Cost is one of the reasons many companies don’t provide more employee training, which is a legitimate concern. Costs for virtual and augmented reality training, for example, can add up. Even when training is low-tech, there’s a labor cost involved for the staff conducting the training, as well as the time commitment of the trainees themselves.
But companies that forego training because of cost concerns often miss the concept of training as an investment. Training is an investment, just like any other investment the company might make, although it has an arguably higher return on investment (ROI.)
The return is employee productivity.
Take a simple example: Imagine that an employee who has no experience operating a piece of machinery is asked to operate that machinery. What would one expect that employee’s productivity to be like with zero training compared with 1 day of training? One week of training?
Investing in Productivity
With no training, the employee’s productivity might be close to zero. The individual simply wouldn’t know what to do. With a day of training, the employee might know enough to start operating the machine at a base level. But what if problems arise and some troubleshooting is needed? Time invested upfront to teach the employee about common problems and how to fix them could save on costly downtime in the future.
How can an employer quantify the ROI of employee training in terms of productivity? Admittedly, it’s difficult to come up with an exact ROI because there are so many factors at play in an employee’s productivity gains that it’s hard to isolate individual variables. But in this feature, we’ll suggest some basic strategies companies can use as a starting point.
Measuring Training Costs
This should be one of the simplest steps in determining training ROI. These training costs can include both labor and materials. Labor consists of the hours spent training, including both preparation activities and the actual training, multiplied by their hourly rate and hours spent in the training of trainees, multiplied by their hourly rate.
Training materials include any materials used as part of the training process. Sometimes, these are single-use expenses, such as a packet of materials trainees keep, and other times, these are multiuse, such as virtual reality equipment or dedicated office space used for the training department. These costs should be allocated over time.
For example, if a company expects a driving simulator with a cost of $500,000 to have a useful life of 10 years during which it will train an average of 50 drivers per year, the cost per driver of that simulator would be $500,000/10 years/50 drivers = $1,000 per driver.
Measuring Productivity Gains
This is the tricky part. As we noted above, it can be difficult to attribute gains in productivity to specific factors. How much of an employee’s productivity improvement comes from learning on the job versus dedicated training, for example?
One option would be to ignore non-training factors entirely. This may at first seem imprecise—and it may be when looking at individual employees—but when looking at a business as a whole or new hires as a category, variations attributable to individual employees get smoothed out.
For example, a company could measure changes in productivity for new hires, on average, before and after implementing a new training program. Theoretically, outside factors like on-the-job learning or informal mentorship from coworkers won’t change depending on whether the new training program is in place, so they can be disregarded with little risk of skewing results.
Measuring Changes in Productivity Before and After
But it’s still necessary to measure changes in productivity before and after training. How this is done will depend on the nature of the position and the work performed. The simplest case is perhaps a worker producing the same quantities every day. If the employee averages 100 units per day before training and 150 units per day after training, productivity has increased by 50%. For more varied work, such as managerial or administrative tasks, it’s still possible to find objective measurements for productivity by identifying key performance indicators (KPIs) and tracking them before and after training. For example, a manager might be measured based on his or her staff’s productivity or the number of team members he or she manages. An administrative assistant might be measured on the quantity of common tasks he or she is able to complete or the time to complete common tasks.
How to Measure Training ROI
In an article for Kodo Survey, Jonathan Deller discusses five different means for measuring training ROI. Whatever strategy one uses, it should be objective and directly tied to a business revenue or cost source.
The cost of an employee is also straightforward but not as simple as using salary. One also needs to consider costs such as benefits and social security.
Gone are the days when employees stayed at one job their entire careers, but employers generally expect staff to stick around for a couple of years. Employers should come up with a realistic tenure for staff, broken down as narrowly as possible. For example, managerial staff might stay with the company longer on average than administrative staff.
Putting It All Together
Once you have compiled all the data above, the ROI is simple and can be calculated with the following formula:
ROI = Productivity Gain x Annual Employee Cost x Expected Employee Tenure/Cost of Training per Employee
So, if a certain training program costs $5,000 per employee and increases productivity on average by 10 percent for an employee category that, on average, costs the company $100,000 per year per employee and remains on the job for 3 years, the ROI would be:
ROI = 0.10 x $100,000 x 3/$5,000 = 600%
Any investor would be hard-pressed to find an investment that could reliably provide a 600% ROI over a 3-year period! Of course, these are hypothetical numbers, but they aren’t outrageous assumptions, and it’s easy to see how significantly investments in employee training can pay off.
Training costs are a valid concern, and small businesses in particular often find it hard to fit those costs into an already tight budget. But in general, time spent training employees today will pay high dividends tomorrow. While this doesn’t necessarily mean companies should ignore cost when implementing training programs, it does mean they should consider the likely long-term benefit of early training investments.