Cost Benefit Analysis for Training
As discussed in previous articles, it is very important to evaluate the benefits of the training and be able to put that in terms of numbers. Training comes at a cost and therefore any organisation would be interested in knowing the return on investment (ROI).
Organisations use different methods to assess the benefits of training in terms of numbers i.e. the profits. Some of the frequently used methods are ROI and Utility analysis. There are many costs that are associated with the training apart from the direct and apparent costs. These costs can be described under two headings:
- -There are costs incurred towards the training needs analysis, compensation of the training program designers, procurement of training material and various media like the computers, handouts, props, gifts and prizes, audio visuals etc.
-Then there is another category is costs incidental to the training session itself such as trainers fee / salary, facility costs / rental etc.
-Finally there are costs involved is losing a man day of work (for those who are sent for training), travelling, boarding and lodging and training material that cannot be reused in some other training program.
The various models that are used to estimate the benefits of the training program are as under.
The Return on Investment Model (ROI)
Organisations spend huge amount of money on employee development, it is therefore very important to ascertain the benefits of training. Different studies were conducted to evaluate the effectiveness of training programs. In one of the studies it was found out that sales and technical trainings gave better ROI compared to managerial training programs. Ford, for example, evaluates all the training programs against the profitability in a given product line. The basic formula for calculating the ROI for training is as:
ROI (in percent) = Program benefits / Costs × 100
Let’s assume that the total costs incurred towards a certain training is USD. 80,000/- all inclusive and the benefits in terms of overall improvement in productivity and quality are USD. 4,00,000/-. Thus the ROI is 525 %, which means for each rupee invested the return in USD. 5.25 over and above the cost of the program.
This problem however relies upon the assessment of benefits from outside, sometimes which requires that non financial benefits may be converted into financial benefits. This requires precision and the sources have to be credible.
This is another way of reflecting upon the usefulness of a training program. Utility itself is a function of the duration up to which the training leaves an impact upon the trainee, the relative importance of the training program, the importance of the position or profile that received training and the cost of conducting the training. For example leadership programs conducted for top and middle management tend to be high on value where as sales training programs for the front line sales staff tends to be low on value scale.
Utility analysis basically derives the effectiveness from analysing the change in the behaviour of the trainee and the positive financial implications of the same. This model is not very famous because the deductions made are essentially subjective in nature