The employee training market may be worth some $109 billion in the U.S., but when it's time to tighten belts, training is one of the first costs cut. And that's too bad. Too often, the owners of small to medium-sized businesses see the cost of training as an unbudgeted, unnecessary expense. While that thought process is understandable, cutting training to save money is like stopping the clock to save time.
According to the American Society for Training and Development, investment in employee training enhances a company's future financial performance. An increase of $680 in a company's training expenditures per employee generates, on average, a six-percent improvement in total shareholder return. Based on the training investments of 575 companies over a three-year period, researchers found that firms investing the most in training and development (as measured by total investment per employee and percentage of total gross payroll) yielded a 36.9-percent total shareholder return as compared with the 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. I know what you’re thinking: “That’s all great, but what’s my ROI?” Right?
The idea of being able to calculate the return on investment (ROI) of training is enticing. An absolute number in a neat package is a trainer's dream! In some cases, it can be obtained. In other cases, while seductive, it may not be worth the effort.
The more money a company spends on employee training, the greater the concern that these highly skilled people will leave and take their knowledge somewhere else. This results in a loss of knowledge and a poor return on the organization's investment in training. Yet research has shown that training actually reduces turnover and absenteeism. Employees will stay at a company where they can grow and develop.
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 of 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 sizeable 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.
If some or most of the considerations above apply to your company, forge ahead with the necessary steps to calculate the ROI. (Note: This is a complex process on which hundreds of books have been written.) A simpler process and equation measures performance ROI, which is the financial return you receive from actual improvements in performance. This technique addresses two questions most asked by executives:
- Did the training work—did people improve their performance?
- Was the investment worth it—did these improvements outweigh the costs?
This simple ROI calculation looks like this:
Percent ROI = (Program Benefit - Program Costs) x 100 / Program Costs
Assume that as a result of a new safety training program, an organization's accident rate declines 10 percent, yielding a total annual savings of $200,000 in terms of lost workdays, material and equipment damage, and workers' compensation costs. If the training program costs $50,000 to implement, the ROI would be 300 percent.
ROI = (200,000 – 50,000) x 100 / 50,000 = 300%
So in this example, for every $1 spent on training, the organization gained a net benefit of $3.
In short, results-oriented training is possible. Be sure you evaluate the business need and match the training to that business need by a thorough process of discovery, design, development, implementation and execution for results. And always remember that training is not an event, it's a process. iBi
Ami Dean is the founder and CEO of WithIn, Inc., a provider of high-quality employee training in central Illinois. Visit withininc.com for more information.