Understanding the basics of Return on Investment in Training: Assessing the Tangible and Intangible Benefits

Citation

Wilson, J.P. (2004), "Understanding the basics of Return on Investment in Training: Assessing the Tangible and Intangible Benefits", Industrial and Commercial Training, Vol. 36 No. 6. https://doi.org/10.1108/ict.2004.03736fae.001

Understanding the basics of Return on Investment in Training: Assessing the Tangible and Intangible Benefits

Understanding the basics of Return on Investment in Training: Assessing the Tangible and Intangible Benefits

Patricia Pulliam PhillipsKogan PageLondon2002128 pp.ISBN 0-7494-3891-6£15.99 (Paperback)

Keywords: Training, Return on investment

Review DOI 10.1108/00197850410556702

Many trainers and training organisations operate on the “leap of faith” principal which believes that training is inherently positive for the individuals and therefore, the organisation. However, most training is not evaluated in terms of its impact on business performance, and so this “faith” may sometimes be misplaced.

The author, Phillips, refers to Broad and Newstrom's research in the USA which estimated that only 50 per cent of all training content is still being used by employees one year after delivery. In 2001, the US spent $56.8b on training, and if Broad and Newstrom's figures are correct, this, at first glance, would appear to be a disturbing picture.

Yet, we should always interrogate figures and not treat them as precise and immovable measures, at least in training and development. Let us briefly consider the alleged evidence above in more detail. First, where did the figure of $56.8b come from – did someone go around and count all the training which happened during 2001 in the US? No, it was clearly an estimate. Second, what is the definition of training; does this include a colleague telling you how to use a specific function of Microsoft Excel? Third, 50 per cent is a suspiciously round figure – how can this be worked out accurately? Fourth, what about the training which is still being used two, three, four years, etc. after the delivery – surely this is an investment which is still paying interest? Fifth, might not the 50 per cent of training which was not used in the first year, be used in subsequent years?

Nonetheless, in spite of all the reservations about the figures above, it is highly likely that not all training is applied and thus, there is waste of resources. This reason and the fact that many executives are demanding more accountability of the training function mean that the impact of training on the bottom line is becoming increasingly more important.

This book considers the return on investment (ROI) in training. ROI is a commonly used financial metric which assesses the financial earnings on capital spent on a specific project. Philips has taken this metric and applied it to the field of training, and while this is not a new concept the book provides considerable details.

The foreword is written by the author's husband, Jack, who originally developed the ROI methodology. The foreword is very evangelical about the benefits of ROI, but the foreword and the rest of the book would have more balance and credibility if some space were devoted to the limitations of the method rather than dismissing valid criticisms in few paragraphs. Jack Phillips goes on to describe what he calls six realities of ROI among which is the assertion that every training and development, performance improvement or human resource department will have to address the issue of ROI.

It is maintained that some schools and universities are also applying the principles. This statement should come with a health warning since education is normally provided for its long – term benefits and not for some purely instrumental reason. Although there is considerable value in using ROI for training which has a more specific focus, the application would be less likely to suit education.

There is a caveat that the book is about “how to understand and make sense of the ROI methodology from a business perspective” rather than about tools, templates, application and implementation. In spite of this disclaimer there is a considerable level of detail and explanation which would allow trainers to begin more detailed examination of training investments.

The ROI method is based upon the four steps of Kirkpatrick's evaluation model of response, learning, behaviour, and results. To these Phillips adds the additional step of ROI which provides a monetary valuation of the training impact.

Philips suggests that many organisations spend less than 1 per cent of budgets on evaluation and measurement of training. Using the ROI approach she suggests that incorporating accountability throughout the programme will cost approximately 4-5 per cent. However, she argues that this cost will be offset by savings identified by the ROI. It is also recommended that the ROI method is not applied to all programmes but to between 5 and 10 per cent of all training. This makes it more suitable for larger organisations than for smaller ones.

The ROI method converts qualitative issues into quantitative measures and uses a conservative approach to the estimation of figures. These are then given a monetary value and so the benefit can be reasonably assessed. The author maintains that it is normally only calculated for the first year because if the benefits are not quickly realised then it is unlikely that they ever will.

In the presentation of results it makes it clear that not all intangibles should be included in the figures because they may undermine the credibility of the more accurate ones. Instead she recommends that these are listed separately, e.g. reduced stress, image of the organisation, and also absenteeism (might this not be a convenient metric for ROI?).

Evaluating training programmes at a deep level is not easy; however, there will be increasingly louder calls for financial accountability of training and the functions of training departments. This book provides a very useful framework with which to begin the process of evaluating training and thereby respond to the keepers of the organizational purse.

John P. WilsonDepartment for Continuing Education, University of Oxford