Learning & Development (L&D) function in any organization is tasked with ensuring the availability of requisite talent to meet the present and emerging needs of the organization and its customers. With training budgets always under pressure, there is the need to do with less money and fewer resources.
L&D has to justify every penny spent on training programs and unless it is perceived that training programs deliver more than the estimated cost, they put it in jeopardy. Proving value over cost is in essence Return on Investment (ROI). However, calculating ROI on a training program (or series of training programs) is easier said than done.
Every training requires time, money and other resources. ROI measures if the training programs are able to pay back the cost involved in training, or for what we spent, what we got out of the training.
Why is it important to calculate ROI?
Every expenditure in any organization is made with a single purpose: to bring in more revenue. Training is like any other expenditure and we need to gather data to see if it’s really working. But, gathering data on training effectiveness is very difficult, if not impossible.
Benefits of training include increased profit or cost-saving. Costs include the costs of operating the training and also the cost of time away from the work of the employees posted for training. In case of training, ROI is calculated to justify the need for training to the top management and shareholders, besides providing assurance to the trainers that they are in fact doing a good job and identifying areas of improvement within the organization.
If at the end of this exercise, benefits outweigh costs, we can say that training has been effective. However, it is not to say that ROI is the same as BCR (Benefit Cost Ratio).
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How to calculate training ROI?
BCR may be defined as Benefits of Training / Costs of Training. If BCR is more than 1, we can say that benefits outweigh costs.
A simple way of defining ROI would be ROI (%) = (Net Benefits of Training / Costs of Training) X 100, or
ROI (%) = (Benefits – costs) / Costs X 100
A result greater than 100 percent means that the program has a net benefit after accounting for the costs involved in running it. For instance, ROI = 150% means that the program yielded a 150 percent return on money invested; i.e. the program yielded Rs. 1.50 for every rupee that the program cost.
To determine ROI, we need to collect data through assessment and evaluation on what knowledge and skills were gained and what behaviours have changed. ROI calculations are aimed at answering two questions:
- Is the transfer of knowledge taking place and are trainees able to use the training inputs to increase efficiency and/or to reduce costs at the workplace?
- Can we measure the cost of the training against the benefits that accrue to individuals as well as the organization?
However, there is a caveat: organizations should be willing to learn, change and try new things, particularly with regard to training and development. Otherwise, calculating ROI would be an exercise in futility.
Evaluation of Training
Any discussion on ROI in training would be incomplete without the methodologies suggested by Jack Phillips and Don Kirkpatrick. To the four levels suggested by Kirkpatrick, Phillips added one more level, which helps organizations calculate the financial return of a training program.
- In this level, we survey the participants and gauge their reaction to training. Were they satisfied or dissatisfied?
- Conducting two tests or surveys – one at the start of the training and the other at the end of the training. This helps us measure what the participants have learned.
- This takes place sometime after the training has been concluded, generally by getting the feedback from the supervisors. Phillips expanded this to include “Application and Implementation”. This stage studies behaviour in the workplace and makes it easier for organizations to see whether training resulted in on-the-job changes.
- This measures whether the organization’s expectations have been met. This is referred to as Returns on Expectations (ROE).
- This level is called ROI determination and is a form of cost-benefit analysis. To conduct this step, we need to choose which factors to measure – for example, productivity, efficiency or some other business metric.
An approach to calculate ROI on training
Right after the training, assessment needs to be done to measure whether the learners have gained the knowledge and skills necessary to change (or improve) performance. After some period, say 2-3 months, assessment is done to measure whether the training stuck and the participants still apply what they learnt from the training.
The next question is how do we collect the information necessary to carry out the analysis. Information is typically collected by way of surveys/questionnaire, interviews with the supervisors, and analysed to calculate ROI.
Finally, the acid test would be whether the training has in fact resulted in tangible benefits to the organization by way of improved profits or reduced costs. An investment in training, when successful, should yield returns to the participants as well as organization alike. It should result in higher motivation and retention levels of employees, more productive workplace and ultimately more satisfied employers who would be willing to invest in training.
According to a survey in 2010 by leading consulting firm McKinsey & Company, effective companies invest the most in training the front line employees, rather than on leadership teams. Also, it is important that the senior management of the organization is actively involved in the training agenda.
Companies, where senior leaders are involved in setting the training agenda, are more likely to benefit from training programs than companies where the HR sets the training agenda. Also, while on the job training has its merits, it has been found that they are more effective when reinforced through some formal teaching and feedback loop.
What return on investment should L&D expect from NBFC and SFB focused training programs?
Some of the areas in which the employees of NBFCs and SFBs need to be trained are:
- Selling skills. This is one area where the staff of NBFCs and SFBs lag behind their banking peers. With SFBs licensed to sell third-party products like insurance policies, mutual funds, pension products etc., they need to compete with commercial banks in the distribution of these products.
- Credit underwriting skills. This is also another area where NBFCs and SFBs need to focus on. They also need to use digital technologies and score-based models to reduce the Turn Around Time (TAT) in loan sanctions. So, L&D should need to evaluate the improvement in these skills post-training.
- Digital literacy of both the front-end employees and customers is one more area of focus, given the geographic areas served by these organizations as well as the talent pool available for the recruitment of staff.
- Customer Relationship Management would be another area of focus given the cut-throat competition faced by these organizations and the evolving nature of customer expectations. There is an urgent need to focus on attracting and retaining customers and to provide customized solutions to their needs.
- Train the trainers is another area of importance, given the need for training customer-facing staff, which should be done by those within the organization. Through “train the trainer” programs, organizations would be able to reach a greater scale so that the benefits of training reach the entire organization.
Given the above training needs of NBFCs and SFBs, the ROI expected by Learning & Development would be based on the outcomes of these training on the following:
- Increase in customer satisfaction, leading to increased customer retention and acquisition of new customers.
- Increase in digital literacy of employees and customers, leading to robust processes and shift from cash transactions to digital transactions. This would result in improved operational risk management which would lead to less number of frauds, thefts, pilferages etc. by field-level staff.
- Improvement in credit underwriting skills of staff, leading to improved documentation standards, increased usage of score-based models for credit decisions, decrease in TAT of loan sanctions, improved monitoring of loans etc.
- Training on selling skills should lead to increased confidence in field-level staff in marketing third party products as well as in increased loan sanctions. There should be a resultant improvement on bottom lines.
While it is difficult to put a number on ROI, L&D should expect improvement in bottom lines commensurate with the cost of training as this would induce these organizations to go in for more such training programs.
About the Author
Rajan Sundaram is a banker with more than 3 decades of experience with Canara Bank. Earlier, he was a faculty with Canara Bank, specializing in the area of Credit, Risk Management and Legal & Recovery. He has also been AVP (Credit Analyst) with Wells Fargo.
A holder of MBA (Finance) and PG Diploma in Human Resources Management from IGNOU, Rajan Sundaram has been Academic counsellor for the MBA Program at IGNOU and guided students for their MBA projects. He has taught papers on Statistics for Management and HR for IGNOU. Sundaram has also taught papers on Trade Finance and Quality Management at B Schools. Apart from academic teachings, he is a freelance trainer on credit and soft skills programs.
Furthermore, he contributed articles to Canara Bank House Magazine and Vinimaya a publication from NIBM Pune. He has presented research papers at Management Development Institute (MDI), Gurgaon and other colleges. Currently, he is serving as a faculty of Banking in Manipal Global Academy of BFSI.