There’s no arguing that employee training and development is a crucial function in your organisation. It boosts morale, ensures employee skillsets are both relevant and ahead of the curve, all while boosting your bottom line. But how can you really be sure of that last point?
Calculating the return on investment (ROI) is a little finnicky, but it’s incredibly important to ensure your employee training is effective, your business outcomes are positively impacted and that you’re getting your money’s worth. There are ways to go wrong here, so we’ll explain the importance and fundamentals of training ROI and how to get it right for your organisation.
Why calculate the ROI of employee training?
ROI will show the business impact of any training programs in monetary terms. It lets you know if your investment is or isn’t worth its salt based on the revenue or value it is generating for you.
We’re not telling you to completely throw metrics like learner satisfaction or engagement out the window because these are the leading indicators that will inform the overall success of training. But we are saying you should be thinking as high level as you are lower order. Calculating the ROI of your training program tells you the benefits of it in relation to the cost. (Think: increased profit, money saved long-term and a competitive economic impact.)
Your budget for training could be as low as a few hundred dollars, but for larger organisations it’s likely to break the tens of thousands. This will have been determined against other budgetary requirements and how necessary you deem training and the method of delivery. An online learning management system, for example, is a large investment to make because the software needs ongoing maintenance, updates and upgrades. If you can’t demonstrate the results of that technology, there’s a chance training budgets could be diminished. The learning and development arm of your organisation might lose influence. Interest in continuing training efforts may evaporate. So, how can you be sure that investment is worth it? By determining your ROI of training, of course. It’s not just about justification. It’s the ultimate measure of accountability.
BCR vs ROI
Many people tend to focus much of their energy on ROI, but your CFO may care more about BCR—so you need to be armed and ready. In most cases though, BCR and ROI are not interchangeable. They are two ways of understanding the financial benefits of an investment.
BCR, or benefit-cost ratio, is simply the total benefits of training divided by the training costs. ROI is calculated by taking away the training program costs from the benefits to determine the true value gained. The main difference, in the case of training programs, is that BCR compares benefits to training costs while ROI compares earnings (revenue, benefits, etc) against cost. BCR appears as a ratio (BCR:1) while ROI is a percentage. So, ratios higher than one indicate a positive financial benefit, and anything equal to or less is a deficit. A BCR of 3:1 means that every $1 invested generates $3 of benefits. This could be translated to an ROI of 200%, wherein for every $1 invested, $1 is returned to the organisation and $1 is gained after costs are covered.
Why you need to consider other measures
It would be imprudent to assess ROI as its own beast or even the only measure worth utilising.
- Firstly, every department will have different idea of what ‘success’, ‘failure’ and ‘benefits’ are, and thus, different ways of measuring them.
- Secondly, it would be a mistake to assume ROI is purely a measure of money made.
ROI is not the whole story. Reporting on other performance metrics is the best way to truly understand the impact of a training program because different facets of those programs will likely have differing impacts on your organisation and business outcomes. If you assume each holds the same weight, you’ll likely throw off your calculations. And if your calculations are out of whack, you could make changes where they’re not needed or fail to make necessary changes at all—which you’ll also just throwing your investments into the wind and hoping it comes back to you.
The challenge of measuring training ROI
Whether it’s time, money or people power you invest into your business, you’ll likely have an end goal in mind and a training method that ensures you’re getting some kind of economic benefit—and if you don’t, this is your sign that you need one. This is stereotypically done to prove to the powers that be (cough, C-Suite, cough) the L&D budget is either necessary or deserves to be topped up, or both. The real question to answer here is not simplywhy training?butis it worth the investmentandhow do we prove that?We won’t sugar coat it. That is hard to do.
The investment is defined easily enough. L&D leaders will already have noted data like:
The evidence for return is a little more intangible, which makes it an intimidating beast to be tamed. We’re here to tell you it can be done. The first step is to shift your thinking a little: we’re talking about the value your organisation has gained from this investment just as much as financial return.
How to measure the ROI of training
Now we’ve got the what, why and maybe nots out of the way, let's talk about the how. If many training ROI metrics are intangible, how can one measure them?
Consider that the intent of training is to upskill, gain job-relevant knowledge and change workplace behaviours. Training ROI should therefore align with job performance metrics. There are plenty of approaches you can take, but the fundamentals of designing a plan to calculate the ROI of training are rooted in these questions:
- Who owns the process?
- What are you measuring?
- How should performance be impacted?
- How does this convert?
1. Choose the task managers
Proving the success of L&D seems like a task for L&D leaders. But who best knows each employee’s training needs and who is in the most advantageous position to see post-training benefits in action? The people who directly supervise and review employees: their managers.
Creating a team of managers whose employees are undertaking a training program is important for establishing the credibility of return metrics. Simply put it’s because they’re on the ground and in the thick of it. A more nuanced explanation is:
- Managers identify and prioritise training needs in the context of their teams’ workload, processes and skillsets.
- They can provide post-training assessments and observe changes in productivity, quality of output and morale.
- They can also link training to and define it in terms of measurable business objectives and personal goals for individuals.
Getting buy-in from managers
Managers are busy people, but this process is one that can actually make their jobs easier. It’ll allow them to better prepare and deliver tasks they already own like performance reviews, career guidance and budget management. It will also help them define performance improvements in concrete business terms, because they will be able to contrast results with other results from other departments. It’ll also be a joint effort with L&D and HR, so if all else fails, let them know the onus isn’t all on them.
2. Define your metrics
Not all metrics are created equal. Some are broadly applicable and others have their niche. Many methods of evaluation follow the Kirkpatrick four-level approach:
This determines the value training provides per employee and what that employee subsequently brings to your organisation. The pertinent questions here are then:
If you plan your metrics in advance to answer these and include steps to achieve them throughout a plan, then you’ll be able to produce measurable results.
What is a training ROI metric?
Let’s backtrack a little. In terms of training, a metric tracks performance and progress. The key performance indicator (KPI) is one commonly used example. Where learner engagement, for example, looks at qualitative data, you want to focus on quantifiable results when calculating ROI.
Maybe it’s seeing if sales KPIs increased after sales training or if marketing tried an effective new approach. However unique the metrics are to you, planning your training to impact the business outcomes you want will enable to collect better data. Other training metrics you might also want to measure include:
- New hire satisfaction (did they find onboarding useful?)
- Stakeholder expectations (namely, if they were met)
- Profits, revenue and sales before and after training (the most tangible ROI metric)
- Operational efficiency(is it better, stagnant or perhaps worse?)
- Customer service feedback
- Staff retention vs turnover rates.
3. Measure the impact on performance
While there are many offshoots, the main path to determining your ROI is to determine the effectiveness of a particular training program. There are three measures of impact you’ll want to consider: learning effectiveness, skills application and business outcomes.
Measure 1: Learning effectiveness
Or in other words: did employees learn what you needed them to learn? Learning effectiveness measures how learning translates into work, productivity and business growth. At this point, you can also factor in learner satisfaction because you’re also measuring their reaction to training. Did they find it worthwhile? Has their day-to-day been positively impacted? Do they feel better equipped to deal with change? Providing surveys and one-on-ones with managers throughout a training program will ensure insights are given in real time and allow you to aggregate responses, too. As an aside, this will also clue you into what content is engaging and what isn’t working.
Measure 2: Skills application
Post-training is an important part of the puzzle. It’s kind of like when you finish an 8-week fitness challenge with a personal trainer and then have to utilise the knowledge you learned yourself so to continue reaping the benefits. In the workplace, this amounts to how quickly employees applied new knowledge and skills and how much their productivity, quality of work and behaviours improved.
Measure 3: Business outcomes
This is the big one for many organisations. This might be, as above, a measure of sales KPIs against sales training. It could be a great customer satisfaction rating after service training. The world of business outcomes is your oyster, but the key here is to have pre and post-training data that you can compare and measurable goals you are trying to achieve through training.
As everything fluctuates in your business, it’s important to track the progress of business outcomes, too. You’ll then likely have a solid backlog of data that can be used to compare with the results of training. This will help you determine if your business outcomes were fated or if training has had an impact.
4. Talk in monetary values
We’ve talked a lot about outcomes in exemplary terms of increased sales and increased customer satisfaction. But the final step to calculating your ROI is to convert those outcomes into monetary values. It’s tricky but it isn’t a guessing game either; you already have the foundation for determining values.
- Consider what your organisation’s existing values are: the value of a sale, turnover, recruitment, instructor salary, administrative overhead etc. Then consider the effects you’ve found training to have. What then is training’s monetary impact?
- Failing current values, historical data is your next best bet. Analytics will be the source of truth you’re after here and can be used to measure the same values as above.
- If you have a set staffing cap or average staffing levels (ASL), you can consider the value of how having better informed staff will help make the most out of your ASL.
- Are there any industry standards your department, agency or organisation adheres to? For example, theDigital Service Standardrecommends several KPIs for Australian Government services.
- And if all else fails, consult experts. These could be internal (your finance team or even department heads) or external (industry SMEs).
Proving the efficacy of employee training is made all the more important when you need to prove its impact on your bottom line. Enter the return on investment.
Determining the ROI of training is incredibly crucial when the initial investment made is large, like for an LMS. Training ROI should reflect job performance metrics considering the intent of employee training is to change workplace behaviours and bolster skillsets. If you have existing departmental KPIs, this will help translate the effects felt into monetary value—and therefore, your ROI.
So, while the devil is in the ROI details, it’s the only sure-fire way you can ensure your employee training is effective, that training has positively impacted business outcomes, and ultimately, that you're getting your money’s worth.