Many managers struggle with how to validate training initiatives in terms of business value. Training improves employees' skills, but by how much? What is this worth to the enterprise? Info-Tech's ROI Calculator for Corporate Training" quantifies the value and helps enterprises prioritize training initiatives.

Calculate the ROI

Using ROI to justify spending helps keep enterprises accountable and ensures that budgets are being allocated appropriately. The basic equation for all ROI calculations is the same:

The ROI equation does not assume a timeframe. To calculate the annual ROI, only include annual benefits (this is typical). If looking at the long-term ROI, then use all the benefits accrued over the lifetime of the investment. For corporate training, returns can be achieved in the following areas:

• Productivity improvement. This is the most obvious benefit. Calculate this by looking at either the number of hours saved per employee, or the number of project hours saved (use one or the other).
  • Example 1: Calculate based on hours saved per trained employee. If an employee makes $30 per hour and training helps him/her complete tasks faster (saving one hour a week), then this is a weekly savings of $30. Annually, this might work out to about $30 x 50 = $1,500.
  • Example 2: Calculate based on project hours saved. If a project costs $100,000 and takes one month (approximately 160 working hours), then the hourly cost of the project is $625. If training helps complete a project in three hours less, then the saving is $1,875.
• Lower consultancy fees. If employees now have skills that were previously obtained through outside consultants or contractors, then this is a source of direct savings. So, if the enterprise was paying an outside consultant $150 per hour for 100 hours a year, and a company employee can do the same task at a rate of $50 per hour, the saving is $100/hr x 100hrs = $10,000. Note: This type of direct savings model can also be applied to other types of outsourcing engagements provided internal employees have a lower hourly cost (including benefits and workstation/resource costs) than external providers. There is also an intangible benefit of having the expertise owned by the enterprise and not being reliant on outside help.
• Employee satisfaction. This is typically difficult to quantify, but loyalty is generally calculated by looking at turnover costs (i.e. hiring/recruiting costs, training, loss of expertise, etc.) and then estimating how much annual turnover can be reduced.
  • Example: Due to better corporate training programs, the enterprise was able to improve employee satisfaction, thus reducing turnover by 2%. With annual turnover costs of $200,000, this saved the enterprise $4,000. 
• Improved quality. Training helps improve output quality, reducing the amount of waste and rework necessary. This is fairly difficult to quantify, but in an IT environment it can translate into fewer errors in code or fewer support incidents for the helpdesk.
• Task-specific benefits. Different types of training will result in different types of benefits, such as reduced helpdesk costs, fewer incidents, improved customer satisfaction, and higher sales figures. These types of task-specific benefits would have to be calculated on a case-by-case basis.
  • Example 1: IT workers are trained in incident and problem management. This might reduce incident resolution time and prevent unplanned downtime.  
  • Example 2: Office workers are trained on the Customer Relationship Management (CRM) system. This would result in various CRM-specific benefits such as customer retention, better cross-selling, fewer support incidents to IT as a result of more knowledgeable workers, and higher sales revenue. 

Recommendations

1. Build HR capabilities through structured processes. The most robust model available for this is the "People Capability Maturity Model"(PCMM), developed by the Software Engineering Institute at Carnegie Mellon University. Using the PCMM, managers are able to take a disciplined approach to the development of workforce competencies.
2. Use a skills assessment to streamline training initiatives. Even enterprises that choose not to pursue PCMM must be able to identify those skills that are most needed in order to achieve business goals. They must also be able to evaluate employees to assess gaps in the enterprise's skills portfolio. Info-Tech Advisor clients should view the research note "Assess Your IT Skills Portfolio";," which includes an "IT Skills Inventory Chart" and an "IT Skills Assessment Table" " to help HR decision makers plan for future projects and prioritize training initiatives.
3. Prove the value. Download Info-Tech's ROI Calculator for Corporate Training to help make the business case for training initiatives. The Excel tool works for both IT training initiatives, as well as for end-user training.

Bottom Line

Training initiatives create business value when they target shortcomings in skills that are needed to further business goals. Preparing a cogent ROI for training initiatives can help ensure that training dollars are directed towards high-value areas within the enterprise.

Go to InfoTech Research's web site for more information at www.infotech.com.