It’s becoming increasingly troublesome to hear learning practitioners tossing around the term “ROI” to demonstrate accountability of their efforts. The sad reality is they’ve been misled to believe that attempting to prove a financial gain from their learning initiatives will lead them straight in their stakeholders’ good graces. Well, I hate to break it to you but doing so will make you look foolish and incompetent.
Don’t get me wrong; I respect their intent to deliver value for the money allocated for their efforts. Every internal business activity must demonstrate some value or it’s irrelevant to the business. Practitioners, however, have long struggled to get their business leaders and stakeholders to take their roles seriously. But believing you can measure the return on investment for training is not the way to go.
You’re now probably saying, “You did just say our stakeholders expect to see some value or return for the money we spend on training.” And I’ll be the first to agree with you on this point but again, if you’re trying to apply a financial calculation to something meant to deliver indirect value to a business, you’re not demonstrating a proper “return.” You may now be saying, “Ok, now you’re just playing with semantics.” No, I’m not. There is a distinct and substantive difference between measuring ROI and delivering value.
Naturally, from your stakeholders’ perspective, calculating ROI is a financial exercise. But you need to recognize why they apply a financial ROI calculation to some areas and not to others. It stems from their formal business education. They learn the methods and rules about how to financially account and evaluate various business areas. These rules are rooted in accounting and financial standards set by the US Generally Accepted Accounting Principles (US GAAP), International Financial Reporting Standards (IFRS), and the Chartered Financial Analyst (CFA) handbook, along with other recognized financial bodies around the world.
Suffice to say that simply creating ROI formulas for training is not going to cut it. And it’s never going to convince your business leaders and stakeholders differently. So please, stop saying it’s all semantics. It isn’t.
ROI Is Inappropriate For Cost Center Activities
This may seem overwhelming, but the good news is: You don’t need to learn all this stuff. All you need to do is first, accept that training ROI is not something stakeholders welcome, and second, learn how to evaluate the performance of your initiatives by applying appropriate and accepted business evaluation methods. Stop reinventing the wheel and apply the tools your stakeholders recognize.
The first, and probably most relevant, step is understanding how business leaders evaluate operational performance. They organize and categorize every operational activity under one of four responsibility centers. Open any managerial accounting text and you’ll discover these four centers are: revenue, profit, cost, and investment. Keep in mind that financial accountability differs under each. For simplicity’s sake, measuring a financial return on investment applies to centers that deliver a direct financial gain. Naturally, it is somewhat more involved, but it implies that any operational activity categorized as a cost center does not typically apply ROI to measure its financial performance.
This is usually where learning practitioners get their knickers in a twist. Learning, or training as stakeholders typically refer to it, is a cost center, unless you’re selling training as a product (read: The 4-Letter Word Learning Practitioners Hate Most… Cost!). Practitioners see this as a demeaning and disparaging reference. But it’s not meant to be. Stakeholders are simply referring to its financial accountability as a responsibility center. Taking it any other way is inaccurate and it is why practitioners lose credibility when speaking to business-educated stakeholders.
Don’t take the cost center label personally. Training/learning isn’t the only cost center. Others include accounting/finance, marketing, production, and HR to name a few. No stakeholder has ever asked for or received an ROI measure for these operational activities. This is because a cost center activity enables and supports outputs for profit-focused centers. The costs (center) deliver indirect value to the success of profit centers.
For example, to claim that training is responsible for say, increasing sales (a direct ROI correlation) is irresponsible for a few reasons. First, it implies training is the only activity responsible for improving sales performance, negating contributions from other operational activities. Second, if sales don’t improve, then training must be held fully accountable for its failure when it may be the result of another operational activity. This is a key reason why applying training ROI is inappropriate, irresponsible, and detrimental to your credibility.
Second, referring back to your stakeholders’ business educational backgrounds and those pesky accounting and financial standards, measuring the ROI of a cost center is not valid. ROI calculations are usually more involved than the simplistic formulas presented by training ROI proponents. They are also more involved than the standard Dupont ROI most are familiar with and which the training ROI formula is based on.
Maximize ROI At A Low Cost
Accounting for a financial return is meant primarily for activities that will deliver revenue and profitability. You may be saying that this is why we train employees so, by extension, ROI is applicable to our efforts. Not so fast. Training, like all other cost center activities, costs. It is just an attributable cost to the profit or investment activity. The ROI measured is that of the profit or investment activity and not of the costs themselves. And the profit or investment activity is measured over multiple periods, usually years.
Naturally, to improve the profitability of activities and ultimately, its ROI, stakeholders must either increase its incoming cash flow (revenue), reduce the outgoing cash flow (costs and expenses), or attempt to do both. Since increasing incoming cash flow is beyond their total control, stakeholders will always focus on costs and expenses first. This is why stakeholders ask these annoying questions like: “Can you do it for less?,” “Do we really need it?,” or “What will we gain from spending the money?” to name a few. These questions are not only asked about your efforts but also about all costs within an activity.
Ultimately, stakeholders are simply trying to maximize the return on investment for the profit or investment activity, and keep in mind that they will push you to reduce your spending. You must have the courage and evidence as to why your effort is required and how the money allocated will be spent. If you can reduce your spending without affecting the integrity of your efforts, then do so. And you know you can do so. You have access to a myriad of learning technologies that you’ve initially pitched to save money and be more efficient to the same stakeholders. So, pull out your expertise, experience, and technologies to reduce your costs to help them improve the ROI of their activities.
Cost Center Activities Are Not Related To Financial Results
I recognize that practitioners are desperately seeking to demonstrate tangible results and value for their efforts. Training, like marketing, finance, and HR, deliver intangible support. And if stakeholders can’t see or touch it, then why even have it? But this is nothing new. Practitioners tend to misunderstand what stakeholders are asking from them. There is never a direct correlation between the actions of a cost center and an organization’s financial results.
Take your marketing counterparts. They are a cost center too. Let’s say a company spends millions of dollars on an advertising campaign. Stakeholders don’t expect, and will probably never ask, marketing to prove how much sales increased as a result. This is because there is no direct correlation between the two. Because a person saw a commercial on television at 11 pm doesn’t prove they purchased the product the next day or week. There is value for spending money on a campaign such as brand awareness, point-of-sale purchases, and brand retention, which will eventually result in sales, but this is only a causal relationship.
The same applies to your learning efforts. Stakeholders recognize it’s required and essential for an effective and competent workforce. They expect your initiatives to focus and target operational areas and specific skill requirements that will improve employee performance. Like the advertising campaign, you can’t prove training delivered improved performance but, if they work better, then it will translate into improved efficiencies (savings) or increasing revenues. Either way, you’ve played a role.
Financial Methods To Measure The Impact Of Training
But what if I told you that you can actually measure the impact of training on your organization’s operations? Yes, it’s true, and it’s right under your nose. There are a couple of financial methods and the other is more qualitative leading to financial.
Financial measures are what managerial accounting refers to as cost-benefit analysis (CBA) and cost-volume-profit (CVP) respectively. A CBA process analyzes potential decisions to accept or forgo (read: Go to Source