WHITE PAPER. Using ROI to Make the Business Case for Training. Authors: Ray Halagera President, The Profit Ability Group

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1 Using ROI to Make the Business Case for Training WHITE PAPER Authors: Ray Halagera President, The Profit Ability Group Dean Pichee President, BizLibrary

2 INTRODUCTION Training Magazine does an annual survey of the world s top 125 training organizations. Their most recent issue found a number of similarities among those organizations deemed the top training companies. Generally speaking they have several specific characteristics. 1. First, these top world-class training organizations view training as a strategic investment, NOT as a business luxury for when you have extra time and money. 2. Effective training programs are also targeted at supporting specific business initiatives. Some common business objectives addressed by these training programs include productivity and process improvements, increasing revenues, lowering turnover, and improving product or service quality. 3. In top training organizations the results are measured. After all, if you view training as an investment, you need to measure the impact of that investment on your business. Ninety-two percent of the top training organizations measure the impact that training has on business results, and nearly two-thirds measure their training ROI. Smaller organizations are just now beginning to track the ROI of their training programs. This paper will address how one might start this task. MEASURING TRAINING Forty years ago Donald L. Kirkpatrick developed an evaluation model for training and development. Kirkpatrick s four-level model has been the most widely used evaluation model in the field of workplace learning and performance. He believes you can measure training on 4 levels: Level 1 Reaction: How did the training participants like the training or what was their opinion of the training session? This is typically done through post-course evaluation forms. Level 2 Learning: The next level of evaluation is measuring learning. This level is typically done by testing before and after the training to measure the learning that occurred. Level 3 Behavior: The third level of evaluation is measuring behavior change, which is often the goal of the training. To measure behavior change, we use surveys, performance appraisals, or follow up with managers. Level 4 Results: The final level of Kirkpatrick s model is measuring the results of a training program to determine whether or not it was worth the cost and effort. Measuring results is tricky but training programs that tie to business results aren t likely to be cut in good times or bad. Dr. Jack J. Phillips, a world-renowned expert on measurement and evaluation, has added a fifth level: Level 5 ROI: ROI goes beyond Level 4, which again quantifies the impact of the training, and addresses the question Did the quantified benefits justify the investment in the training? Level 5 is what we will cover in the rest of this report. 2

3 WHY MAKE A BUSINESS CASE FOR TRAINING? Why is it necessary in today s business climate for human resource and training managers to make a business case for training investments? The majority of decision makers, the people who control the dollars, use one simple criterion in deciding where to spend the money: What does it mean to their bottom line? When it comes to funding training, the people who control the funding are demanding to know: Which elements of their business can benefit most from training? What are the results they are getting from their training & development expenditures? Why should they spend any money on training? Due to the fact that the people who fund the training demand to know how the training will help in the success of the business, it is necessary to make a business case for the training. Business cases are generally designed to answer the question: What are the likely financial consequences of taking this action or making this decision? Developing a business case for training essentially tells the decision maker, this is how the proposed training is going to help our business; this is what the proposed training is going to do for the bottom line. If you plan to be successful in making a business case for training you will have to think like the person who will decide whether or not to fund the training. Six best practices for aligning training to deliver business results: 1. Identify the business objectives and partner with stakeholders 2. Understand the business need 3. Establish goals 4. Determine the performance Requirements 5. Align the learning solution 6. Develop and execute a measurement plan Taking the effort to make a business case will force you to start thinking like the decision makers. This requires you to identify and then quantify the impact your proposed training will have on the bottom line of the business. 3

4 HOW TO MAKE A BUSINESS CASE FOR TRAINING It is important to include the following key components in order to create a successful business case for training that decision makers will be likely accept. Components of a Business Case: The Benefits The Cost The Investment The Time Line The Financial Model(s) The Benefits In the case of training, the benefits are the way the training will ultimately improve the profitability of the business. This could include the increased revenue due to salespeople going through sales training, or the reduction in workmen s compensation due to warehouse personnel going through safety training, for example. The Cost The cost of implementing what was learned in the training is not the same as the cost of the actual training. It is important to realize that in the case of sales training, for example, the cost of the training may be the extra time the salespeople now need to utilize the call planning process they learned in training. In the case of safety training, for example, the cost may be the extra time taken to find another person or a hand truck to help lift anything over 50 pounds. The Investment The investment is what is actually spent on developing and delivering the training. This may include the dollars spent on the training program, the fee you pay for the trainer, the value of the time the participants are off the job while in training, and/or the travel and entertainment expenses of the participants to attend the training. The Time Line The time line is simply how long the benefits of the training will last. For instance, consider whether a person who has received safety training will need re-training every other year. The Financial Model(s) The financial model or models pulls all of the above components of a business case together in a nice, neat, and concise analysis and answers the decision maker s question: Do I or don t I fund this training? Tip: If there is a need to compare performance before and after the learning solution has been applied, you may want to gather baseline data before the learning solution is rolled out. If you are isolating effects, you may find it helpful to use data from a control group before, during and after the implementation. 4

5 THE FINANCIAL MODELS There are several financial models available to make a business case. Cost/Benefit Model Net Cash Flow Model Discounted Cash Flow Model Payback Period Model Return on Investment (or ROI) Model In this report, we ll address the Payback Period Model and the ROI Model. Payback Period Model The one financial model that most of us can easily understand and relate to is the Payback Analysis model, which essentially calculates how long it will take to get back the money that was invested in the training. Calculating the Payback Period is rather straightforward. To determine the payback of a training investment in terms of how many months it will take to recover the investment in the training, you simply divide the amount of money you invested in the training by the monthly net benefits generated by the training. Payback = # of months needed to pay back investment = Investment $$$/Net benefit $$$ per month Consider a relatively straightforward sales training program as an example of applying the payback analysis. In this example we are training a sales team to improve their closing skills and the investment required for the training is twenty thousand dollars. As a result of the training, we project that the sales team will generate ten thousand dollars a month in additional sales. Our gross margins are twenty-five percent; therefore, our net benefit is twenty-five hundred dollars a month. Cost of training your salespeople to improve their closing skills: $20,000 Net benefit per month from the training: $2,500 in gross profits from the additional $10,000 in sales generated from the training in closing skills Using the monthly payback analysis, we divide the twenty thousand dollar investment by the twenty-five hundred dollar net monthly benefit and we get a payback of eight months. Payback = # of months = Investment $$$/Net benefit $$$ per month = $20,000/$2,500 per month = 8 months 5

6 The investment in sales training of twenty thousand dollars will take only 8 months to pay for itself. In this case, we would assume that the benefits of this training should last much longer than 8 months, so this is a good investment. The hypothetical situation detailed above demonstrates how the payback analysis is a relatively straightforward way to make the financial case for training that everyone can easily use and relate to. The Return on Investment Model is also a way to make the financial case for training and will be detailed in this report. LOOKING AT ROI In this section we provide you a detailed look at the return on investment calculations, including what it is and who is using it to make the business case for training. Return on Investment Model The financial model decision makers consistently use is the infamous ROI, or Return on Investment. Mathematically and as simplistically as possible, ROI is the sum of net benefits generated over the life of the investment divided by the cost of the investment, and then expressed as a percentage, i.e., an ROI of 35%. ROI = Sum of Annual (Benefits Costs) Investment Decision makers often need objective information showing what they can reasonably expect to get for their money before they spend their money. They need to see the expected, or forecasted return on the investment before they make the decision. The expected, or forecasted return on the investment is a Pro-Forma, or expected, ROI, which looks like this: In order to measure the business outcomes of training. You must be able to measure current performance against benchmarks you believe actually indicate success. With this information in hand, you are much more prepared to offer reasonable, professional predictions of the success of your proposed training efforts, because you've been able to make the link between current performance, business outcomes and learning objectives and content designed to improve the performance you are measuring. ROI = Sum of Annual (Benefits Costs) EXPECTED Investment 6

7 First, we need to identify and then quantify the benefits expected to be generated by the training. The benefits would be either the expected increased revenue or expected decreased costs attributable to the training. The next component to the business case, the costs, will need to be identified in terms of what will comprise the expected costs associated with generating the benefits attributable to the training. This is the cost incurred to make what was learned in the training actually payoff on the job. Consider the ongoing costs associated with maintaining the stream of benefits attributable to a training program, specifically on how to do the sales call planning process. Even though we expect a benefit from being trained in planning a sales call the benefit being the increased revenue generated from being better prepared going into a sales call there is an ongoing cost associated with this increased benefit. That ongoing cost is the value of the time the sales person now has to take to do the call planning. The final component of the business case, the investment, is the cost of the training or the investment. This is the one-time expenditure needed to generate the stream of net benefits. And finally, we need to determine how much will need to be invested in providing the training to the employees. And remember, as we discussed before, the investment includes not only the cost of purchasing or developing the training materials, but also the cost of employees participating in the training program, measured in terms of time off the job as well as travel and entertainment costs incurred in order to participate in the training. The challenge of e- learning metrics today was summed up by Tom Peters, who said in an interview with ASTD, I m 100% in favor of measurement and I m 100% terrified of it because most of the time we measure the wrong thing. REAL WORLD ROI AND BUSINESS CASE EXAMPLE Hopefully the concepts we covered in this report will continue to make sense as we apply them in this section to an actual business case using the financial models ROI and Payback in analyzing training proposed for one of our clients. You may use the provided schematic depicting the process we went through with our client to help you build your own business case. (See page 12). Supervisory Training Program for Call Center This is a proposal for the training for supervisors of a Fortune 500 call center operation. The objective of the proposed training program was to improve the interpersonal management skills of the call center s supervisors. Our client, the training department, felt training for supervisors was needed; however, in order to help our client convince the decision makers to fund the training, we went ahead and included a business case with Pro-forma ROI into the proposal. 7

8 Using the business case approach presented earlier: First, identify and then quantify the expected benefits of providing training to improve the supervisors management skills. Then, identify and quantify the expected cost associated with implementing the new management skills learned through the training. Next, identify and then quantify the expected investment to be made in the management skills training. Finally, calculate the pro-forma ROI and the pro-forma payback. Lower employee turnover is the umbrella benefit, because in order to achieve lower employee turnover you have to increase the satisfaction and engagement of the employees, and with more engaged employees you get fewer customer complaints and therefore improved customer retention. Not only does the improved employee satisfaction impact revenues, but equally important since it reduces employee turnover, it reduces the money spent on hiring replacements for those who are leaving. For every employee who decides not to leave a company you avoid cost such as: Industry experts agree that it can cost anywhere from 25% to 200% of the annual compensation to fill a position. This figure includes recruiting costs, training, and lost productivity. The cost of recruiting replacements, The money spent on temporary hires, The premium spent on overtime while you are understaffed, and so on. Let us look at the expected ongoing costs we identified that would be incurred in the supervisors using their new interpersonal management skills back on the job. Consider the following situation The ongoing costs we identified for the call center supervisors to use their improved interpersonal management skills on the job involved the value of the time taken by both supervisors and employees to use these newlylearned skills on the job. The necessity of devoting time by each supervisor to now being a people-focused manager. The time spent by employees discussing and resolving with their supervisors their work issues as their supervisors take the time and effort to do so. 8

9 Finally, we needed to determine how much money had to be invested in the training. Investing in the training program we proposed to improve the supervisory skills in their call center involved: The cost of either purchasing or developing a program to train managers on actions or behaviors they need to follow. The cost of delivering the program. The value of the time devoted by supervisors to participating in the training program and learning how to be a people-focused manager. Travel and expenses. After we had identified all the above components of the Pro-forma ROI we were to create to make the business case for investing in the management training of supervisors in a call center, we proceeded to quantify the components as needed to calculate the Pro-forma ROI and payback period. First, we calculated the expected annual benefits of training the call center supervisors to have improved management skills. In this situation we decided to focus on the benefit of reduced turnover made possible through training the supervisors. We did not try to estimate the benefits of improved customer retention. Concerning the dollar benefits attributable to reducing turnover, numerous studies from HR organizations such as Mercer, Spherion, and Hewitt Associates, have shown that the cost of replacing an employee who voluntarily leaves, which includes the cost of hiring a replacement, the cost of overtime while a replacement is being hired, and other components we identified earlier, is anywhere from % of their salary, depending on the position they hold. Data from AQPC's 2008 Benchmarking Study found that organizations where employees spend more than 5 days each year in training average $210k in revenue per employee whereas organizations whose employees spend 5 days or less in training average only $138k in revenue per employee... wouldn't it be worth spending $200 to generate $72k more in revenue?? In dealing with the call center employees, we decided to take a very conservative average of $15,000 to replace a departing employee, equal to 75% of the average salary of departing employees. Details on the call center for which the business case was designed: The call center had 500 employees. The turnover rate at the time we were proposing the training was 30%. The annual cost of turnover for the call center equaled 30% turnover, times 500 employees, times the $15,000 to replace each departing employee, for a total of $2,250,000. 9

10 Our experience with training supervisors at similar call centers indicated the client could expect at least a 10% reduction in employee turnover once the training took effect back on the job; therefore, in this case we expected the call center s turnover could easily go from 30% to 27% following the training. We were able to conclude that the estimated annual benefit of the training we calculated equaled the 10% reduction in turnover times the $2,250,000 annual cost of turnover for an estimated annual benefit of $225,000. Annual benefits = estimated value of reduced turnover attributable to the training Replacement cost per employee voluntarily leaving = $15,000 Number of employees = 500 Turnover rate = 30% Annual cost of turnover = 30% x 500 x $15,000 = $2,250,000 Turnover to be reduced by 10% Estimated annual benefit = 0.10 x $2,250,000 = $225,000 Next, we looked at the expected annual costs of using the improved supervisory skills. The annual costs of the supervisors using the training would be the value of the time required by both the supervisors and the employees to use what they learned on the job. The dollar value of the time in this situation was calculated. Annual costs = supervisor AND employee time spent on one-on-ones with each other 0.5 hour per employee per month x 12 months x 500 employees x $50/hour salary = $150,000 in supervisory time Estimated annual costs = 0.5 x 12 x 500 x $50 = $150,000 AND 0.5 hour per employee per month x 12 months x 500 employees x $14.50/hour salary = $43,500 in employee time Estimated annual costs = 0.5 x 12 x 500 x $14.50 = $43,500 10

11 Finally, recall what the total money needed to invest in this training calculated included: The expenditure for the workshop to train the 20 supervisors: 20 supervisors x $500/supervisor for materials and facilitation fees = $10,000 for the workshop The value of the 20 supervisors time to attend the training workshop: 20 supervisors x 8 hours in workshop/supervisor x $50/hour = $8,000 in management time The dollars spent in transportation and lodging (Travel and expenses) to get the supervisors to the workshop: 20 supervisors x $500 in Travel and Expenses/supervisor = $10,000 Total investment required estimated: $28,000 Pulling together the estimated total investment with the benefits and costs into our ROI model, we were able to calculate the pro-forma ROI. The supervisory training was expected to have a two-year life for the supervisors trained. ROI = Sum of Expected Annual (Benefits - Costs) for 2 Years Expected Investment ROI = Sum of Expected Annual ($225,000 - $193,500) for 2 Years Expected $28,000 ROI = Sum of $31,500 x 2 $28,000 Research from Bersin & Associates in June 2010 found that organizations with a strong learning culture are: 46% more likely to be strong innovators in their markets; 34% more likely to get to market before their competitors; 18% more likely to currently be a marketshare leader in one or more of their markets; 33% more likely to report higher customer satisfaction than other organizations; 39% more likely to report success implementing customer suggestions; and 58% more likely to be successful at developing the skills needed for meeting future customer demand. ROI = 225%! Pulling it all together in terms of Payback analysis: Net annual benefits = $31,500 Net monthly benefits = $31,500/12 = $2,625 Training investment = $28,000 Payback period = $28,000/$2,625 per month = 10.6 months! 11

12 Using the data from our example, and this time breaking down the annual net benefits into monthly amounts, we see that the annual benefit of $31,500 equates to a monthly net benefit of $2,625. Dividing our investment of $28,000 by the monthly net benefit, we see the time needed to pay back the investment in supervisory training for the call center was expected to be 10.6 months! Visit am.xls to access an online ROI calculator. ABOUT BIZLIBRARY BizLibrary provides online training for small and mid-sized organizations nationwide. BizLibrary bases its delivery on the quality of its training content, technology platform and customer service. BizLibrary can deliver online training in the form of streaming video, interactive e-learning or custom developed courses. BizLibrary also offers a lending library of video and DVD programs for those clients who are not interested in online training. BizLibrary s solutions also include a state-of-the-art Learning Management System that is easy to use and very flexible. Biz Library provides a range of professional services to its clients that include curriculum design, marketing assistance and a range of site customization services. Learn more at REFERENCES Phillips, Jack. (2003). Return on Investment in Training and Performance Improvement Programs. (2nd Ed.). Butterworth-Heinemann Publications: Burlington, MA. Definitions and calculators for capital budgeting at Corporate Finance Live at Halagera, Ray. The Profit Ability Group, (636) , ray@theprofitabilitygroup.com 12