I used three different articles to tell you why calculating ROI for your learning efforts is important to do, what gets in the way of making it happen, and things to keep in mind as you approach this critical process. Now it’s time to get into the nitty-gritty details of how to do it.
But before getting into ROI, another way to measure the financial impact of your learning efforts is with the simple benefit/cost ration. All you do is take the total dollar value of the benefits from the learning initiative and divide that by the cost of the learning, as shown in the following formula:
Benefit/Cost Ratio = (Total Dollar Value of Benefits)/(Cost of Learning)
For example, let’s say you determine the total dollar value of benefits from your learning to be $111,150, and the cost of the learning initiative to get there was $52,000. The Benefit/Cost Ratio would be $$111,150/$52,000 = 2.14, which means that for every dollar invested into developing and delivering the training, $2.14 in benefits were reaped.
Now, if you wanted to turn that into an ROI calculation, which as you know is usually presented as a percentage, you subtract the cost of the learning from the total dollar value of benefits, divide that figure by the cost of the learning, and multiply by 100. The formula looks like this:
Using the figures from the example above, this is what you get:
Wow! That was clearly a very effective learning initiative. Good work! But it’s not that simple, right? Of course, it’s not. First of all, note that when you’re subtracting the cost of learning from the total dollar value of benefits, what you’re calculating there is the net benefits of learning, so sometimes you’ll see the formula presented like this:
Of course, the devil is in the details, as they say. And the devilish details in this formula include both the cost of learning and the total dollar value of benefits. The cost of learning is the simpler of the two. You can easily calculate the cost of developing the learning by adding up the labor costs of the people who developed it, any expenses incurred in doing so for materials, and so on. Also be sure to allocate some percentage of overhead that supported the effort as well in terms of workspaces and computer equipment used. You want this to be a very thorough and rigorous number, otherwise, it looks like you’re trying to make sure it comes out better than it otherwise might. Finally, make sure you add in any and all costs for delivering the learning as well.
The much trickier part, of course, is figuring out the total dollar value of benefits. You just have to spend the time thinking through how to measure this. For example, let’s say you developed a learning initiative specifically targeted at boosting employee retention among your salespeople. You’ll be able to calculate the changes in that metric from pre-learning to post-learning, although make sure you leave ample time for the learning to have its effect!
To put a dollar value on an improvement in retention, you could start with the average earnings of a salesperson. Let’s say at your company that average is $57,000. You would also need to know the average cost of turnover, or what it costs to replace an employee. It would be good to calculate your average on this based on your company’s actual experience. There are rules of thumb out there, but they range from a conservative 50% of an employee’s annual earnings to as much as 150%. Let’s say yours comes out to 65%, which is $37,050. If you have a sales team consisting of 70 people, and average attrition before the learning was 10%, which means you had to replace 7 people per year. In the years following the learning, attrition was only 5.7%, which means you were only replacing 4 employees. The difference there is that 3 people stayed, so multiply that by the cost of turnover ($37,050), which is $111,150. That’s your total dollar value of benefits from learning.
As you can see, although you have to keep your wits about you when calculating the ROI of learning, it can be done, and it should be done. The larger question you can’t really address this way is what other factors other then your learning may have played a part in changing attrition and retention patterns, but at least it’s a starting point!
Here are all 5 parts to this series: The ROI of Learning Part 1: Barriers,The ROI of Learning Part 2: Where to Begin, The ROI of Learning Part 3: Additional Considerations, The ROI of Learning Part 4: Learning/Training ROI Methods, The ROI of Learning Part 5: The True Costs of Learning