How to Calculate ROI (Return of Investment) of Employee Training and Development

Return of Investment on Leadership Development Programs is rarely measured by companies with the reason of difficulty in measuring soft factors. However, the benefits at the end of this process are much more satisfactory for the planners and executors.

ROI measurement is the process of collecting and analyzing the performance data and translating this into a measurement of real financial benefit to the organization. This benefit is then compared to the cost of creating this benefit through training and measurement. In many cases, ROI measurement can be linked to data collected and analyzed for Training Needs Analysis (TNA). If detailed TNA studies are done before the training, the data from these studies can be compared to the feedback and performance data acquired after the training takes place. In addition, the TNA is likely to highlight the expected benefits and results from the training. In this case, the change in performance may be more accurately determined.

'Soft Skills' Training can offer ROI through sustainable and valuable improvements, particularly when: 

1) It is strategically linked to individual, team and organizational needs 

2) It addresses individual, team, and organizational attitudes to change

3) It is supported by ongoing reinforcements by managers and team members 

4) It is followed by real opportunities to practice “how to”.

With this perspective, a model as below may be used to measure ROI of leadership development:

Stage 1: Create an ROI Measurement Plan

To achieve the ROI measurement requires that the ROI process is planned early and that two planning documents are prepared:

·    The Data Collection Plan

·     State the objectives of the training/learning

·     State the objectives of each phase of data collection at each evaluation Level

·     Identify any previously used metrics, values or methodologies used by the client, and determine their suitability for the current exercise

·     Select the appropriate evaluation methods

·     Identify the audiences who will be surveyed for data

                                    i.  The learner

                                   ii.  The manager

                                  iii.  The analyst (for analytically determining performance-change data based on available performance measurement data)

·     Set the timing for the data collection

                                  i.     Pre-training data collection (benchmarking the current situation)

                                 ii.     Post-training data collection (comparative data (“apple to apple

comparison”))

1.   Immediately post-training (initial reaction and assessment)

2.   At a later date when the effect of the training has had time to

make itself felt in the learner’s job performance

·     Allocate responsibilities for data collection and analysis

·    The ROI Analysis Plan (This is a continuation of the Data Collection Plan, capturing information on the key items needed to develop the actual ROI calculation.)

·     List Significant Data items to be collected

                                  i.   Benefit Factors

                                 ii.   Cost Factors

·     Methods to isolate effects of the learning/training from other influences

·     Methods to convert data to numerical values

·     Intangible benefits

·     Other influences

·     Communication targets

Stage 2: Collect Data

As described above, data will have to be collected at various points in the training process, to be able to carry out effective ROI calculations. The following notes may help plan your data collection exercise.

1.  Identify the purposes of the evaluation. State clearly what the evaluations are to measure and what the goals of the training are intended to be. Be as specific as possible about the goals of the training, and make sure these goals address the performance enhancement, business improvement or cost-savings expectations.

2.  Select the evaluation instruments and methodology. Identify how the data will be collected and analyzed (see below for different methods of data collection)

3.  Establish the timing for the data collection. Decide whether a pre-training analysis is required, or post-training analysis or both.

4.  Carry out the data collection.

Stage 3: Isolate the effects of training

Once the training program is complete, it is essential to identify which performance improvements have resulted from the training, and which improvements are co-incidental and may not be directly relevant to the training. 

Tools to isolate the effects of training can include:

·    Control Groups; comparing the change in performance of a group that has undertaken training, to the performance change of a similar, untrained group, can provide a factoring value by which the total measured change can be adjusted.

·    Trend lines; these show the trends in performance change, which would have been expected if the training had not taken place; these can be compared to actual improvement measurements. Draw a trend line, derived from previous performance data, and extend into the future; then compare this later with the actual data derived from the results of the post-training evaluation.

·    Mathematical forecasting. This may be appropriate where there are several factors to consider in the change in performance (e.g., sales increase due to training, and an increase in marketing expenditure). It may be possible to calculate the expected trend due to the marketing intervention and calculate the difference as being due to the training.

·    Participants’ estimates of the impact.

·    Supervisors’ or managers’ assessments of the impact of training on measured performance improvement.

·    Senior management estimates the overall value of training programs on the business, taking into account other factors they are aware of.

Having isolated the effects of training, it may be necessary to adjust the numeric results of the data collection exercise to reflect the fact that estimates may be “inflated”; on average, individuals may believe that training has resulted in a 25% performance improvement; in practice it may be less than that, as the group concerned may have a tendency to over-estimate the effects of the training. Taking a conservative approach, and applying an adjusting factor, may help to reduce bias in the survey data.

Stage 4: Convert data to monetary value

In this stage, it is important to estimate the financial value of the various changes resulting from the training and to identify the total costs incurred in implementing the training program.

There are various strategies for estimating the value of performance changes:

·      Output data converted to profit contribution or cost savings

                i.   Direct costs saved

               ii.   Increased volumes of output produced

             iii.   Timeliness of output

·      Cost of quality calculated and quality improvements converted to cost savings or increased profitability

·      Cost savings (salaries and overheads) in reductions in participants’ time in completing projects.

·      Internal or external experts may be able to estimate the values of the performance improvements gained.

·      Participants or their supervisors/managers can estimate the cost savings or value of increased productivity

Having calculated the direct financial value of the performance enhancements, it is also necessary, wherever possible, to estimate the value of the more “intangible benefits”, such as:

·    Increased job satisfaction, and the benefits of increased staff retention and reduced recruitment costs

·    Increased organizational commitment

·    Improved teamwork

·    Improved customer service

·    Reduced problems and complaints

·    Reduced conflicts

To calculate the cost of the training program, ensure you include:

·    Cost of external training services purchased

·    Cost of training materials supplied

·    Cost of internal training staff involvement

·    Cost of facilities used for the program

·    Travel, accommodation and other incidental costs

·    Salaries and benefits of the participants

·    Administrative and overhead costs of the training function.

·    The costs of carrying out the ROI on the training program.

Step 5: Calculate the ROI

ROI can be expressed in 3 different ways:

1. Benefit/Cost Ratio

BCR = Program Benefits / Program Costs

1. ROI %

ROI = [Net Program Benefits / Program Costs] x 100

3.   Break-even time

Break-even time in months = [Investment / Benefit] x Period in months

It is possible for business benefits to last more than 1-year, but in most cases, the effect of training is more difficult to assess over longer periods, so typically 1-year benefits are calculated. Longer-term programs can be measured over multiple years.

Calculating ROI requires that business results data must be converted to monetary benefits. It is important to be able to allocate financial value to results such as;

·    Improved productivity

           i.   Time saved

          ii.   Output increased

·    Enhanced quality

·    Reduced employee turnover

·    Decreased absenteeism

·    Improved customer satisfaction

Whilst qualitative results are hard to quantify, we believe there are many tangible benefits to investing a little more time to ensure that soft-skills training is as effective as it can be. These include creating/ enabling: 

·  Dynamic working culture – Team members become better equipped to problem-solve positively and proactively, and they have the determination to strive for excellence. 

·  Successful implementation of change - Effective leadership, individual motivation and improved communication brings active involvement, and commitment to planned changes. 

·  Increased satisfaction – Improved communication and an open, dynamic working culture improves overall satisfaction and commitment. 

·  Reduction in staff turnover - A more satisfied and committed, less stressed workforce is less likely to move on. Salary and other benefits become the less important when team members feel respected appreciated and supported. 

·  More efficient meetings - Open and honest communication and effective facilitation of meetings saves time and improves collaborative problem solving and decision-making. 

·  Meeting of deadlines – More effective communication and negotiation between departments mean that targets are more likely to be met because of increased transparency, trust and rapport.

·  Increased productivity – Through effective leadership, improved motivation and communication, individuals and teams are better equipped to achieve results. 

·  Saving of managerial time - Improved team communication and collaborative problem-solving results in fewer conflicts and fewer demands on management time. 

·  Reduction in complaints – Improved collaboration, negotiation, and resolution of problems results in fewer grievances, and a reduction in internal and external complaints.