Training ROI. Are You on the Verge of Losing Your Budget? An ESI International White Paper +44 (0)

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1 Training ROI Are You on the Verge of Losing Your Budget? An ESI International White Paper +44 (0)

2 Training ROI: Are You on the Verge of Losing Your Budget? It is the responsibility of a learning professional to build and improve talents and help transform the organisation. Learning programmes are essential in all organisations and most of these programmes have always been dependent on return on investment (ROI). However, how exactly is ROI calculated and how do you incorporate it into your programmes? How can they say, People are the priority and then slash our L&D budget? The Top Three Misconceptions of Calculating ROI: 1. It is Not Necessary as People Understand the Value of Our Training Programmes. Most people do understand that learning programmes bring value to the organisation, however the issue lies in understanding the true value of it. It is crucial for the topic on training budget to always be kept visible for discussion in an organisation. 2. If ROI is Important, People Will Ask to See it. Regardless of whether the ROI is sought, it is crucial to realise that in lean times, leadership tends to shift towards the CFO to make data-driven decisions and CFOs are likely to make a final decision based on ROI. 3. It is Almost Impossible to Calculate ROI Calculating a true ROI is indeed difficult, especially when the value of training is not conveniently quantifiable. However, the real requirement is to prove beyond a reasonable doubt that the learning programme is cost justified. 2

3 There are Some Fundamentals to Consider Before Embarking on the ROI Journey. Here are Five Foundational Components of Calculating Training ROI: 1. Get Your Head Straight ROI is more than a calculation; it is a way of thinking. Learning professionals often focus on the quality of their training rather than the impact of the learning. Although quality is vital, it is also necessary to adopt a mindset shift from a quality mindset to an impact and results mindset, which also refers to the willingness to accept responsibility for the actions of delegates immediately after they leave a learning event. 2. Calculate Early and Often Although it is possible to calculate ROI at a later stage, it is certainly not advisable, as it is likely to miss out on the core benefits of ROI the opportunity to make adjustments to the training programme along the way. Astute organisations will view ROI as a real-time process and not as a snapshot to be repeated after a few years. The main reasons for calculating ROI continuously is the immediate access to deliverables for a programme, to monitor the benefits generated by the programme, and most importantly, how it is trending, as this provides an opportunity to identify problems and the root cause. 3. Build a Case Getting to ROI is like building a court case making arguments, presenting supporting facts and ultimately these arguments result in a conclusion that the training programme generates more value than it costs. The first step in providing ROI is to provide a layer of evidence that supports the idea that value is being created. The essential proof points are: Your training programme improves the student s ability to do the job That improvement has a positive impact on the business That impact results in a financial benefit to the company and That benefit is more than the cost of the training If the job impact and the business result of that impact is not showcased, then it would be harder to prove ROI. 4. Validate Your Findings A survey approach to ROI is highly recommended as it pays to have different perspectives to validate the data. This should ideally be executed immediately after the course, although the opinions gathered may be inaccurate as students are usually optimistic upon leaving the course. For this reason, it is a good idea to do a follow up survey a couple of months after to accurately determine if the training impacted their performance and drove business results. This also provides an opportunity to gather informative answers and the obstacles encountered, and if possible, it is recommended to survey the delegate s manager to corroborate the findings. 5. Tell the Story Ultimately, this is not about the numbers, but about the story of the programme. The story needs to be compelling and interesting with the goals clearly envisioned, challenges faced and how it was overcome to make a difference for the business. If possible, it is recommended to include testimonials from students as it can produce powerful analysis, when combined with antidotal evidence. 3

4 How to Conduct an ROI Study on Training ESI conducted a study to demonstrate the value of learning programmes across several course sessions and dozens of companies and government agencies in North America, South America, Asia and Europe. Though the study is vast in terms of the number of students, training sessions and organisations involved, the methodology used would be the same for any size programme. Step 1: Step 2: Step 3: Step 4: After each class, all delegates were ed an online survey. The survey took roughly seven minutes to complete and the response rate was 75%. The question categories include: Training quality Job impact Post training support Business results Job performance change Business impact Return expectations Sixty days after the class, a second survey was sent to the same delegates in order to validate their initial responses and to collect additional information such as time-to-job-impact and barriers-to-use. This step is important as usually, on average, scores drop on the second survey. Therefore, identifying barriers-to-use and time-to-impact is critical since adoption is key to driving ROI. Results were analysed across four levels of learning measurement, which lead to ROI including quality, effectiveness, job impact and business results. It is an important prerequisite to quantify these measures, not because they are required for the math (only job impact is needed) but because they provide quantitative proof supporting the final conclusion. It is crucial to note that training effectiveness supports job impact, which supports business results, which leads to positive ROI. ROI cannot be determined without first knowing the investment. Therefore for training ROI, it is important to estimate: The per student loaded tuition costs (including courseware, instructor, venue cost, snacks, admin cost, etc.) The average salary cost of the attendees Estimates need not be exact but should be as close as possible. The ESI study used a loaded per student tuition cost of $1,600 and an average learner salary of $80,000 ( from 4

5 Step 5: It is vital to be as conservative as possible in measuring ROI. Hence, the delivered job impact number in the follow-up survey should be used rather than what was predicted immediately after the class. The single most important measure in determining the ROI for a learning programme is the training s contribution to performance improvement. For the project management and business analysis learning programmes detailed in the ESI study, learners reported a nine percent improvement due to training. Even though this number was reported 60 days after the student returned to his/her job and is lower than what was reported initially after the class, we will factor it down to 5.82% in the interest of being accurate and conservative. This added step is based on a dataset of over 500 million student scores, conducted by Knowledge Advisors. Based on its extensive experience, self-reported scores (even based on experience) should be factored down by roughly 35% to compensate for bias. As a result, the ROI calculations below apply a 5.82% percent improvement due to training. Though technically ROI is a single calculation, there are a few additional calculations you can perform around ROI to help communicate the impact more effectively. The ESI study calculated ROI, monetary benefit per learner, benefit to cost ratio, and average payback period. Return on Investment ROI is calculated as the return of the training ( financial benefit) divided by the investment in the training (costs). The investment components were defined in STEP 4, but what about the return? The return is calculated by multiplying the percent performance increase by the average delegate s salary. You may ask what salary has to do with the financial return of performance improvement. Look at it this way. Your company gets more value from you than they pay you that s how they earn a profit. So we can conclude that if an individual s productivity increases by six percent, as it did in the study, then the company would benefit more than six percent of the individual s salary. Therefore, using salary as a basis for calculating ROI is actually conservative. So here is the math: Return = $80,000 (average salary) x 5.82% (performance increase) = $4,656 Investment = $1,600 ( fully loaded class cost) ROI = ($4,656 $1,600) / $1,600 = 191% Per Student Monetary Benefit This number shows only the return side of the ROI calculation. In this case, the training generated $4,656 in monetary benefit for each student taking the course. Benefit to Cost Ratio This ratio articulates the monetary value of the training relative to the cost. For the ESI study, the companies investing in project management and business analysis training received $2.91 for every dollar they invested in training. The benefit to cost ratio is 2.91 to one 5

6 Payback Period This is a time-based ROI calculation, which indicates how long in months it will take to payback the initial investment in the training. To calculate the payback period, divide the per student monetary benefit by 12 (months) to get the monthly benefit. Then divide the investment by the monthly benefit to get the payback period. $4,656 (annual benefit) / 12 (months) = $388 (monthly payback) $1,600 (investment) / $388 = 4.12 to payback the investment $80,000 (salary) x 6% (% improvement due to training) Articulates the monetary value in hard relative to the cost of training Return on Investment for Project Management and Business Analysis Learning Programmes ROI Percentage = 191% less cost) in monetary terms for hard and soft dollars attributable to the increase in performance relative to training Payback Period (months) = 4.12 This is a time-based ROI indicator. It states how long, in months, it takes the original investment to break even. 6

7 Making the Connection: How to Boost ROI in Your Training Programme There is no need to get disappointed if the ROI is not ideal. ROI is a measurement tool and the objective of measuring anything is to improve it. There are three common problem areas to start looking into: The content was not relevant for the audience The content was not delivered well Adoption of the content was not supported by the organisation Focusing on adoption and job support can help influence the ROI. Here are the specific questions that can be used to measure job support: Participant materials were useful on the job (1 to 7) Training expectations were set with the manager prior to training (1 to 7) Use of training was discussed with the manager after the training (1 to 7) Adequate resources were provided to apply training on the job (1 to 7) However, job support is only one component of a comprehensive adoption strategy. Other root causes of poor adoptions are: Lack of clarity on who is responsible for learning adoption Unclear roles and responsibilities of each actor in the learning adoption process Lack of coordination of collaborative efforts between learner, trainer and manager Learning is not always designed to support learning adoption Different learning adoption types require different learning solutions Learners are not motivated to apply their knowledge and skills due to unclear relationship between learning adoption and performance improvement New behaviours do not fit the existing processes and culture Lack of a clearly presented learning adoption process Lack of clear and simple tools that support the learning adoption process By being proactive and taking a comprehensive view of job support and other adoption practices, ideal ROI numbers can be reached to ensure the advancement of your learning investment. 7

8 More Information If you would like more information about this study or ESI International s learning programmes, please contact us at enquiry@esi-intl.co.uk +44 (0) About ESI ESI, a subsidiary of Informa plc (LSE:INF), helps people around the world improve the way they manage projects, contracts, requirements and vendors through innovative project management training, business analysis training and contract management training. In addition to ESI s more than 100 courses delivered in more than a dozen languages at hundreds of locations worldwide, ESI offers several certificate programmes through our educational partner, The George Washington University in Washington, D.C. Founded in 1981, ESI s worldwide headquarters are in Arlington, VA., USA. To date, ESI s programmes have benefited more than 1.35 million professionals worldwide. For more information visit