Return on Investment for Customized Training
Why invest in training for your staff?
“An investment in education always pays the highest returns.”
“What’s worse than training your workers and losing them? Not training them and keeping them.”
—Zig Ziglar, success speaker
Studies and corporate bottom lines show that companies reap many benefits from investing in training for employees.
Training improves employee performance….in quality, quantity, speed, safety, problem solving, attitude, ethics, motivation, leadership, and communication. According to Ferdinand Fournies, performance problems occur because employees (1) don’t know what they’re supposed to do, (2) don’t know how to do it, and/or (3) don’t know why they should do it. Targeted training is one solution to all three factors.
Training enhances company profits. Training ups revenue in increased sales, increased referrals, new product ideas, and improved customer satisfaction and retention. According to the American Society for Training and Development, investment in employee training enhances a company's financial performance. An increase of $680 in a company's training expenditures per employee generates, on average, a 6 percent improvement in total shareholder return. Based on the training investments of 575 companies during a three-year period, researchers found that firms investing the most in training and development (measured by total investment per employee and percentage of total gross payroll) yielded a 36.9 percent total shareholder return as compared with a 25.5 percent weighted return for the S&P 500 index for the same period. That's a return 45 percent higher than the market average. These same firms also enjoyed higher profit margins, higher income per employee, and higher price-to-book ratios.
Firms that invest $1,500 per employee in training compared with those that spend $125 experience an average of 24 percent higher gross profit margins and 218 percent higher revenue per employee (source: Laurie J. Bassi et al., "Profiting From Learning: Do Firms' Investments in Education and Training Pay Off?" American Society for Training and Development, 2000).
The Cheesecake Factory, one of the most successful restaurant chains in the nation, spends about $2,000 per employee for training each year and reaps sales of $1,000 per square foot—more than twice the industry average.
Training saves labor….by reducing duplication of effort, time spent on problem solving, and time spent on correcting mistakes.
Training saves money. A better skilled workforce means fewer machine breakdowns, lower maintenance costs, lower staff turnover, lower recruitment costs, fewer bad debts, fewer customer support calls, fewer help desk calls, less need for supervision, reduced downtime, and increased worker productivity.
Training improves a company's competitive edge. According to Nobel Laureate Gary Becker, professor of economics and sociology at the University of Chicago, "Any company has to recognize that not only is the human capital of their employees a major asset, it is also a depreciating asset that needs continuing investment." Keeping worker skills up to date keeps a company in the running.
Training increases worker productivity. Just a 2-percent increase in productivity has been shown to net a 100 percent return on investment in training (source: "The 2001 Global Training and Certification Study," CompTIA and Prometric).
Motorola calculated that every dollar spent on training yields an approximate 30 percent gain in productivity within a three-year period. Motorola also used training to reduce costs by over $3 billion and increase profits by 47 percent (source: Tim Lane et al., "Learning to Succeed in Business with Information Technology," Motorola).
Training saves supervisory and administrative time and costs. The less time and money a manager has to spend on monitoring and guiding employees, the more time is freed up for more profitable activities.
Training improves customer satisfaction. Better-quality work means better-quality products and services . . . resulting in happier customers.
Training improves employee satisfaction and retention. Many people assume that once employees are trained, they are more likely to leave the company for greener pastures, but actually, the opposite is true: trained staff are happier and more likely to stay put. Their self-esteem improves, which in turn improves their morale in the workplace and their loyalty to their employer. A Louis Harris and Associates poll reports that among employees with poor training opportunities, 41 percent planned to leave within a year, whereas of those who considered their company's training opportunities to be excellent, only 12 percent planned to leave. A Hackett Benchmarking and Research report shows that companies that spend $218 per employee on training have more than a 16 percent voluntary turnover, while companies that spend over $273 per employee have turnovers of 7 percent.
The Cheesecake Factory, which as mentioned above, spends an average of $2,000 on training per hourly worker each year, has an employee retention rate of about 15 percent better than the national average.
Career development is the No. 1 factor in employee retention, according to a survey of 6,400 employees conducted by consultants Sharon Jordan-Evans and Beverly Kaye.
In an AON survey, respondents ranked “opportunities for personal growth” as the main reason they took their current job and stayed in that job. Significantly, they ranked it ahead of salary.
According to a study by Louis Harris & Associates for Interim Services Inc., companies that fail to train their employees are more than three times as likely to lose them.
Investment in professional development training is a win-win for company and employee alike.
CALCULATING YOUR RETURN ON INVESTMENT (ROI) FOR TRAINING
When to calculate ROI
Not all the benefits of training are quantifiable; many are intangible, such as improved employee self-esteem and morale. Moreover, trying to set a monetary value on the value of training is complex, and therefore probably not worthwhile for a short course delivered to a small number of employees. So when is it worth the time and effort to do all the company research and cost-to-benefit ratio calculations?
- when the training program will have a long shelf life
- when the program will serve many participants
- when the program represents a sizable investment of company resources
- when the "before" and "after" performance factors are tangible, can be quantified in some manner (i.e., with measurable indicators), and can be assigned monetary values
How to calculate ROI
There are many different ways to calculate ROI. For information on the various theories and methods, consult the bibliography below.
SELECTIVE BIBLIOGRAPHY ON RETURN ON INVESTMENT
ROI Overview and the Pros and Cons of ROI Calculation
Barron, Tom, "Is there an ROI in ROI? Another Look at Evaluating Training Programs." Alexandria, VA: American Society for Training & Development (ASTD), 1998.
Cross, Jay, "A Fresh Look at Return On Investment," white paper. SmartForce: The e-Learning Company, 2000.
Parry, Scott B., "Measuring Training's ROI, Another Look at Evaluating Training Programs." Washington, DC: American Society for Training & Development, 1998.
Phillips, Patricia P. and Jack J., "The Bottom Line on ROI: Basics, Benefits, & Barriers to Measuring Training & Performance Improvement." DC: The Center for Effective Performance, 2002.
Tobin, Daniel R., "The Fallacy of ROI Calculations," Corporate Learning Strategies.
Methods of Calculating ROI
Brauchle, Paul E., "Costing Out the Value of Training, Another Look at Evaluating Training Programs." Washington, DC: American Society for Training & Development, 1998.
Conner, Marcia L., "How do I measure return on investment (ROI) for my learning program?" Training & Learning FAQs, Learnativity.com. 2002.
Martin, John, "ROI: Do It & Prove It," ASTD, 2001.
Phillips, Jack J., Return On Investment in Training and Performance Improvement Programs. Gulf Publishing, 1997.
---------------. "Was It the Training?" ASTD, 2001.
Setaro, John L., "Is It Worth the Cost? Calculating the ROI for Training," mytrainingserver.com/news.
Shepherd, Clive. "Assessing the ROI of Training," Fastrak Consulting, 1999.
ROI Calculators (Online Tools, Software)
Training ROI Worksheet.
An Excel worksheet allowing calculation of the real or actual cost of training. www.workplacebasicskills.com/non_frame/free_tools/roi/worksheet.htm
ROI Calculator for Training Methods.
An Excel workbook for comparing costs and determining ROI of various training methods. www.mediapro.com/html/resources/roi.html
A media selection and ROI decision support tool that helps the user analyze a course to decide the most economical blend of instructional delivery methods.