Most organizations operate under the assumption that investments in training and development programs payoff by improving employee performance and employee retention, yet a number of employee training decisions are made using intuition or industry “best practices” without consideration for measurement of program outcomes nor their alignment with business strategy. Over time investments made this way cause learning and development to look like an expense center rather than investment center, which makes it highly susceptible to cost reduction initiatives. Calculating the expected ROI, or financial value, of investments in learning and development programs is not easy, but it is ideal for aligning these investments with business strategy and minimizing the impact of cost cutting initiatives on learning and development budgets. If you are considering an investment in learning and development CorDell & Company recommends you follow these five steps.

The first step in calculating the ROI for a learning and development program is to define the financial value of the behavioral change your customer desires. To do this you must clearly define the business results your customer is getting that are a concern and quantify how the customer would like those business results to change. The difference between the desired and current business results equals the financial value of solving this problem. If the financial or management information system does not capture data on the business results that concerns the customer, then arrange for a pre and post measurement process, agree to an acceptable timeframe for that measurement, and include the cost of the measurement in the overall cost of the training project. In an ideal world the business results the customer is concerned about will be easily linked to operating profits, revenues, or costs, but in some cases it won’t be that easy. For instance, a change is sales win ratio can be easily translated to revenues by multiplying the average number of sales opportunities by the change in sales win ratio by the average deal size and then by the number of sales representatives. The equation would look something like this;

Average number of sales opportunities X (new sales win ratio – old sales win ratio) X average deal size X number of sales representatives

A change in customer service scores effects customer retention and customer retention effects customer lifetime value, which is expressed in financial terms, so a desired change in behavior that drives improvements in customer service scores could be linked to an increase in customer lifetime value. On the surface a change in something like the product pipeline might seem easy, but in practice it is a bit difficult because there is usually disagreement about the magnitude of the affect of intermediate measures, like number of patents filed, ideas generated, and product life times on things like average profit per product. In the case where you can’t get agreement on the affect of intermediate measures on sales, profits, or costs we recommend you skip the ROI calculation and instead use whatever financial value the customer assigns to the changes they desire. If you take this approach you still need to make sure you have a pre and post training measurement in place to determine how effective the training was at making the desired change.

Once you have determined the financial value of the change the customer seeks we recommend you investigate to ensure you are fixing the most likely cause of the problem, and to ensure that there are no barriers to the desired behavior change. Start by investigating changes associated with the industry, customers, and competition, to rule out factors external to the company as the cause of the poor business results. If external factors are the likely causes of the problem, training solutions, if they are appropriate responses to these changes, can be significantly different. Once external factors are eliminated as likely causes, investigate internal factors associated with people, process, and technology. If the problem is linked to process or technology then training on current processes and technologies might be the best solution. If no recent changes have been made in the customer’s technologies or processes then the problem is likely a deficiency of knowledge, skills, or abilities, and you want to make sure that any behavioral change resulting from training will not be negatively affected by current processes nor technologies.

Next you want to estimate the cost of each training solution you are considering. The most important thing here is to capture the often unforeseen costs like training staff time invested in planning and administration and leaners time away from work. Additionally, several organizations today offer seminars, mentorship, or coaching programs staffed by company employees and often times forget to include the time away from work for these people. In an ideal world you will capture 100 percent of the costs associated with a program, but in reality it is probably good enough if you capture 90 percent or more. You don’t have to be 100 percent accurate on this, but if you fail to do it you are highly likely to underestimate the costs of training programs and make poor investment decisions.

Now comes the hard part. You have to estimate the portion of the target population you think will change its behavior, or the average behavioral change per person, as a result of the training. This is why measuring and tracking pre and post training is so critical. Over time this information can really help you understand what your workforce is capable of learning and improve the accuracy of future training investments. If you have not done this before you can analyze three to four prior training programs and compare before and after performance review ratings for those who participated in the training program. If you don’t have or can’t get this information we recommend you interview a few managers and get their opinion on the effects of past training programs.

Now you have all the information you need to estimate the ROI of a future training program. It should look something like this;

(((financial value of the change the customer seeks X the portion of the target population who’s behavior changes) – the cost of the training program) / the cost of the training program) X 100

Here is a sales force training example to illustrate this. In this case the company’s current win ratio is 15 percent and the sales VP wants to push that to 18 percent. The companies current average deal size is $5,000, they have 10 sales representatives, and each sales representative gets an average of 300 qualified selling opportunities per year. The equation to calculate the financial value of the change the sales VP wants is;

300 X (.18 – .15) X $5,000 X 10 = $450,000

The training options to consider are A) two day training with a cost of $4,500 per person, B) one day training with a cost of $2,500 per person, and C) an online course with a cost of $500 per person. Given the company’s experience they estimate the portion of the training population that will change its behavior from these training options at 30 percent, 20 percent, and five percent respectively. The equations to calculate the ROI of these training options are;

((($450,000 X .30) – ($4,500 X 10)) / ($4,500 X 10)) X 100 = 200%
((($450,000 X .20) – ($2,500 X 10)) / ($2,500 X 10)) X 100 = 260%
((($450,000 X .05) – ($500 X 10)) / ($500 X 10)) X 100 = 350%

While option A is estimated to produce the largest absolute lift in sales, based on this ROI calculation, the investment with the best return is option C. Why go through this exercise? Following these steps to calculate the ROI of learning and development programs forces you to align training investments with your customers business strategy and gives the customer the ability to evaluate this type of investment against other investments like software upgrades, process reengineering, and marketing campaigns.

About CorDell & Company

Founded in 2006, CorDell & Company is a human capital management consulting firm that specializes in improving profits and performance for both large global and small local companies by identifying, acquiring, motivating, retaining, and developing talent.