ROI of Learning: Measuring the Financial Effects of Training
What are the economic benefits of further training measures in companies? For HR managers, a concrete calculation of cost effects is desirable in order to make and justify investment decisions. But: The calculation of an ROI of learning is accompanied by many challenges. We show possibilities and limits of the ROI calculation.
ROI of Learning – What's that?
|Definition: Return on Investment (ROI) of Learning|
|The Return on Investment (ROI) of Learning, also known as Return on Training Investment or Return on Education Investment, is a metric that expresses the relationship between the financial impact and cost of a learning initiative as a percentage.|
The economic Return on Learning (ROL) can be calculated with the following formula and is similar to the conventional cost-benefit calculation for the Return on Investment (ROI):
ROI of Learning (%) = (Benefit of the learning program (in Euro) - Cost of the learning program) / Cost of the learning program x 100
|ROI of Learning: Example|
|A company carries out sales training with total costs of 10,000 euros, which subsequently leads to more sales being made in the amount of 100,000 euros (benefit of the learning program). This results in an ROI of learning of 900 %. |
ROI of Learning (%) = (100.000 Euro - 10.000 Euro ) / 10.000 Euro) x 100
The calculation is therefore essentially based on two key figures:
The benefit of the learning program refers to the monetary value the company receives from the investment, e.g., in the areas of:
A. Resource savings (e.g., onboarding effort, etc.) B. Productivity gains (e.g., labor hours, revenue, etc.) C. Reduced recruiting efforts (e.g., attrition rate, recruiting costs, etc.).
For example, if you want to calculate the return on learning in terms of productivity gains, shortened onboarding times, or decreased turnover rates, these metrics must first be translated into monetary values in order to insert them into the formula.
For the most accurate ROI calculation, all factors that can be measured in monetary terms must be included in the calculation together.
2. The cost of the learning program is essentially the sum of the following three items:
1. Development or acquisition costs (How much did the learning program cost to develop or acquire?). 2. Implementation costs (How much work was involved in the implementation? How expensive were trainers or instructors, if applicable? How much were travel and logistics costs, if any?) 3. Employee costs (How many employees spent how many working hours on the learning program?)
|Note: Savings as Benefits|
|Cost savings have a correspondingly beneficial effect on the ROI. By using an e-learning solution instead of classroom training, the total costs can be reduced, for example, through savings in travel costs, costs for trainers, room bookings, etc., so that the ROI of an e-learning solution is higher than the ROI of classroom training, while the benefits remain the same.|
The net benefit of the learning program is obtained by subtracting the benefit and the training cost. The result is then divided by the training costs. If you then multiply this value by 100, you get the ROI of learning as a percentage.
The result can be as follows:
ROI < 100 %: The investment is not worthwhile for the company in relation to the benefits considered and causes additional costs.
ROI = 100%: The investment is indifferent for the company related to the considered benefits.
ROI > 100 %: The investment is worthwhile for the company in relation to the considered benefits and brings financial advantages to the organization.
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ROI calculation using the example of Accenture
Starting in 2001, the U.S. consulting firm Accenture partially replaced campus-heavy classroom training with cost-effective scalable and location- and time-independent learning formats, such as online training, multimedia content and webinars.
The Chief Learning Officer at the time, Daniel Vanthournout, took the tough economic times of the 00s as an opportunity to calculate the return on investment of the internal learning offering.
Working with the finance department, outside survey agencies and the advice of University of Chicago professors, he determined the ROI of the learning offering as follows:
1. Benefits studied: Productivity and length of affiliation
Vanthournout's team focused on two metrics for benefits to calculate, productivity and length of affiliation:
Productivity could be broken down conclusively to the employee level: The vast majority of employees billed their work as fee-for-service to clients. This was done by multiplying the number of hours spent on clients by the hourly rate at the end of the month. The return on sales (or margin) per employee was derived from the fees charged each month minus the monthly salary of the consultants.
Length of service was recorded at the employee level.
2. Data basis: Utilization & personnel data
Vanthournout's team analyzed the usage data of the learning opportunities of more than 261,000 Accenture employees and related this data to the two metrics productivity and length of service, which were stored in the personnel data.
3. Measurement: A/B test by control group
To determine the effect of the learning opportunities, Vanthournout divided the workforce into two equal groups depending on the duration of use of the learning opportunities: the frequent users:inside (duration of use upper 50%) and the few users:inside (lower 50%).
The frequent users:
were able to bill an average of 17% more time to clients, which equated to an additional $8,400 in value added per employee,
had 20% higher fee rates on average, resulting in additional revenue of $9,900 per year per employee,
stayed employed an average of 14% longer, resulting in $7,000 in added annual value.
This added up to a net financial benefit (benefits minus costs of the learning program) of $25,324 per employee per year in the frequent learner group.
4 Calculating the ROI of Learning
ROI of Learning (%) = (benefit of learning program (in euros) – cost of learning program) / cost of learning program x 100
Multiplying this net benefit by the number of all employees at the time (approximately 50,000), he arrived at the total value of $1.266 billion as the net benefit of the learning program in terms of productivity and tenure.
Divided by the total cost of all training expenditures for the same year (0.358 billion), this equated to a return on learning of about 353 percent:
353 % ≈ 1,266 / 0,358 x 100
We can see from the Accenture example: The detailed calculation of such figures requires a comprehensive database, as well as effort and care in the preparation of the data. In the following, we show ways in which companies can systematically approach the ROI of learning – and what pitfalls and limitations there are in doing so.
Limitations and criticism of the ROI formula
The ROI of learning can, as seen in the example of Accenture, help to make financial benefits from further training comprehensible. However, the ROI calculation by Accenture must also be viewed critically.
This is because the meaningfulness is heavily dependent on the data basis regarding the costs and benefits, as well as the possibilities of being able to completely isolate this data for the ROI calculation. In essence, companies face these three challenges when calculating ROI:
1. Companies must have a comprehensive data base
"As a young company, we have only been pursuing the topic of personnel development and training in a structured manner for two years. As a result, we have very little data from the past and no optimal access to our internal cost structures. The expenses for further training cannot be completely isolated within the travel costs, for example."
L&D manager of a retail company
A basic prerequisite for calculating benefits is a database that covers the key figures needed to measure the economic success of training measures. In addition, an ROI calculation must include as much relevant data as possible before and after or without and through the introduction of the learning program.
For example, if an ROI calculation is based only on the cost savings of the learning program, the ROI may be negative. Despite any productivity gains and organizational savings that may not have been considered, for example, due to lack of data – not to mention factors that are not monetized.
Against this backdrop, the significance must therefore always be critically questioned.
2. Costs and benefits of continuing education can only be measured and isolated to a limited extent
In order to isolate the effect of learning offers, companies can measure corresponding key figures before and after the introduction of the offers. In practice, this is often difficult: most companies have already installed numerous learning offerings. And these internal learning concepts are usually in a constant state of flux. A clearly delineated "before" often does not exist.
Another option in this case is to define a control group that does not have access to the learning offerings. Understandably, most companies do not want to deny a large group of employees access to learning opportunities for an extended period of time.
Accenture's study design did not use either of the two common methods, but instead distinguished between frequent and infrequent learners. However, this distinction presents further challenges:
Coincidental correlation: it is possible that the higher value creation does not result from the use of the learning offers, but is related to the fact that these are simply motivated employees who also tend to use the internal learning offer more intensively.
Unconsidered offer quality: The reporting of an average return on investment implies that further investments will generate a similar “return”. However, low learners do not suddenly become learning champions because more learning opportunities are available to them. Rather, companies should always qualitatively record the reasons for a lack of willingness to learn in order to be able to improve the quality of the offerings.
Other externalities: A (temporal) change in key figures for productivity or employee retention depend on numerous complex, external factors, such as the economy or the development of the corporate and leadership culture. These are difficult to isolate from the effects of learning.
3. No non-monetary learning effects measurable
Continuing education measures can have many positive cost effects. However, only direct monetary effects can be expressed with the ROI formula. Other learning effects, for example with regard to increased competence acquisition, an improved communication culture or competitiveness, can hardly or not at all be measured in monetary terms.
Conclusion: The ROI formula helps when...
This means that calculations of the ROL according to the ROI formula are only useful if the following conditions are met:
Data regarding the benefits and costs of training can be collected before and after the introduction of a learning offer - or compared with a reference period.
Other influencing factors can be calculated out.
The ROI calculation only serves to estimate the influence of monetarily measurable factors.
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