ROI stands for Return on Investment and is the most commonly used financial calculation for determining the business impact of training projects. We calculate the ROI of a training project by first determining the total monetary benefit derived from the project such as increased customer satisfaction, staff reduction, productivity improvements, increased revenue, decrease costs, cost avoidance, or increased strategic advantage. Second, we estimate the total cost of developing and deploying the project. These costs typically include course development, travel, hotels, instructors, facilities and infrastructure. We then calculate ROI of the training project from these two numbers.
Historically, most discussion regarding the ROI of training initiatives has focused on the “R,” or financial benefit of the ROI calculation, and not the “I,” or cost of doing the project. Finding the financial benefit is critical to any financial justification and should always be the primary focus. When estimating the “R” or return in our ROI calculation, there are numerous techniques and methodologies available for estimating these results and very capable practitioners in this area.
While finding the financial benefit is critical to our financial justification, the cost of developing the training solution is equally important in determining whether a project will meet required ROI goals. Often training professionals take the cost to produce training as a given and may not look at it as an integral part of determining the ROI and associated financial justification of the training project.
Let’s illustrate this with an example project. Our example project will train 200 customer service representatives on the company’s account management system. The system enables customers to do more of their own account maintenance and management. Customer service leadership believes that training customer service representatives more effectively with the account management tool will enable customer service representatives to transfer these skills to their customers resulting in increased customer self-sufficiency, reduced call volumes and increased customer satisfaction. Customer service leadership asked the learning and performance department to evaluate the business case for this training initiative as well as provide the training.
In their analysis, the learning and performance department quickly identified a credible return of $200,000 for this training project. It was also able to estimate that the cost to do the project would be $200,000. We put these numbers into the ROI calculation shown below to calculate this projects ROI.
(Financial benefit of training project – Cost of training project)/ Cost of training project
Using our formula, a $200,000 return on a $200,000 investment produces a ROI of 0%. Clearly, this will not be enough to cost justify the project since company policy dictates any training initiative must produce a 150% ROI for authorization and funding.
If we believe this is a project that would benefit the company, what options do we have now?
ROI is a mathematical ratio and we can increase the ROI of a given training project by either increasing the return it produces or reducing its implementation cost. I have illustrated this relationship in the tables below:
Table 1 – A comparison of the ROI of a project with a $200,000 financial return as project costs decrease.
We can see in Table 1 that for a project with an identified return of $200,000, our project costs cannot exceed $80,000 to reach our goal of a 150% ROI.
Table 2 – A comparison of the ROI for a project with a $200,000 project cost as the financial return increases.
We can see in Table 2 that for a project with an identified cost of $200,000, our project return must be $500,000 to reach our goal of a 150% ROI.
We can cost justify the project and achieve our ROI goal of 150% by either finding a financial return of $500,000 resulting from the project, reducing the cost to develop the project to $80,000, or, more realistically, a combination of the two.
As we stated previously, there can be a tendency among training professionals to believe that there is only one solution for a training objective and the cost of doing the project is fixed. Based on this assumption, we begin to look for an additional revenue return from our project to close the ROI gap. This can be challenging.
- First, it is difficult to isolate and quantify the impact of training on an individual’s performance from the numerous other factors that influence an individual’s performance such as leadership, infrastructure and workload.
- Second, quantifying the performance improvement is only half the battle; the next step is to link the individual’s performance improvement directly to a quantifiable business result.
- Third, cost justifying training often relies on financial benefits that are intangible. Executive decision makers are skeptical of financial benefits resulting from cost avoidance, staff reduction, increased customer satisfaction and productivity increases.
So, let's say we sharpen our pencils, meet with stakeholders, and we are able to identify a credible return of $300,000 or $100,000 more than our original estimate for this training project. Once again putting these numbers into our ROI calculation, we see that the project will now produce an ROI of 50%, and that is still short of our 150% ROI goal. We believe that $300,000 is the best return we can credibly expect. This is disappointing but we go back to our ROI calculation one last time. This last calculation tells us that if we can develop the project for $120,000 or a reduction of $80,000 from our original estimate, we can meet our ROI target of 150%. With the wide range of tools available for training development and deployment, we should be able to construct a solution that meets our cost requirements and achieves our ROI goal.
Our original training strategy utilized a traditional classroom training design with students traveling to classes in multiple cities. To reduce costs, let's look at some alternative training strategies that are available. These are:
- Change the delivery medium from traditional classroom to virtual classroom or e-learning
- Streamline course content
- Reduce production costs through asset reuse and repurposing
- Utilize advanced course development tools such as Articulate or Captivate
The table below illustrates some alternative solutions and their associated cost reductions.
Table 3 – A comparison of project costs using alternative delivery mediums.
We see from Table 3 that utilizing an alternative delivery medium, such as Virtual Classroom or self-paced e-Learning, reduces our development costs below $120,000 and provides the ROI we need to move forward with our project.
As businesses become leaner and more focused on the bottom line, it is important to always look at the “I” as well as the “R” in any training ROI calculation.
Mark Bower is founder of Edge Interactive and has more than 25 years of experience as a training executive, entrepreneur and management consultant.
Written for TrainingIndustry.com
