Return on training investment is a comparison of the “training’s monetary benefits with the costs” (Phillips, 1996, p. 43). Since over $70 billion is spent on training in the US and over $130 billion worldwide each year (Bersin, 2014), there is interest in evaluating training expenditure return on investment (ROI). The calculation of ROI for training initiatives is a controversial subject. Too often, training staffs question whether return on training investments can or should be calculated (Parry, 1996). ROI can be calculated for training initiatives when certain conditions exist, mainly that the training effort is intended to ultimately result in a positive change in net income. In addition to using ROI projections to prioritize training projects, financial analysis of training outcomes improves the value perception of the training function in organizations. The example that follows details the ROI process for expected performance improvement in the financial services industry.
Opportunity
The ROI analysis example reviewed in this chapter determined whether a redesigned training program decreased time-to-proficiency for new bankers in a financial services organization in the U.S. Specifically, this evaluation was guided by the following question:
Definitions
There are two components required to calculate ROI: return is the value an organization receives from an investment and investment is the total amount of money required to yield a return (Phillips, 1996). When calculating training program ROI, the investment is all the costs associated with creating and delivering a training solution (total program costs). If the training solution replaces an existing training solution, which is the case in this chapter’s example, the investment is the total cost to redesign and deliver the new program. Investment includes all related direct and indirect redesign and delivery costs.
In organizations, both return and investment are calculated and analyzed through Generally Accepted Accounting Principles (GAAP) (Financial Accounting Foundation, 2016). Consider the flow of money through a typical organization’s income statement; in general terms, revenue is generated by the sale of goods or services. Gross margin is determined by subtracting the direct costs of creating and delivering the goods or services. Direct costs include the labor and materials required to manufacture goods and deliver services. Net income, or net margin, is calculated by subtracting the indirect costs associated with creating or delivering goods or services. Indirect costs include marketing, sales, warranty, training and administrative expenses (e.g. selling, general & administrative costs or SG&A). Interest, tax, and amortization expenses are also included in the calculation of net income. For the purposes of training investment ROI calculation, return is measured at the net income level excluding tax, interest, and amortization expenses. (See Figure 1)
Learning initiative ROI is calculated by dividing total change in net income derived from training (Net Program Benefits) by total learning initiative cost including consulting, design, delivery and support expenses (See Figure 2).
Figure 2.
Training initiative ROI calculation
Another way to state the learning initiative ROI calculation is Net Program Benefits – Total Program Costs divided by Total Program Costs.