Return on Investment

ITE- 695

ROIThere are many catch phrases for Return on Investment. Cost-Analysis, cost of training, cost-benefit analysis, cost effective analysis, to name just a few. They all refer to the same objective, and that is to measure the benefit of training, against how much time and money shall be spent to acquire that training.

Basically, ROI in training is how much money does your company want to spend to make sure it can be competitive in the global arena, and still be within the missions and visions of the company.

We shall be using Anne F. Marrelli’s two part article, Cost Analysis for Training, and Determining Training Costs, Benefits, and Results, which is found in Technical & Skills Training, October, 1993, and Nov/Dec, 1993 issues respectively.

Ms. Marrelli is a senior Human Resources Management Specialists in the Chief Administrative Office of the County of Los Angeles.

Ms. Marrelli uses a nine-step cost analysis approach:

1. Define the Question or problemExplain clearly and precisely what problem

needs to be addressed. Must be a specific question.

(e.g.) Would a reward incentive for good work performance have a more positive effect on worker morale and behavior, as opposed to punishment for poor job performance.

By constantly comparing training costs with benefits or results, a case history can be built up to support your decisions and relay credibility to the existence of the training program. Some points are:

Decide which training program, if any, is the most cost efficient response to a problem.

Select the most efficient instructional media or course for a training program. Efficient meaning where the objectives are met.

cont.

Decide which training program’s results are worth it’s cost.

Demonstrate a training programs ROI. Determine if a training programs

benefits remain stable over time.

Step Two:Identify Alternatives

The best solution to a performance problem is to identify favorable alternatives.

When weighing these alternatives, use factors that meet your training objectives, such as:

indications of effectiveness, cost, ease of implementation,

cont.

Time constraints, Facilities, Equipment, Supply requirements, Probability of acceptance by

management and participants, Qualified personnel, and Job characteristics (narrow & broad

range of acceptable performance)

Step Three:Select Cost-Benefit or Cost-Effectiveness Analysis

ROI has two methods to analyze cost verses results; cost-benefit and cost-effectiveness.

Cost-Benefit - both costs and benefits are computed in dollars. It is used mainly to evaluate training programs already in place or training programs that are still in a research status. cont.

Cost-Effectiveness - costs are calculated in dollars, like cost-benefit, but the results are tallied by the objectives met. Cost-effectiveness is the best method when the results are difficult to put into dollar figures.

(e.g.) employee morale

Step Four:Identify Costs Personnel Course materials Supplies Equipment Facilities Services Travel

Cost Resources

Instructional designers and trainers Articles in development and training

periodicals Discussion with colleagues Review history of previous cost-analysis

studies Other sources

Step 5Identify or Measure Cost-benefit analysis

Cost-effectiveness analysis

Benefit Classifications

Cost-savings benefits Cost-avoidance benefits Added-value benefits Direct benefits Indirect benefits

Cost-Effective Analysis

Measures the effectiveness and the results of each training option.

(e.g.) The number of policy violations per month, or, a written test of policy and procedure knowledge.

Step Six:Estimating the Value of each Component Recording source of data Time factor Cash flow

Step Seven:Comparing Costs and Benefits or Effectiveness

Cost-Benefits AnalysisComparing the costs of training verses the

benefits of training is just a matter of subtracting the costs from the benefits that will be received. For example, if the costs of training is $10,000, and the benefits received are over $10,000, then the difference is the net benefit of the training program.

Cost-Effectiveness

The cost-effectiveness of a training program is calculated by using the ratio system; effectiveness divided by the cost. Here the effectiveness is measured by the objectives met, as according by the mission and visions of the organization.

Step Eight:Five factors to consider when choosing a training option

1st - check ratios of correlating training options

2nd - consider cash flow

3rd - differential distributions

4th - training impact

5th - decision making

Step Nine:Present the Recommendation in a Report

Specifications and general rules to apply toward your recommendations (Marrelli,1993)

“Explain and support the rationale for your decision. Document your data sources and estimation

methods. Provide a decision-making tool for those who must

approve or concur with your recommendation. Design your report as a clear, comprehensive, and

well-organized record of the cost analysis. “