How Do You Measure the Real Value of Training? Exploring Cost-Benefit Analysis and ROI

Cost-Benefit Analysis Overview

Cost-Benefit Analysis is used to decide whether to proceed with a decision. It is a quick and simple technique for non-critical financial decisions. A Cost-Benefit Analysis (CBA) is a uniform methodology that assists agencies in analyzing and documenting potential costs for outsourcing services compared to using state employees.

Evaluating Training Benefits

Evaluating the benefits of training and quantifying them is crucial, considering training incurs costs. Therefore, organizations are interested in knowing the return on investment (ROI). Organizations utilize various methods to assess the benefits of training in monetary terms, such as ROI. It is essential to evaluate the benefits of training and quantify them. Training involves costs, and organizations are keen to understand the ROI.

Methods for Assessing Training Benefits

Organizations use different methods to assess the benefits of training in terms of numbers, i.e., the profits. Some of the frequently used methods are ROI and Utility analysis. There are many costs associated with training apart from the direct and apparent costs. These costs can be described under two headings:

1. There are costs incurred towards the training needs analysis, compensation of the training program designers, procurement of training material, and various media like computers, handouts, props, gifts, prizes, audio-visuals, etc.

2. Then there is another category of costs incidental to the training session itself, such as trainers' fee/salary, facility costs/rental, etc.

3. Finally, there are costs involved in losing a man-day of work (for those who are sent for training), traveling, boarding and lodging, and training material that cannot be reused in some other training program.

The model used to estimate the benefits of the training program is as follows.

The Return on Investment Model (ROI)

Organizations spend a huge amount of money on employee development. Therefore, it is very important to ascertain the benefits of training. Different studies have been conducted to evaluate the effectiveness of training programs. In one study, it was found that sales and technical training provided better ROI compared to managerial training programs. Ford, for example, evaluates all training programs against the profitability in a given product line. The basic formula for calculating the ROI for training is as follows:

ROI (in percent) = Program benefits / Costs × 100

The analysis component defines the cost of the investment required to achieve a potential cash flow benefit. Actual calculations are prepared using standard accounting methods. However, unlike some calculations, such as those for money market interest-bearing securities, training cost-benefit calculations are not always based on fixed rates of return. For this reason, they are often imprecise. Training cost-benefit analysis, in short, is not an exact science. It can, however, provide an investment perspective based on current training needs and long-term productivity expectations. Ultimately, they allow the investor an opportunity to make an informed investment decision on a particular training purchase.

Benefit Types

The first benefit is cost-motivated, where the result of a training experience cuts costs. Training staff to operate a computerized accounting system, for example, could reduce the time required to prepare financial reports. This time savings, expressed at an equivalent salary rate, is reallocated to maximize staff productivity by paying wages that generate greater outputs. The staff could then prepare demand financial reports and use the saved time to manage accounts receivables. An ability to manage accounts receivables, in turn, serves to reduce credit carrying costs.

Revenue-motivated training, the second type, results in an increase in revenues. The above example touches on a revenue motivation. By reducing accounts receivables, client collection periods are shortened, which improves the cash position and allows investment or debt servicing.

Other revenue motivations reflect entrepreneurial ventures where an add-on service is designed to generate new revenues. A firm introducing desktop publishing services, for example, may require training on their computer systems before a quality product can be delivered. Various training environments often overlap to meet cost savings and revenue generation expectations. Both address performance discrepancies but realize the benefits in different manners. These benefits, added together, reflect a net performance improvement. Computer-related training, as we have seen, can look to reduce time spent performing manual functions (costs) and redirect this time to produce new goods or services (revenues).

Solution Types

The first solution type, hard training, is applied. It involves mental or physical activities and produces direct, easily measured results. An individual, for example, who learns to drive a car in a forty-hour course, including classroom and practical training, is usually able to turn the car on, put it in gear, accelerate, and stop immediately after the course is completed. The degree to which they are able to do this is easily measured through observation.

The second solution type, soft training, is conceptual, cognitive, and results in a potential for action. This type is more difficult to measure since the results are not always immediate. If, for example, a salesperson takes motivational sales training, they may be motivated at the end of the course to set a personal goal of doubling their sales in the next year. The achievement of that goal will not be evident immediately after the course is completed. Also, with time, the trainee may become disillusioned, perhaps because of declining sales due to market conditions or poor office relations. The return on the original training investment, in this case, depreciates with time, perhaps to the point where training requires repeating. This condition creates the greatest anxiety with training investors and constitutes a greater risk.

Utility Analysis

This is another way of reflecting upon the usefulness of a training program. Utility itself is a function of the duration up to which the training leaves an impact upon the trainee, the relative importance of the training program, the importance of the position or profile that received training, and the cost of conducting the training. For example, leadership programs conducted for top and middle management tend to be high in value, whereas sales training programs for the front-line sales staff tend to be low on the value scale.

Utility analysis basically derives the effectiveness from analyzing the change in the behavior of the trainee and the positive financial implications of the same. This model is not very famous because the deductions made are essentially subjective in nature.

Thank you for sharing. Everyone is focused on calculating ROI on training. Training employees is a part of OD. No organization can expect their employees to perform wonders without being trained, motivated, mentored, coached, counseled, and more. There are many skills to be measured, noted, and compared within trainees post-training, not just limited to calculating enhancements in revenue generation. It is not an easy task to measure these skills as it purely depends upon the employee's motivational factors - internal and external - associated with performance standards. At times, employees are reluctant to perform even if they have updated their knowledge and are capable of delivering their best.

Every training session needs motivation as a catalyst; otherwise, it is not easy to see employees reflecting whatever they have learned during the training. Keep sharing your knowledge, and let us learn more and more.

With profound regards