Making ‘cents’ from your training ROI

How organizations can make training accountable
By Ajay Pangarkar and Teresa Kirk
|Canadian HR Reporter|Last Updated: 03/03/2005

It is surprising how many Canadian organizations still question the value of continuous workplace training.

Surprising, but perhaps understandable. Too often, the investment companies make in employees, specifically training, is not adequately measured, not well understood and nobody is held accountable for the results.

Showing the value of training begins well before the training itself — with the right questions at the outset. These would include: What does the organization need to develop? Who needs to be trained? What is the objective? Is it best done in-house or by an external provider? Is it really needed? And ultimately, what results are expected?

Once specific objectives are identified it is time to establish “benchmarks” that will assist in building credibility for the ROI measurement. Benchmarking provides a specific measure of how much an organization improves before and after the training effort.

For example, if the goal is to increase sales by 15 per cent, research what the sales and marketing staff would need to achieve this goal, speak with the production staff to determine if they are capable of supporting this increase, and consult the administration and customer service staff to learn what they require to be effective.

Defining and conducting the actual ROI measurement

Measuring training’s return-on-investment is one way to tangibly show the impact of an employee’s acquired knowledge on the organization and on the bottom line. Used in the strictest sense, ROI answers the question, “For every dollar invested in training, how many dollars does the employer get back?” Learning professionals are taught to evaluate training using an industry standard, called the Kirkpatrick model for training evaluation. This is a simple four-level evaluation model widely used in a variety of learning environments. Simply, the levels are defined as:

1) the reactions of the training participants, as measured through feedback surveys;

2) the evaluation of what participants learned (testing);

3) the application or transfer of the training to the participants’ job; and

4) the measurement and impact of the training on organizational performance.

A more recent measurement practice is the Phillips’ ROI methodology. This model takes level 4 of Kirkpatrick and converts it to an ROI measure (level 5). It also identifies non-tangible results (level 6).

The mistake many managers make is evaluating ROI based on level 1 (evaluation of the training/trainer) and level 2 (testing of what the employees learned). The results leave managers with a false impression that the training initiatives were successful solely based on the evaluation of the course and testing of the participants. They only realize later that having positive training evaluations and employees with more knowledge does not necessarily deliver the return expected.

Not everything can be measured

Although evaluating training is important, it is not essential to measure every training effort at the ROI level. If it is not critical to the organization’s strategy, or if it isn’t a significant investment, then it is not wise to evaluate it at level 4 or level 5. The sales example mentioned earlier would meet both criteria and, hence, require a level 5 evaluation. With an employee orientation program, however, a level-2 or level-3 evaluation is probably more than sufficient.

That said, most training efforts should at least be evaluated at level 3 — how participants apply what they have learned to their job. This is where most training evaluations fall apart. The process should be simple. For example, before sending staff on a word processing course, an organization should first do a pre-evaluation identifying what workers know before the training and determining what they require to do their job more effectively (many learning professionals can assist with this aspect). Once the training is complete, an organization can ensure they’re utilizing the new skills through post-evaluation, coaching, productivity output measures, and actual tasks that require the use of the skills. This is level 3.

Conducting training ROI analysis is not in itself a difficult process. The problem occurs when stakeholders want to see immediate results through obvious measures such as revenue or profitability. The process must encompass the benchmark process described earlier. It requires an organization to identify specifically what it wants to improve, determine the expected output, and be able to quantify the results in monetary terms. If the objective is to improve product quality, for example, the outcomes to measure would be a reduction in production defects, customer complaints, or product returns as a result of training’s effectiveness. Benchmarking such specific and tangible criteria, both before and after the training program, will build credibility for the learning strategy.

Getting proven results and returns from training

Financial measurement is important but should not be the only measure of training’s impact on the organization. ROI data alone doesn’t address other key business (level 6) impacts, such as increased employee morale, better communication, or increased customer satisfaction. Nor will ROI data alone help improve training efforts so that they yield a higher ROI. And demonstrating a positive ROI does not necessarily mean that the organization’s actually getting the right results or going in the right direction.

Training and employee development must be accountable to business results and strategically aligned. Simply providing training as a “solution” to a business problem will certainly result in failure. As with any other business investment the same rules apply to training. A systematic approach to researching, developing, and integrating a true learning strategy will provide measurable and proven results far beyond the standard measure of ROI.

Keep in mind that training is not appropriate for all situations. If it’s decided that some type of learning initiative is the route, then the question to answer is who will require training and what is the most effective way to transfer this learning need. Always challenge preconceptions and groupthink. Don’t be misled by what people may assume is needed but focus on what is actually needed. If not, all that effort will be useless.


Formulas for evaluating training

Although the Kirkpatrick model is effective in measuring the impact on business, managers regularly measure ROI based on a standard formula of business investment and expenditures similar to Phillips’ level 5. The formula is net benefits (realized monetary benefits minus total direct and indirect costs) divided by the total direct and indirect costs, expressed as a percentage.

There are two other formulas used in ROI measurement. One is a benefit/cost ratio (BCR), which is total training benefits divided by total training costs.

The other formula is the payback period for training, which is the total training cost divided by total monthly benefits (the latter being total training benefits divided by 12).

For example, if a sales training results in an increase of $60,000 in realized monetary benefit and the total cost was $10,000, the ROI would be 500 per cent. In other words, for every $1 invested in training, the net benefit realized is $5 in increased revenue from additional sales. The BCR would be $6, and the payback period would be two months.

Ajay Pangarkar and Teresa Kirkwood are partners at CentralKnowledge.com. They help organizations leverage the power of their employee’s intellectual capital through effective learning solutions and evaluation strategies. Ajay and Teresa can be reached at (888)274-2025 or at info@centralknowledge.com.

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