Calculating ROI of Employee Training and Development
Updated: Dec 14, 2019
One of the largest asset any business could have is its people. Unfortunately, for many companies they forget to tap into this potential. If the untapped potential locked inside employees is unleashed and channeled effectively, it can boost the company’s performance exponentially. Also, for many employees they fail to unlock the potential in themselves by looking only at the short-term rather than the long-term perspective it takes to make a difference in their career.
DOES TRAINING MATTER?
The question remains for any company, “What is the best way to go about training employees?” This is not an easy answer that can be summed up in a short paragraph. However, what we look at are ways that the Return-on-Investment (ROI) is noticeable and measurable. This means that the company will know exactly how much they have gained from a training program, and it can be segmented to the ROI obtained from each department or team. As an employee, the question is, “Why should I get additional training?” ROI calculations can and should be used as a means to determine the value of the training towards their personal financial gain. They too will then be able to calculate the value of training programs by comparing costs and gain an understanding of the potential gain from that training program based on projected earnings afterwards.
The last time I checked, Sales, Income or Revenue was the top line on an Income Statement (Profit & Loss). I know income is the most important to my checkbook. Because Sales drives business. Areas that benefit from employee training can include sales and customer relations. It’s not new science to understand that increased customer satisfaction leads to repeat sales. It’s also not hard to see how better personality and communication skills will help in these areas. If a company’s sales force can improve its presentation and closing skills, conversion rates will go up and the difference can by monitored and measured to judge ROI. Similarly, being able to communicate better with customers will improve loyalty and repeat business.
A challenge many organizations face is convincing everyone that in order to remain competitive in today’s global marketplace, it is vital that your workforce maintains the best skills and know-how to safely produce the best products and services. Another challenge is time. Taking workers off of the floor to specifically train those employees costs money. What top managers want to know is that for every dollar they invest in training, how many dollars are they getting back? This can be as simple as using a formula for measuring training ROI:
ROI (%) = ((Monetary benefit – Training Cost)/Training Cost) x 100
To get the figures for the ROI analysis, keep track of training costs, including the cost of design and development, promotion and administration, delivery (staff or technology), materials and training facilities, trainee wages, and training evaluation. After the training, keep track of monetary benefits, including labor savings, reduction in lost workdays and workers' compensation costs, productivity increases, and lower turnover costs.
However, the one thing this simple formula does not consider is missed opportunity costs. Many mediocre companies are still profitable. This is the reason that many companies do not invest in employee training. The old adage, “If it’s not broken don’t fix it” is often spoken at a mediocre company. The question is how do they become world-class? Opportunities present themselves continually in the marketplace but if the managers are not skilled at looking for them, or the workforce is not skilled enough to compete for them, the company misses these opportunities. There is not an immediate impact to their financial statement so they do not recognize the loss. It’s business as usual for them. The first step is recognizing that to remain competitive in the marketplace we must continually improve.
Workplace training matters because it can:
Minimize accidents, lost workdays, and workers’ compensations costs
Promotes regulatory compliance and avoids costly fines and lawsuits
Improves the quality of products and services, increasing customer satisfaction levels
Increases market competitiveness for the organization
For an employee, he or she can also use the same ROI formula above to better themselves by asking if it is worth investing their earnings into continued professional development. For simplicity sake, let’s say that the employee makes $25,000 per year and by earning a certification, professional certificate, or degree they can double their annual income to $50,000. If the cost of training were $10,000, their ROI would be 150% of their investment ((25,000 – 10,000)/10,000) x 100 = 1.5, or by restating it another way, they will earn 1.5 times the amount they invest in themselves.
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* Source: Bureau of Labor Statistics 2014 wage data and 2012-2022 employment projections .