Cost Benefit Analysis

How do we conduct a cost-benefit analysis to determine return on investment for training programs?

One of the most important aspects of training from an organizational standpoint is determining the costs and benefits that are involved with a training program. Since training should be considered an investment in the organization's human resources, it is expected to have a return which can be measured by productivity and efficiency substantial enough to justify the costs associated with the program as well as producing a visible benefit to the organization. Training directors and managers can select from a number of different methods for determining a training function's return on investment (ROI). One calculation method that can be used is shown below.

1. Calculate training return. The training evaluation should have produced some payoff measure, such as increased sales, the value of higher productivity, the costs savings of less equipment damage, and so on.

2. Figure training investment. This figure reflects the total costs of conducting training. Add together the following expenses:

* Program expenses. Include expenses for trainees' and trainers' travel, lodging, and food, as well as trainers' salaries and facility rental.

* Materials and equipment expenses. Factor in costs for materials, supplies, and equipment operations.

To figure total training investment, deduct from total expenses any offsetting factors:

* Program revenues. Pay backs from training might come from trainees' accumulation of frequent flyer coupons, or from resale or rental of training materials.

* Equipment revenues. Resale, rental, or reuse of training equipment for other purposes can offset the cost of purchasing the devices.

3. Subtract the training investment from the training return. This calculation yields a net (after expenses) training return.

4. Calculate R.O.I by dividing the net training return by the training investment. This final calculation should yield a figure greater than one. If not, the company has actually lost money by training employees.

Averaging Costs over Time

The previous example used simple calculations for the purposes of illustration. In real life, however, figuring the R.O.I for a training program involves more complex calculations. The initial investment should be divided over the program's life cycle, since the more years a program operates, the more value the company gets for its initial investment. Also consider the number of employees who will undergo training during the program's life cycle and the average tenure of these trained employees. Then include these factors, along with the average annual increase in productivity, sales, and so on, when calculating the program's payoff.

The following examples show how to use these additional factors in evaluating a training investment.

Averaging costs over the program's life cycle. An organization has decided to purchase equipment for producing in-house training videos, but is debating what type of equipment to buy. Camera A has a purchase price of $10,000, a $2,000 savings over the higher-priced Camera B. But after getting information on repair and maintenance, the cost breakdown over the equipment's life cycle of 15 years proves Camera B to be the better