Return on Investment ITE- 695

ROI There are many catch phrases for Return on Investment. Cost-Analysis, cost of training, cost-benefit analysis, cost effective analysis, to name just a few. They all refer to the same objective, and that is to measure the benefit of training, against how much time and money shall be spent to acquire that training.

Basically, ROI in training is how much money does your company want to spend to make sure it can be competitive in the global arena, and still be within the missions and visions of the company.

We shall be using Anne F. Marrelli’s two part article, Cost Analysis for Training, and Determining Training Costs, Benefits, and Results, which is found in Technical & Skills Training, October, 1993, and Nov/Dec, 1993 issues respectively. Ms. Marrelli is a senior Human Resources Management Specialists in the Chief Administrative Office of the County of Los Angeles.

Ms. Marrelli uses a nine-step cost analysis approach: 1. Define the Question or problem Explain clearly and precisely what problem needs to be addressed. Must be a specific question. (e.g.) Would a reward incentive for good work performance have a more positive effect on worker morale and behavior, as opposed to punishment for poor job performance.

By constantly comparing training costs with benefits or results, a case history can be built up to support your decisions and relay credibility to the existence of the training program. Some points are: n Decide which training program, if any, is the most cost efficient response to a problem. n Select the most efficient instructional media or course for a training program. Efficient meaning where the objectives are met. cont.

n Decide which training program’s results are worth it’s cost. n Demonstrate a training programs ROI. n Determine if a training programs benefits remain stable over time.

Step Two: Identify Alternatives The best solution to a performance problem is to identify favorable alternatives. When weighing these alternatives, use factors that meet your training objectives, such as: n indications of effectiveness, n cost, n ease of implementation, cont.

n Time constraints, n Facilities, n Equipment, n Supply requirements, n Probability of acceptance by management and participants, n Qualified personnel, and n Job characteristics (narrow & broad range of acceptable performance)

Step Three: Select Cost-Benefit or Cost- Effectiveness Analysis ROI has two methods to analyze cost verses results; cost-benefit and cost- effectiveness. Cost-Benefit - both costs and benefits are computed in dollars. It is used mainly to evaluate training programs already in place or training programs that are still in a research status. cont.

Cost-Effectiveness - costs are calculated in dollars, like cost-benefit, but the results are tallied by the objectives met. Cost-effectiveness is the best method when the results are difficult to put into dollar figures. (e.g.) employee morale

Step Four: Identify Costs n Personnel n Course materials n Supplies n Equipment n Facilities n Services n Travel

Cost Resources n Instructional designers and trainers n Articles in development and training periodicals n Discussion with colleagues n Review history of previous cost-analysis studies n Other sources

Step 5 Identify or Measure n Cost-benefit analysis n Cost-effectiveness analysis

Benefit Classifications n Cost-savings benefits n Cost-avoidance benefits n Added-value benefits n Direct benefits n Indirect benefits

Cost-Effective Analysis n Measures the effectiveness and the results of each training option. (e.g.) The number of policy violations per month, or, a written test of policy and procedure knowledge.

Step Six: Estimating the Value of each Component n Recording source of data n Time factor n Cash flow

Step Seven: Comparing Costs and Benefits or Effectiveness Cost-Benefits Analysis Comparing the costs of training verses the benefits of training is just a matter of subtracting the costs from the benefits that will be received. For example, if the costs of training is $10,000, and the benefits received are over $10,000, then the difference is the net benefit of the training program.

Cost-Effectiveness The cost-effectiveness of a training program is calculated by using the ratio system; effectiveness divided by the cost. Here the effectiveness is measured by the objectives met, as according by the mission and visions of the organization.

Step Eight: Five factors to consider when choosing a training option 1st - check ratios of correlating training options 2nd - consider cash flow 3rd - differential distributions 4th - training impact 5th - decision making

Step Nine: Present the Recommendation in a Report Specifications and general rules to apply toward your recommendations (Marrelli,1993) n “Explain and support the rationale for your decision. n Document your data sources and estimation methods. n Provide a decision-making tool for those who must approve or concur with your recommendation. n Design your report as a clear, comprehensive, and well-organized record of the cost analysis. “