The concept of Return on Investment (ROI) was formed as part of the concept of Value Creation. The origins of ROI were in the Manufacturing sector, where it’s simple to measure time and output. Next, to adopt the concept was the Banking industry where intense competition necessitated Innovation Management and with that the need to calculate ROI. ROI calculation is now a common feature in every industry and business function.
Employee Training is part and parcel of workforce development. It necessitates spending a lot of effort and resources. Deliberating if the Training Program is going to be worth all the costs is a valid concern.
Return on Training Investment (ROTI) is the comparison between financial benefits obtained from a training program and the total cost of running that training program. The objective of ROTI analysis is to see whether the benefits outweigh the costs i.e., to establish if the investment was worthwhile.
ROTI calculation and analysis is significant when:
- Investment in a training program is viewed as a substantial outlay.
- Attainment of explicit strategic or operational objectives is associated with the training program.
- Financial benefits and their amount from the training program is ambiguous.
ROTI can be calculated dependably so long as:
- Measurement data on changes in business performance, pertinent to training, is reliable or can be rationally estimated by those who matter.
- Financial values can be assigned to the applicable performance measures.
- Cost related to developing, delivering, and handling the training program can be classified.
ROTI calculation involves selecting performance measures, gathering data on those measures as well as data on costs—both direct and indirect—related to training, and lastly calculating the Return On Training Investments.
Key steps in the ROTI calculation are:
- Choose the performance measures to use.
- Gather data on changes.
- Gather data on costs.
- Calculate ROTI.
There are 3 types of calculations that are relevant in ROTI analysis.
- ROTI as a percentage
- Benefit to Cost Ratio (BCR)
- Payback Period
Let us delve a little deeper into the calculation methods.
1. ROTI as a percentage
This calculation shows Net Training Benefits as a percentage of Training Cost. An outcome of 100% or more denotes that the Program has a Net Benefit after accounting for all the costs connected with running the program.
2. Benefit : Cost Ratio (BCR)
This ratio divides Total Training Benefits by Total Training Costs. When BCR is greater than 1, the benefits exceed the costs and the program is judged a success. When BCR is less than 1, the costs surpass the benefits and signify that enhancements or alterations are needed to warrant the continuation of the program.
3. Payback Period
This calculation exhibits the time in which the Training Investment will be paid back i.e., when the costs equal the benefits. The calculation is usually done in terms of months.
Monthly Training Benefits are calculated by dividing Total Training Benefits over 12 months.
It is pertinent to note that although ROTI analysis is important in evaluating a training program, merely a ROTI calculation will not typically be adequate to make the business case for a Training Program or influence top management to act. Sometimes we have to consider non-monetary benefits of training, such as a change in attitude. When monetary and non-monetary benefits are combined, these supplement Performance Management resulting in benefits such as reduced absenteeism, lower turnover rates, and more promotions from within.
Interested in learning more about Return on Training Investment? You can download an editable PowerPoint on Return On Training Investment (ROTI) here on the Flevy documents marketplace.
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