Pam Kennett asked:
Copyright (c) 2007 Chiswick Consulting Limited
People development has become a key concern for organisations – employees expect high quality development as part of their contract and are often what will attract an individual to one particular organisation over another. The positive impact of people development through better communication, greater motivation and lower turnover, has been documented. But how do you measure the financial gain from developing people? Return on Investment (ROI) is something that organisations expect from their people development programmes yet few know what it looks like, how to measure it or how to achieve it.
There are real benefits to linking training and development to ROI: * To uncover what works and what doesn’t * To track the impact of people development on desired goals * To justify the investment in people development
Perhaps one of the most important reasons though, is to raise HR’s profile and standing in the business community as a function which is more than just an overhead cost but one that delivers real financial benefits to the business.
How do you define it?
ROI is the added value created from an investment in terms of cost saving, cost avoidance or income generation created from an investment. Of course there are other benefits to training and development beyond these financial measures but when we talk about financial ROI we are really talking about the financial benefits delivered to an organisation as a result of the training or development intervention. The ROI percentage is obtained by calculating the benefits minus cost, divided by cost, multiplied by 100.
Kirkpatrick’s Model (1959) highlights 4 levels of ‘payback’ on development: Level 1 – Reaction – participants’ reactions to a development event Level 2 – Learning – the degree to which learning occurs as a result of the project Level 3 – Behavioural Change – the transfer of learning to impact on job behaviour Level 4 – Organisational Performance – the impact learning has on the organisation
Whilst feedback on training and development is often gathered at level 1 and sometimes even at levels 2 and 3, financial ROI, which really impacts at level 4 – organisational performance – is rarely measured. The reason given is that it is just too difficult to calculate ‘true’ financial ROI for many HR professionals.
In a recent survey by consultancy, Lane 4, other criteria for measuring return were considered to be more relevant than financial ROI measures. This may be because as HR professionals we are just more comfortable talking ‘behaviours and performance’ rather than ‘dollars and cents’.
There is certainly alot of research linking various aspects of training and development to behaviour change and performance. For example, the development of transformational leadership is associated with a number of positive outcomes at both the organisational and individual level, such as lower levels of work stress, increased employee motivation and customer satisfaction. The development of improved communication skills has been shown to result in greater team innovation. The HR professional must take this one step further and link performance indicators to financial ROI – cost savings, cost avoidance and income generation.
The best return on training and development occurs when performance indicators which are linked to achieving an organisation’s strategic objectives are used as part and parcel of the design criteria for a training course. For example, if a company identifies that resolving customer problems more quickly reduces costs by 10% (on staff/overtime/supervision) then a training and development aimed at customer service skills, call handling and the like will deliver real ROI.
In summary, if we want to be respected by our colleagues for delivering a financial contribution, we must start measuring and talking hard measures and link each and every training intervention to a hard measure: cost saving, cost avoidance or income generation. It’s not easy and takes practice but the simplest way is to design each training intervention with a key performance indicator in mind and link that performance indicator to a hard measure.