Return on investment (ROI) is one of the most important metrics for any business. Running a company takes a lot of capital investment, and if those investments aren’t paying off, you need to change tactics. Conversely, if they’re giving you a huge return, you want to be able to increase your investment.
Training is no different. It’s easy to assume that training is always a good investment—but that’s not always the case. And when it is a good investment, there are often multiple options, some of which will be more effective than others. But how do you figure out when your learning and development activities are good investments?
Let’s take a look.
Why Calculating Training ROI Is Important
Every expenditure in your business has the same purpose: to bring in more revenue. Directly or indirectly, it’s all tied back to that. Spending on advertising gets the word out. Spending on employee benefits attracts better employees. And spending on training ensures that your employees are providing high-quality services or products in an efficient manner.
Training is like anything else; you need to gather data to see if it’s working.
If you’re seeing positive return on your investment, then the training is working. You’re equipping your employees with more information and skills that help them do their jobs better.
A negative return means the training isn’t having the desired effect. Maybe it’s too expensive. Or it’s added another layer of tasks that your already taxed employees don’t have time for. Whatever the reason, you need to know about it.
That’s why having a robust ROI measurement system in place to analyze your trainings is so crucial.
How to Calculate Training ROI
Here’s the basic formula for return on investment:
ROI = net profit / total investment
When it comes to calculating training and development ROI, it’ll look something like this:
Training ROI = change in profits related to training / cost of training
If you convert these to percentages, it’s ideal to have an ROI of over 100%. A 100% ROI means that you’ve earned your money back, but haven’t increased revenue. An ROI of less than 100% means you’ve actually lost money on the training.
Which Metrics and KPIs to Track for Calculating Training ROI
Of course, knowing the formula for calculating ROI on your learning and development is easy. Figuring out the metrics and key performance indicators (KPIs) for figuring out your ROI is a different story.
Let’s start with looking at the cost of training. Seems simple, right? You pay a trainer to come in for a day, or pay an organization that’ll host your employees for a week, and that’s the cost.
But it’s more complex than that.
You need to figure in lost productivity, the salary paid to your employees while they’re in training, any costs for implementing the procedures or methods learned at the training, slowed production while getting used to new methods, and maybe even costs associated with shifting the culture at your company.
Figuring out all of these costs takes time, and no matter which position you hold at a company, you’re going to need information from many other involved parties to get an accurate number.
Learning and development metrics related to the other part of the equation aren’t always straightforward, either. For example, if the training is aimed at reducing the amount of time it takes new hires to get up to speed, you might not see bottom-line changes for years.
But that doesn’t mean there isn’t huge value—or notable ROI—in that training. You just need to know what to measure. In this case, time to competency is an important metric. If a training has to do with healthier habits, you might measure bottom-line revenue, but again, there’s a more immediate metric: sick days taken.
Of course, these metrics don’t fit neatly into your training ROI equation unless you have specific numbers for them. So you’ll need to do some digging for this step, too.
For example, time to competency isn’t a dollar amount. But you can look at the amount of salary you’re paying to a salesperson while you train them—they’re not selling anything yet, so that’s an investment that hasn’t yet had a return. If you cut that time in half, you’re paying out half of the salary for unproductive time per new salesperson.
Still, you need somewhere to start. Here are a few things you might want to track, depending on the type of training that your employees have received.
For sales training:
- Average sales cycle length
- Percentage of successful closes
- Percentage of sales reps meeting their quotas
- Time to competency
- Total revenue generated
For marketing training:
- Number of qualified leads generated
- Cost per qualified lead
For customer service training:
- Time per interaction
- Average customer satisfaction rating
- Increase in revenue
- Increase in overall company knowledge
As you can see, there’s a wide variety of metrics and KPIs that you can track to see if your training is providing a good ROI. In most cases, the metrics you choose will depend on the training and its goals, as well as what you’re already measuring in your company.
For example, you might have specific goals set for your customer service team. If 56% of your customer service representatives met those goals last quarter, and 73% meet them this quarter, there’s a good chance that your training was effective.
Does that mean you have a positive ROI? Not necessarily. You’ll have to assign a dollar value to any increase in performance—and that will be highly specific to your company and its situation. You might say, for example, that meeting your marketing goals is worth $500,000 to your company. And if you can attribute meeting those goals to the effects of the training, you can calculate your ROI.
How to Make the Process Make Sense
By now, you understand how complex training ROI calculations can be. You need to take a huge number of things into account, and you’ll need to assign dollar values to many of those things—and that’s not easy.
To help you out, we’ve put together a timeline that will help you focus on the things that matter during each step of the process. Of course, every calculation will need to be fit to your particular company’s circumstances.
1. Choose training goals.
What do you want out of the training? The ultimate goal is increased profits, but are you looking to improve customer service, employee morale and engagement, regulation compliance, or something else? Identify your goals first.
2. Choose training metrics.
Using the guidelines above, choose which metrics you’ll use to assess the success of your training. The more you can use metrics that you’re already measuring, the better, but if you need to put new measurement systems in place, don’t hesitate to do it.
3. Choose a training and provider.
Will you run the training in-house, or bring in an outside group? Which training package makes sense for you, both with your goals and your financial resources?
4. Choose which employees will be trained.
It’s tempting to have everyone trained, but spend some time thinking about which employees will benefit most. There’s nothing worse than attending an irrelevant training—it’s bad for morale and it wastes money.
5. Complete the training.
Whether you’ve brought someone in from the outside or you’re running the training yourself, it’s time to get to it! Do what you can to encourage people to really invest their time and attention in the training sessions so they get as much out of it as possible.
6. Calculate the cost of the training.
It’s best to do this after the training is complete, because you may accrue unexpected expenses. Take a wide view when calculating the cost, and include the direct cost of the training, lost productivity, meals provided, and so on. Remember that employees may experience decreased productivity while they adjust to new skills and processes, too.
7. Analyze the selected metrics.
This is where you’ll determine how much you’ve gained from the training. Use the metrics above to measure the increase in performance that your employees have gained from the training. One thing to keep in mind here is that you’ll want to focus on gains that are attributable to the training. If your sales reps sell an average of $60,000 per quarter, don’t use that as the return value in your equation. If they’ve sold an average of $62,000 this quarter, use $2,000 as the return value. You may have to dig into more data (or ask training recipients) to see how much of the gain is attributable to the training.
If you’d like to dive into an interesting model of learning that many people use to measure the effectiveness of their trainings, check out our introduction to the Kirkpatrick model.
8. Calculate training ROI.
Use the equation above to determine the return on investment of your training. And, if you’re interested, dig into more detailed numbers, like the cost per successfully trained employee.
Does Calculating Training ROI Have an ROI? Is It Worth Doing?
After seeing how complicated this entire process is, you might be wondering if it’s worth the effort. Will you see a return on investment for all of the effort you’re putting into calculating your ROI?
If you plan on running more than one training—which we strongly recommend—the answer is yes. Calculating your training ROI will help you make better decisions about trainings in the future. You’ll know which employees benefit the most from receiving training. You’ll know which training providers provide the most valuable information. You’ll know if different types of training (for example, classroom-type training or another alternative, like an LMS) have different effects at your company.
It’s certainly not easy; figuring out the return on learning and development activities takes time, effort, and a lot of communication between departments at your company. But if you’re serious about getting the most for your investment when it comes to training, it’s absolutely worth doing.
Do you calculate training ROI for your business? Or do you plan on calculating it in the future?
Original Post by Continu