L&D: Making a Case for Training (1994)

Same As It Ever Was – Same As In 1994 – IMO

When Is It Justified, When Not?

Making a Case for Training

by Guy Wallace

In a recent project, we identified more than 500 distinct training needs within the
client corporation. Approximately 50 of the needs were being addressed by existing
training. Should those other 450 be addressed?

We helped another client quantify the Performance Improvement Potential (Thomas
F. Gilbert’s “PIP”) in the area of CAD-CAM operations; the PIP amounted to millions
of dollars annually. Should that performance gap be closed?

Just because we can define a training need doesn’t mean that the need should
always be met. Determining and quantifying a training need/performance problem,
even one costing millions of dollars a year in nonconformance, may not automatically
warrant the expenditure of corporate funds to address that problem, even
though the problem seems to scream out to trainers for resolution.

The decision to spend thousands or millions of dollars on training is a business
decision, not a training decision. Trainers should have no vested interest in whether
a particular need is addressed. One of our responsibilities as trainers is to help our
clients make good business decisions about the value of training relative to other
organizational opportunities.

Many, but not all, of the 500 needs we identified for the first client will be
addressed. They will be addressed on the basis of return on investment (ROI), on
how much value the dollars spent resolving those needs will return to the
corporation compared to other potential corporate expenditures. (Training is, of
course, only one bucket into which corporate resources are strategically tossed.)

In order to allow our training clients to evaluate the investments we propose, we
must:
• Use the language and numbers familiar to management – e.g., ROI
• Present the language and numbers in a familiar format – e.g., a business case.

Slide1

Calculating the Return on Training Investment. Management has a fiduciary
responsibility to use corporate funds to the best advantage of the corporation.
Management should only spend money on a training project if the ROI for the
project compares favorably to the ROI for other potential investments.

The ROI percentage can be expressed as:

[Return – Investment] / Investment

A training investment of $50,000 a year that returns $75,000 annually has an ROI of
50%.

We contend that we can substitute either Gilbert’s Performance Improvement
Potential (PIP) or the Cost of Nonconformance (CONC) for “Return” in the equation
above. CONC is the potential value of performance minus the actual value of  performance.

The potential value of performance, like the return, can be very difficult and problematic to measure; we prefer to use instead a simple but real cost of performance,
for example as measured by the salaries of the performers. One hundred performers
earning $35,000 a year gives a benchmark of $3.5 million for 100% proficient
performance.

If we assume that our 100 performers actually work at 50% proficiency, then the
actual value of performance is $1. 75 million, resulting in a CONC (or a PIP) of $1. 75
million annually: $3.5M minus $1.75M.

Spending a million dollars a year to bring this workforce to a proficiency of 100%
yields an ROI of 75%: [$1.75M – $1.0M] / $1.0M. Bringing it to 90% proficiency
yields an ROI of 40%.

Training ROI calculations are really much more complicated than this. Not all
performers start at the same level of proficiency; they may not reach 100% proficiency
after training; and factors such as scrap and rework, schedule slippages, sales
volume, and lost opportunities may not be factored in.

We believe that a better model for calculating training ROI is one that often understates
the return. How can the model understate the return on investment? We tend
to use very conservative numbers in our calculations. Here is the algorithm we used
to calculate the CONC for our CAD-CAM client.

swi-newsletter-1994-1-spring_Page_06 - Copy

The assumptions for this sample calculation are that:
• The average loaded salary of a CAD-CAM performer in the organization was
$30,000.
• The average CAD-CAM user spent 25% of his or her working time using the
system (some used the system more than others).
• There were 800 CAD-CAM users.
• The average deficiency level was 50%.

With these numbers, we calculated the value of the performance deficiency to be
$3M.

Slide2

But in reality, the numbers were low. The average fully loaded salary was significantly
higher than the $30,000 we used in the calculation above – it was $50,000-
plus. And the number of CAD-CAM users was upward of 1500 … or even 3000 –
the client wasn’t sure. Plugging those numbers into the algorithm gives CONCS
ranging from $9.37M up to $18.75M. These are all potential annual savings that are
left on the performance table.

In addition, some estimates of performer proficiency (estimates made by the performers’ own management) were far below the estimates we used in our algorithm
– as low as 25% proficiency! The hourly cost of using the CAD-CAM system
wasn’t factored into our algorithm (to keep it as simple as possible). Neither were
the costs of potential rework or scrap caused by deficiencies in performance.

Our relatively simple algorithm, using numbers generated by the client, showed just
how serious the performance gap was – and how large the potential return on
investment for the training we had scoped. Even with a multimillion dollar price tag
on the training, the ROI was phenomenal- so phenomenal, in fact, that the executives
we were working with did not want the number to appear on paper.

Obtaining Management Buy-In for Training ROI. Presenting the training ROI in a
successful business case means obtaining and packaging a variety of data. Find out
what is an acceptable return in your organization and what kind of ROIs management
has been achieving lately. Get management to help you generate the figures
that will go into your business case – that reduces later disputes over the validity
of the figures. Keep the model relatively simple; you could factor in an increase in
sales volume to your training return, but figures like that – valid or not – are open
to dispute because they depend on so many other variables, such as the state of the
national economy. The more complicated your models are for calculating costs and
returns, the more difficult it is, in our experience, to get the models accepted.

Because of the high visibility of the quality movement, we suggest that you use
terms derived from disciplines of quality, productivity, and finance.

Be aware, also, of the politics of your situation. A multimillion dollar CONC may
make the “owners” of the CONC feel wary that others will perceive the gap as a
measure of their own incompetence; the client may, in such cases, be reluctant to
use the “real” CONC numbers. With our CAD-CAM client, the amount of scrap
caused by the relatively low proficiency level of the performers became an extremely
sensitive issue; the cost of scrap attributable to the performers would have
been very expensive. We wound up ignoring the issue and excluding the factor from
our algorithm.

When you feel that you have a training case that makes sense from a business
perspective, package and present your proposal as a genuine business case in a
format accepted in your organization. Help your client come to a decision based on
a business perspective, not a training department perspective. That allows you to
become a business champion, not just a training champion.

******* ******* ******* *******

Portions of this article are adapted from a longer piece by Guy Wallace that appeared
in ASTD’s Technical and Skills Training Journal in May/June of 1991. The article contains additional detail on calculating and presenting training ROI. See the Journal or contact SWI for the text of that article.

Slide3

Become a Business Champion, not just a Training Champion

The full Spring 1994 newsletter is available as a PDF here:  SWI Newsletter – 1994 – 1 Spring

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