Assessing the

Return On
Investment (ROI) of
training
Submitted by
GP IV
CCBMDO

Assessing the ROI of training

Introduction
If people really are greatest assets, isn't it time to look at their training
programmes as investments in an organisation's human capital and not just as an
expense?. In order to address the luke warm response from the senior management
as a practical difficulty faced by the HR managers responsible for the training and
development in an organization, Group IV CCBMDO 5 has undertaken the study of
the concept of evaluation of training by ROI method and use the tool for the senior
management to understand the importance of investment and approve the required
investment in training in their organization.
Contents

• Measuring the success of training

• Forecasting and measuring costs
• Forecasting and measuring benefits
• Calculating return on investment
• Making ROI work for you

Measuring the success of training

The evaluation of training, like motherhood and apple pie, is inherently a good
thing. But, because short term priorities always crowd out their longer term
competitors, it's typically something we plan to do better next year - after all, we've
got away with it so far, so another year won't hurt!
And even if training evaluation is undertaken, it is usually at the easiest and
lowest level - the measurement of student reactions through happy sheets.
Reactions are important and the happy sheets serve a purpose, but will they be
enough to back up your arguments when there is a need for a greater investment in
training, when major changes need to be made in direction, when there is stiffer
competition for resources, when times get tough?
Why evaluate training?
Let's summarise the main arguments for better evaluation of training:
• To validate training as a business tool
Training is one of many actions that an organisation can take to improve its
performance and profitability. Only if training is properly evaluated can it be
compared against these other methods and expect, therefore, to be selected
either in preference to or in combination with other methods.
• To justify the costs incurred in training
We all know that when money is tight, training budgets are amongst the first to
be sacrificed. Only by thorough, quantitative analysis can training departments
make the case necessary to resist these cuts.
• To help improve the design of training
Training programmes should be continuously improved to provide better value
and increased benefits for an organisation. Without formal evaluation, the basis
for changes can only be subjective.
• To help in selecting training methods
These days there are many alternative approaches available to training
departments, including a variety of classroom, on-job and self-study methods.
 Using comparative evaluation techniques, organisations can make rational
decisions about the methods to employ.
Criteria for measuring training success
The form of evaluation that we undertake is determined by the criteria that we
choose, or are told to use, to measure success:
Numbers
One way of measuring the success of training is the good old ‘bums on seats’.
Although by no means a true measure of the effectiveness of training, student
numbers do reflect the fact that the training is addressing a need and that the design
and methodology is meeting expectations.
Direct cost
Direct costs are those costs that are incurred directly as a result of a training
programme – external design and development, consultancy fees, travel expenses
and so on. If the programme did not take place, these costs would not be incurred.
Many organisations only ever take direct costs into consideration when measuring
training costs.

Indirect cost
Indirect costs are costs that may or may not be directly associated with a
training event, but which would have been incurred anyway, whether or not the
training took place. Examples are salaries of in-house trainers and students and the
costs of rooms and equipment. Any analysis of the true costs of training will include
both direct and indirect costs.
Efficiency
Efficiency is a measure of the amount of learning achieved relative to the
amount of effort put in. In practical terms this means the amount of time it takes to
complete a piece of training. Efficiency has a direct relation to cost – the more
efficient a training method is, the less it will cost.
Performance to schedule
Sometimes with a training programme, ‘time is of the essence’ – the training
needs to be completed by a given date if a particular business objective is to be
achieved. In these situations, the extent to which a training programme performs to
schedule is a critical measure of success.
Income received
If you are a training provider operating externally to a client organisation, then
income received is a vital measure of your success. It’s the financial equivalent of
‘bums on seats’ – the more courses you run or places you fill, the greater the benefit.
Some internal training providers may also cross-charge their clients, although,
because this correspondingly increases the cost to the organisation, this is not
regarded as a benefit when assessing return on investment.
The extent to which trainees mix
 A justification often made for training, particularly group events, is that it
provides an opportunity for students who work in different departments or regions to
meet with each other, share experiences and make contacts. Because this is a
valued outcome of training, it needs to be considered when comparing training
methods. Similarly, some training may be regarded as a perk, a benefit of some
value, even if this is not directly related to learning.
Reactions
Reactions are what you measure with the ‘happy sheet’. Reactions are
important because, if students react negatively to your courses, they are less likely to
transfer what they learned to their work and more likely to give bad reports to their
peers, leading in turn to lower student numbers.

Learning
Learning, in terms of new or improved skills, knowledge and attitudes, is the
primary aim of a training event. Learning can be measured objectively using a test or
exam or some form of assessed exercise. If a student has to achieve a certain level
of learning to obtain a ‘pass mark’, then the number of passes may be used as an
evaluation measure. Another important aspect of learning is the degree of retention –
how much of the learning has stuck after the course is over.
Behaviour change
If a student has learned something from a course, you hope that this will be
reflected in their behaviour on the job. If a student employs what they have learned
appropriately, then their work behaviour will meet desired criteria. Behaviour can be
measured through observation or, in some cases, through some automated means.
To assess behaviour change requires that the measurements are taken before and
after the training.
Performance change
If, as a result of training, students are using appropriate behaviours on the job,
then you would expect that to have a positive impact on performance. A wide variety
of indicators can be employed to measure the impact of training on performance –
numbers of complaints, sales made, output per hour and so on. It is hard to be sure
that it is training that has made the difference without making comparisons to a
control group – a group of employees who have not been through the training.
Return on investment as a measure
Return on investment (ROI) is a measure of the monetary benefits obtained
by an organisation over a specified time period in return for a given investment in a
training programme. Looking at it another way, ROI is the extent to which the
benefits (outputs) of training exceed the costs (inputs).
ROI can be used both to justify a planned investment and to evaluate the extent to
which the desired return was achieved. However, it can not measure all aspects of
training success:
• Whether students liked the training or not
• The numbers of students participating in the training
• The extent to which students' personal objectives were achieved
The process of calculating ROI
To calculate ROI you must first make estimates or obtain measurements of
the costs and benefits associated with a training programme. As you will see, the
calculation of ROI is then a relatively simple process. Let's start with the costs …
Forecasting and measuring costs

Design and development costs

The first category of cost to be considered is the design and development of the
training programme, whether this comprises classroom events, self-study materials,
simple coaching sessions or some combination. You will need to consider:
• Internal days of design and development
• Costs of external designers and developers
• Other direct design and development costs (purchase of copyrights, travel,
expenses, etc.)
• Outright purchase of off-the-shelf materials
Promotional costs
Most organisations devote effort to promoting their training programmes. This
second category takes promotional costs into account:
• Internal days of promotional activity
• Costs of external agencies
• Other direct costs of promotion (posters, brochures, etc.)
Administration costs
An allowance must be made for the time taken by the training department in
administrating the training programme. This will typically be a factor of the number of
students:
• Hours of administration required per student
• Direct administration costs per student (joining materials, registration fees,
etc.)
Faculty costs
The next category of costs relates to the delivery of the training, whether this is
mediated by faculty (tutors, instructors, coaches, etc.) or is self-administered
(workbooks, CBT, online training, etc.). Let’s start with the information needed to
calculate faculty costs:
• The number of students who will be going through the programme
• Hours of group training (whether classroom-based or delivered in real time,
online)
 • Hours of one-to-one training (typically face-to-face, but could conceivably be
conducted by telephone, video conferencing link or in real-time, online)
• Hours of self-study training
• Additional faculty hours (preparation time, the time needed to review or mark
submitted work or the time needed to correspond by email or bulletin boards
with online students)
• Faculty expenses (travel, accommodation, subsistence, etc.).
Materials
Then there's the cost of materials:
• Cost per student of training materials (books, manuals, consumables, etc.)
• License cost per student for use off-the-shelf materials
Facilities
You will also need to allow for the cost of your training facilities, whether these
are internal or external. Make sure to include the rental or notional internal cost of
the following:
• Training rooms
• Open learning / self-study rooms
• Equipment used
Student costs
Probably the most significant delivery cost relates to the students themselves.
It is only necessary to charge a student’s cost against the programme if training is
undertaken in time that would otherwise be productive and paid for, so you only need
to estimate the amount of travel and training that is undertaken in productive work
time, i.e. not in slack time, breaks or outside work hours.
When an employee goes through a training programme in work time, the
organisation is not only having to pay that person’s payroll costs, they are also losing
the opportunity for that person to add value to the organisation. When a salesperson
is on a course, they are not bringing in new business. Similarly, a production line
worker is not creating products, a researcher is not developing new ideas and an
accountant is not finding ways to save money.
If an employee can be easily replaced while they are undergoing training, then
there is no lost opportunity – the cost is simply the employee’s payroll costs. In many
cases, however, it is simply not practical to obtain a suitable replacement, so the
output that the employee would have generated in the time that they are receiving
training will be lost. In this case, the true cost of the employee being trained is the
lost opportunity – the 'opportunity cost'. The calculation of opportunity costs goes
beyond the scope of this article, but, It is sufficient to say, they are greater than an
employee's payroll costs and need to be considered in any serious evaluation of
costs.
 Finally, don't forget to include any direct student expenses - travel,
accommodation and subsistence.
Evaluation costs
You also need to make an allowance for the time spent evaluating the training,
whether this is an ROI analysis or some other method.

Forecasting and measuring benefits

The financial benefits of training can not be measured in terms of student

reactions, nor the amount of learning that has been achieved; not even the extent to
which behaviour may have changed. The real benefits come from improved
performance – traditionally the hardest training outcome to forecast or measure.
So, what do we do when faced with this difficulty – back away and focus our
evaluation efforts on easier measures? No, we do the very best we can, because all
other measures fail to reflect the financial reality that training must pay off – in hard
cash.
If it is any comfort, trainers are not alone in finding it difficult to calculate the
benefits of what they do. Is it any easier to predict the benefits to be obtained from
launching a new product, running an advertising campaign, initiating a research
programme or changing the pay and benefits policy?
Let's look at the major categories of benefits. Note that these categories are
not necessarily mutually exclusive - in some respects they provide alternative ways
of looking at the same underlying benefit. Because of this, you should be extremely
careful not to include the same basic benefit under more than one of these headings.
Labour savings
Labour savings occur where, as a result of the training, less effort is needed to
achieve current levels of output. We have to assume that savings are realised by a
reduction in the amount of labour applied to a particular job, not by utilising the newly
available time to achieve further output on the same job.
Labour savings will only be realised if the labour applied to a job can really be
reduced, whether this comes as a result of redundancies, transfers of staff to new
positions or re-allocations of work. If the time savings simply result in more slack,
then there is no saving.
Examples of labour savings include:
• Reduced duplication of effort
• Less time spent correcting mistakes
• Faster access to information
Productivity increases
Productivity increases occur where, as a result of training, additional output
can be achieved with the same level of effort. This implies that the organisation
requires or desires more output in this particular area. If it does not, then it might be
better to express the benefit as a cost saving.
Examples of productivity increases include:
 • Improved methodologies reducing the effort required
• Higher levels of skill leading to faster work
• Higher levels of motivation leading to increased effort
Other cost savings
Cost savings can be achieved in a variety of ways, not just through savings in
labour, and this category allows you to take account of these. Examples include:
• Fewer machine breakdowns, resulting in lower maintenance costs
• Lower staff turnover, reflected in lower recruitment and training costs
• A reduction in bad debts
Other income generation
In some job positions, it may be possible for new income to be generated as a
direct result of training. Sometimes this can be satisfactorily recorded as a
productivity increase, but there will be times when a more direct and specific analysis
is required.
Make sure that you offset from the income any variable costs that are incurred as a
result – it is the net contribution that you are looking for.

Examples of other income include:

• A higher success rate in winning competitive pitches, leading to increased

sales

• Sales referrals made by non-sales staff

• New product ideas leading to successful product launches

Calculating return on investment

Return on investment tells you the percentage return you have made over a
specified period as a result of investing in a training programme. On the assumption
that benefits will continue to accrue some time after the training, then the period that
you specify is critical to the ROI figure you will obtain. You may like to specify a
period that fits in well with your organisation’s planning cycle – perhaps a year or two
years. On the other hand, you may wish to calculate the period to correspond to the
lifetime of the benefit, in which case you will need to know how long the average
student stays in a position in which they can continue to apply the knowledge and
skills being taught.
It is relatively simple to calculate return on investment:
% ROI = (benefits / costs) x 100
Payback period
 Another way at looking at ROI, is to calculate how many months it will take
before the benefits of the training match the costs and the training pays for itself.
This is called the payback period:
Payback period = costs / monthly benefits
Payback period is a powerful measure. If the figure is relatively low – perhaps
only a few months – then management will be that much more encouraged to make
the training investment. As a measure, it also has the advantage of not requiring an
arbitrary benefit period to be specified.

Here's an example of the final results for a ROI analysis:

Duration of training 33 hrs

Estimated student numbers 750
Period over which benefits are calculated 12 months
Costs
Design and development 40,930
Promotion 4,744
Administration 12,713
Faculty 86,250
Materials 15,000
Facilities 40,500
Students 553,156
Evaluation 872
Total cost 754,165
Benefits
Labour savings 241,071
Productivity increases 675,000
Other cost savings 161,250
Other income generation 0
Total benefits 1,077,321
Return on investment 143%
Payback period 8 months
Making ROI work

It has become something of a cliché for senior management to claim that 'people are
our greatest asset'. Yet, much to the dismay of trainers, the effort they put in to
developing this 'human capital' continues to be seen as an expense and not as an
investment. It's time to turn this around. Start to analyse the training programmes as
if they are capital investments by using techniques like ROI then only, the senior
management may start to change their attitude to training. At a time when there are
so many exciting new developments in training - not least online learning - and a
possible recession ahead, new managers from CCBMDO will need their co-
operation.