Training Proves Its Worth

When times were good, and money plentiful, training and development programs
flourished. Many companies were happy to train employees, because it both strengthened
the organization and served as a retention tool.

Since 1998, money spent on learning and development as a retention tool -- from
leadership-development training to management-skills seminars -- has increased 15
percent, from $221 per employee to $252, according to Hackett Benchmarking and
Research, a firm that tracks best practices in HR, finance, and other areas of "knowledge
work." The company has an 11-year, ongoing study of 1,600 companies, a list that
includes 80 percent of the Dow Jones Industrials and two-thirds of the Fortune 100. But
can that level of investment continue during the economic downturn?

"People will spend money on training, in good times or bad," says Tom McKenzie, vice
president of Boston-based Provant, which provides companies with training services and
products to improve performance. "The money might go up or down, but training still
goes on." People "just bury the costs," he says.

But for those HR professionals and training managers who aren't adept at hiding training
in their pared-down budgets, now is the time of reckoning. In companies where training
was considered to be a nice perk, like free doughnuts on Friday or on-site dry-cleaning
service, programs are likely to be on the chopping block. Even in companies where
training was viewed as very important, it might now be perceived as less important than
other areas of the business.

If training programs are going to survive the budget knives during this economic
downturn, they have to prove their worth. Did training bring the company new
customers? Did it reduce turnover? Did it increase sales? And can HR actually show how
training affects the bottom line?

Absolutely, says Richard Roth, managing director of Hackett Benchmarking and

Companies that spend more than the average amount on training have a higher placement
of internal hires, and that reduces, in real dollars, recruiting costs and downtime, he says.

"The other thing we're able to show is that companies that spend more on training have
lower annual turnover."

Companies that spend $218 per employee in training and development have more than 16
percent annual voluntary turnover, Roth says. Companies that spend $273 per employee
have less than 7 percent annual voluntary turnover. "To me, it's pretty compelling," he
says.

1
Jack J. Phillips, an expert in measurement, evaluation, and return on investment, agrees
with Roth about the opportunities that HR has to demonstrate the link between training
and business results. "It can be done, and done accurately, but not as easily as some
people would like," he says. "You can get that connection with credibility and accuracy,
but it involves a disciplined methodology to do that." Here's a short course in how to do
it.

The steps that show the bottom-line value of training

Determine how the training is connected to a business need. Too often, Phillips says,
training is put in place without enough forethought. "Management says, 'I want these 10
core competencies in all our employees.' It may be the right thing to do, but we would
like to precede that with an understanding of how it helps the business if we do that."

Make sure the program has clear objectives. Training programs should have a learning
objective: some observable and measurable behaviour at the end of the process, Phillips
says. There are three types of learning objectives: awareness -- a familiarity with terms,
concepts, and processes; knowledge -- a general understanding of concepts, process, or
procedures; and performance -- an ability to demonstrate skills on at least a basic level.

Good training should have two more objectives: application -- "What do we expect you
to do differently?"; and impact -- "What business measure will you drive if you do this?"
Impact objectives are often such hard data as output, quality, cost, and time, Phillips says
in Human Resources Scorecard: Measuring the Return on Investment (Butterworth-
Heinemann, 2001), co-authored with Ron D. Stone and Patricia Pulliam Phillips. Soft-
data impact objectives include customer service, work climate, and work habits. What
Phillips often sees missing from training programs are the application and impact
objectives.

NAPCO, a company whose case study Phillips uses in Return on Investment in Training
and Performance Improvement Programs (Butterworth-Heinemann, 1997), used a needs
assessment, application objectives, and impact objectives in its program, "Motivating
Employees for Improved Performance."

At the time of the training, the company supplied the automotive industry with rubber
and plastic parts. Now, as NAPCO International, it designs and markets replacement
parts and upgrade kits for U.S.-made military wheeled and tracked vehicles, helicopters,
and plane. At the time of the case study, NAPCO had declining sales that were traced, in
part, to front-line management's lack of leadership skills. A needs assessment confirmed
the problem through such hard- and soft-data indicators as percentage of shipments met
or missed (productivity), parts rejected (quality), turnover, and absenteeism. The
company could measure how effective the training was by monitoring changes in those
areas.

2
Training focused on teaching managers how to understand and motivate employees for
improved performance, inspire teamwork, and demonstrate leadership. The pilot class, a
24-hour, six-module program taught over the course of a month, asked participants to
apply the skills they'd learned, so that training transferred immediately to the job.

Determine the return on investment. The idea of evaluating training on four levels --
reaction and implementation; learning; application; and impact -- was developed nearly
30 years ago by D. L. Kirkpatrick, Phillips notes. But even a program that had a
measurable business result might have been delivered at too great an expense. A fifth
element should be added, he says: return on investment (ROI).

The steps for determining the return on investment don't have to be complicated, he says.

• Collect data to demonstrate the change in behaviour. You need material to show you
both the situation before training and the situation after training. This is another important
area that is typically overlooked in evaluations, Phillips says.

The data you're collecting to reflect how training has changed a behavior can include
surveys, questionnaires, on-the-job observation, post-program interviews, focus groups,
performance monitoring, and performance contracts (in which a participant, the
instructor, and the participant's supervisor agree on specific outcomes from training). The
data collection at NAPCO came in the form of an action plan, designed to show how the
new skills were applied to affect productivity, quality, turnover, and absenteeism. Data
collection has to be "sensible," Phillips says.

"If it consumes too many resources, or busies the organization too much, sample a small
number of participants, and keep the disruption, cost, and time to a minimum. But plan
on that follow-up collection process, so that participants will know they're going to be
involved."

• Isolate the effect of training. The question that arises over and over again, Phillips
says, is whether a change that's seen in an organization comes about because of training
or other factors. It's the hardest thing to determine, but it's critical, he says.

"If we ignore this issue altogether," there's no point in pursuing an ROI process, he says.
"The whole management team wonders, 'Was it the training? Or something else?'"

Phillips has identified 10 strategies that can be used to isolate the effect of training,
including control groups, trend lines (to project the values of specific output variables if
training had not been undertaken), and forecasting models. One simple measure, he says,
is to ask the participants themselves how much of the change in their behavior is
attributable to training. "They often know more about influences than we give them credit
for," he says.

3
United Petroleum International used the participant rating method to evaluate the effect
on its 117 sales engineers and 8 sales managers of an e-learning program designed to
improve sales skills such as client partnerships, product pricing and contracting, and
selling more profitable products. It was important to identify the training program's effect
by itself, because the company had instituted a new incentive plan at about the same time.

Sales at the company increased after the training and incentive plans were put into place.
The sales engineers and managers said that the training program was responsible for
about 37 percent of the increase. The new incentive plan was responsible for about 36
percent. The effect of coaching by sales managers was put at 17 percent, with the
remaining 10 percent of influence due to executive management's input, market changes,
new products, and other factors. When the ROI calculation was made, the role of training
in the sales increase was taken into account.

• Convert the data to monetary value. This is often the part that is the most difficult for
many HR pros and training managers, Phillips says. "Their training hasn't been doing
quantitative data and hard numbers," he says. One participant in a measurement and ROI
workshop told Phillips that he'd gone into training specifically to escape the numbers.
"That underscores the issue," Phillips says. "Many people are not willing, or don't have
the desire, to deal with these issues, but we are forced to."

The steps in the conversion process are:

1. Focus on a unit of measure. It could be hard data, such as units produced, error
rates, or overtime; or soft data, such as tardiness or requests for transfers.

2. Determine a value for the unit. This is more complex for soft data, but Phillips
says it can be done. If there is a project on reducing turnover at a company, for
instance, and there's not a standard acceptable value for the cost of a turnover,
Phillips will offer several studies of the cost of turnover among engineers and ask
the organization to consider what most reflects their experience. In United
Petroleum's case, the measurement was hard data: additional sales closed.

3. Calculate the change in performance data. Figure the change in output data
after the effects of training have been isolated from other influences. In United
Petroleum's case, sales of petroleum products improved by 2.65 additional closes
per month, but only 37 percent of that could be attributed to the effect of the
sales-skills training program, leaving a factor of .98. This amounted to a net profit
margin per close of $1,323, attributable just to the training program.

4. Determine an annual amount for the change. For United Petroleum, this came
out to $15,876 per sales engineer.

5. Calculate the total value of the improvement. When the annual amount was
multiplied by 117 sales engineers, United Petroleum saw an increase in sales of
$1,857,492 per year, directly attributable to the training program.

4
• Tabulate program costs. Phillips recommends that this be the "fully loaded cost of
training." That is, the value of the cost of taking people away from their jobs for the
training -- including salary and benefits. "That's what the company lost by not having
people on the job. If they're willing to pay for the job, that should be our standard." For
United Petroleum, the cost of the training program was $606,600.

• Calculate the return on investment. It's the net benefits, divided by the costs, times
100 percent.

United Petroleum's ROI worked out this way: $1,857,000 (the sales increase, rounded)
minus $606,600 (the cost of the program). That yields the net benefit of the program
($1,250,400). That amount is divided by cost, $606,600, times 100 percent. The result is
a 206 percent return on the investment in the training program for the company.
Considering that most companies regard an ROI of 25 percent as a good outcome, this
training program was an excellent one, according to Phillips.

Can this be done even when your program is targeted for elimination?

Phillips says he's often called in as a consultant to analyse programs that are on the
chopping block. "We probably will uncover a lot of things that are not working --
programs that had no up-front analysis, no objectives, no plans for collection of data -- all
the classic issues and problems, but they have now got to show value.

"We do the same process: collect data, isolate the training effects, capture the ROI. The
problem is the program is often not adding the kind of value it should because it was
flawed from the beginning. This analysis shows the problem. The good thing is you can
learn a lot of lessons. "

If there's time and commitment, some programs can be fixed, he says. Sometimes,
though, a training program just doesn't have what it takes.

"Usually, if the perception is that it's not adding value, more than likely it's not," he says.
"We have caused a lot of programs to die peaceful, graceful deaths with this process. We
don't like to use it to kill programs, though. We like to see it as process improvement. We
can adjust, change, and redirect a program so that it can be useful."

By Carroll Lachnit Workforce, September 2001, pp. 52-56

5
 Calculate the Cost and Benefits of Training

Most organizations would like to be able to measure the costs invested in training
initiatives against anticipated results. The challenge is that it is far easier to measure the
costs of conducting training than it is to quantify results. A useful tool in determining
costs and savings is to compare costs per participant versus savings per participant.

Comparing costs and benefits can be done in the following four simple steps:

1. Calculate the cost of training. This will include training costs such as:

• Facilitator fees

• Training design

• Course materials

• Videos and workbooks

• Facilities rental

• Equipment rentals (such as overhead projectors)

• Production downtime (including employee time off the job)

• Videoconferencing facilities

• Specialized computer equipment

• Administration (such as registration procedures or confirmation notices)

• All the relevant costs, divided by the anticipated number of participants, gives the
cost per participant.

2. Determine the potential savings generated. These savings might include:

• Fewer errors

• Reduced customer turnover

• Less equipment downtime

• Increased revenue collection

• Faster equipment startup time

6
 • Reduced employee turnover, when turnover is attributable to poor supervision

• Proper implementation of new customer strategies

• Higher workplace morale through more effective management practices

• Less time lost to grievance hearings and work stoppages because of ineffective
supervision

• Reduced recruitment costs (because training can create more job-ready candidates
for promotions)

• Maximized productivity of new employees through efficient orientation training

3. Calculate the potential savings. To calculate potential savings, set goals for post-
training achievements by identifying and quantifying the changes a training initiative will
produce if all other factors are constant. The factors in the formula include the following:

• Current level of performance (for example, 200 error rates per month; six lost
customer accounts per month; five days lost to work stoppages per year)

• Translate the current level of performance into a dollar figure (for example: 200
error rates x five minutes’ correction time x $15 salary per hour = $250 per
month).

• Identify the change that training can produce (for example, reduce errors to 50 per
month).

• Calculate the savings that the target criteria will generate (for example: 200 errors
- 50 errors = decrease of 150 errors per month savings = 150 x five minutes/60 x
$15 = $187.50).

• Identify a meaningful time line for realizing savings, based on your best business
predictions about factors contributing to errors remaining unchanged.

• Identify the number of employees in the target training group.

• Divide the total anticipated savings by the number of participants to identify the
savings per participant.

4. Compare the costs to savings.

• Multiply the cost per participant by the total number of participants.

• Multiply the savings per participant by the total number of participants.

7
 • Compare your figures to establish your business case for training.

This exercise not only identifies actual costs and realistic savings but also ensures that
your training expectations are reasonable and targeted to measurable business outcomes.

SOURCE: Excerpted from The Trainer’s Tool Kit by Cy Charney & Kathy Conway.

Task: Lessons learnt from these two articles.