted to monetary value for comparison and ROI calculation.
Part B of this third task involves determining the complete cost of the training itself. Factors to consider include costs involved in designing and developing the training, materials provided to each participant, the cost of the instructor (including prep time), training facilities, travel, lodging, meals, and the cost of salaries and benefit of each participant while attending the training.
Once the above number crunching is done, you'll have a final number that represents the benefits accrued as a result of the training, and a number that represents program costs. Dividing the benefits by the costs provides the cost/benefit ratio. To determine the ROI for a program, divide the net benefits by the program costs and multiply that number by 100.
Many companies find their results to be amazing. For example, after I conducted a six month supervisor training program for 32 front-line supervisors in a 600-person company, I worked with that company to calculate the ROI. Together we discovered that the program brought a 968% return on investment. That number gave the VP of HR a lot to brag about and helped justify further training expenditures.
By crunching the numbers, many see training is not an expense, but a profit center.