Return-on-Investment (ROI) in Training Workers
by Ron Kurtus (revised 6 April 2012)
A company may see the need to train some of its workers to have new skills, to reflect new company policies, or to avoid workplace problems. In order to determine the return on the investment required to train the workers (ROI), a specific purpose for the training must be stated and measurements must be made before and after the training.
Training workers, managers and other personnel in-house can be a costly proposition. Not only must a company pay the wages of the trainers, but training takes workers off the job. To justify this training expense, management usually wants to see what sort of return they are getting on their investment.
To determine the return-on-investment (ROI), distinct goals must be set for the training and measurements made before and after.
Questions you may have include:
- What determines the initial measurements?
- What are the costs and savings in training workers?
- What is an example of the ROI?
This lesson will answer those questions.
Measurements must be made before the training starts to really determine what sort of ROI there is from the training. Measurements must be translated into dollars. The question here is how much does it cost the company for the person to do a certain amount of work?
These measurements are also useful in determining the need for training and are part of the process of selling the idea to management. Unfortunately, training decisions are sometimes based on a "gut feeling" instead of true measurements.
Must reflect objective
These initial measurements must reflect the objective of the training, which is usually improved performance or reduction of losses. The objective may also be to increase the usefulness or value of the workers to the company through learning new skills.
Performance measurements are essentially how much work is completed in a given time. It could be how many units are made on the assembly line, how long it takes a secretary to type a memo, or how many sales a salesperson closes in a month.
The same measurement must then be done after the training.
Measuring result of new skill
If a new skill is to be learned, its overall value to the company must be determined. Secretaries may have to learn to use spreadsheet software, assembly workers may need to learn to use new machinery, and managers may need to project management skills.
The productivity of an area of work—and not the individual worker—must be measured before and after new skills are taught.
Measuring losses and waste
Safety, equipment maintenance, and personnel issues are important areas to reduce losses due to personal injury, insurance rates, equipment failure, and lawsuits. The goal of the training is to reduce the losses and to verify that reduction.
Accident statistics in a work area is a good example of information on which to base any improvements due to the training. It is necessary that such information be available before the training starts. It is also useful in analyzing the type of training necessary.
Often initial loss or waste metric can be indicated in the cost of doing business in an area. Reduction of losses should then be reflected in reduced costs after the training.
Measuring result of soft skills
The training of managers on "soft skills" such as listening and empowering the workers are not easily measured. The effectiveness of a manager is often measured on how well his or her workers perform. Sometimes managers are judged on their political skills, despite the performance of their workers.
It is very difficult to measure the results of training in soft skills, and many companies wonder if it really is worth the investment.
Translating into money
These initial measurements must be translated into dollars over a period of time to late. What it is saying is how much a person is worth to the company.
Training cost and ROI
After initial measurements are made, the actual cost of training the workers must be calculated, measurement of performance or such must be repeated, so that the ROI can be calculated.
Cost of training
The cost of in-house training consists of the hourly cost of the trainers, the hourly cost of the workers, and the lost work of the workers. In cases where workers are at distant facilities, travel costs and per diem for the trainers must be added. The assumption is that the training is done in the facility, but if it is done outside, those costs must also be added in.
Hourly cost consists of hourly pay (or equivalent hourly pay, if a salaried employee) plus the burdened amount to cover insurance, benefits and such. In some cases, overhead is also included in this cost.
Cost of lost work
When an employee is not working, the company may be losing money due to lowered production. In the case of sales representatives, there may be lost sales opportunities during that training period.
The return-on-investment calculation Management wants to see some sort of return from the money spent on training their personnel. Final measurements must be made to verify the improvement and a comparison made to establish a ROI.
Suppose a company wanted to reduce the lost sales from 20 of their salesmen. They send these salesmen to five days of skill-based sales training. Before they were sent to training, their manager notes that they only close 50% of sales demonstrations.
Each salesman sells about $200,000 worth of goods of which the company makes 10%.
Cost of workers
The salesmen make a $40,000 per year salary, with burdened wages (adding in FICA, insurance and such) of $52,000 per year.
If each worker is making a burdened wage of $800 per week, the output for the work done is $800,000 for 50 weeks.
Suppose the company charges $900,000 for the services provided by these workers, but due to $20,000 worth of mistakes, their profit is $80,000 for the year for the 20 workers.
Consider a 5-day training session for 20 workers with one trainer:
1. Cost of trainer
If the trainer is making $40,000 per year, the burdened wages (adding in FICA, insurance and such) would be around $52,000 or $1000 for the week.
2. Cost of training material
Purchasing the training material could be $100 per student or $2000 for the 20 workers. Preparing training material in-house cost more up-front, but would them average out to be less in the long run.
3. Cost of wages paid during training
If each worker is making a burdened wage of $800 per week, the cost in wages for the training session would be $16,000.
4. Cost of lost opportunities
Finally, the company loses money when workers are off the job because of lost opportunities or production. Suppose they only make 10% profit from the work done. That adds another $1600 to the cost of the training.
The total cost of training the 20 workers for a week in this example is: $20,600.
Suppose after the 20 workers attended the 5-day training session and when they returned to work, their new skills resulted in a 10% increase in production and a 20% decrease in errors.
A typical example for training 20 employees is that if the workers are now only 10% more productive, the result is a savings of $80,000 in one year.
The ROI would be $80,000 for a $20,600 investment or about a 4X ROI.
Also, improved safety training may show no immediate impact, but it reduces the potential of extremely costly lawsuits or insurance payments in the future.
Defining a training goal and making initial measurements are very important in establishing the ROI from training. You must also establish the cost of the training and make measurements over a period of time to verify its value.
Define what you want to do before doing it.
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Return-on-Investment in Training Workers