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By William D. Young, Ed.D., SPHR
February 2001
Reviewed July 2002
Organizations spend an ever-increasing amount on employee training and development. Latest figures for 1999 estimate these costs to be in excess of $2 billion per year. These costs reflect the necessity to stay abreast of changes in technology, as well as the need to maintain a competent and productive workforce. Mills (1975)1 first used the term "human resources development" to describe the range of both behavioral and management technologies that focused on improving the operating effectiveness of a company and the quality of worklife of its employees. Today, human resource development ranges from courses focusing on basic skills training to advanced technological training. These courses may include training focused on the latest management theories and interpersonal skills enhancement, culture and organizational change, communication, performance management and other topics related to, literally, the development of an organization's human resources. While a very significant amount is spent annually by corporations to provide this range of training, very little effort is expended in assessing the bottom line impact. In fact, in many organizations, the inability to document the cost/benefit of providing human resource development opportunities is the major reason why what is provided may be limited in scope.
Calculating the "Hard Skills"
In the broadest sense, human resources development can be categorized into two categories - hard skills and soft skills. Hard skills are those that typically have a direct application on the job being performed. Examples of this type of development would include instruction on the operation of a new piece of equipment, learning a new programming language or taking a course that teaches a skill that can be used directly to enhance on-the-job performance. Examples of soft skills training include courses in team building, leadership skills or dealing with confrontational customers. Hard skills training is typically more quantifiable than soft skills training. Cullen, et.al. (1978) 2 developed a model to assess hard skills training. This model presents a four-step process to calculate the cost-effectiveness of a training process. Step 1 identifies training costs to include training development, training materials, training time and production losses (pre-training). Step 2 identifies training returns to include time to reach job competency, job performance and work attitudes. Step 3 focuses on the analysis process which includes training time, production rate, performance test (pre and post-training), product quality (pre and post training), raw material efficiency, worker attitude and cost conversions. Step 4 is the evaluation including training time, job performance, worker attitudes and cost comparisons.
Each of these components can have the direct cost associated with it calculated. This cost is the "investment" that the company has made in the employee's development. The return on this investment can also be measured. Types of measurement of the results for hard skills include measurement of task performance (time to produce and rate of production), product quality, decreased material used and decreased scrap. Measures of employee attitude can also be obtained. The rate of return is calculated by conversion of the performance to a monetary value and the cost after the training can be compared to pre-training.
The calculation of the cost/benefit of hard skills training is typically straightforward. Time, expense and quality of the production of a product or service before the intervention (training) can be identified. After training, time, expense and quality of the production of the product or service is again measured. The cost/benefit of the training has been demonstrated if there is a:
1. Decrease in the time necessary to produce the product or service;
2. Decrease in the expense associated with the production of the product or service; or
3. Increase in the quality or customer satisfaction of the product or service.
Calculating the "Soft Skills"
Unfortunately, trying to document the benefit of soft-skills training is not as easy or clear. How is the benefit of an off-site daylong team building exercise for a department evaluated? Even if the department produces a quantifiable product and after the training their output goes up, that the training is the cause can only be inferred or implied. There is no direct measure to say with certainty that the training was the sole cause of the improvement. When human resource development areas such as management skills, interpersonal skills, 360° assessments, culture change and other similar activities are considered, the connection between the intervention and quantifiable results becomes even more tenuous.
One approach that can provide some measure of the effectiveness of an HRD program is the calculation of a Return on Investment (ROI). To calculate an ROI it is necessary to find the total financial benefit derived from the development intervention and then compare it with a cost figure that reflects all the costs of providing the intervention. For example:
A company sends a manager to a three-day course in supervisory skills. The manager supervises a department of 10 employees who process payables. The department processes 1000 invoices a month. The monthly payroll for the manager and department is $24000. Therefore, the monthly cost of production per invoice per month = $24 ($24000/1000). After the training, the number of invoices processed per month is monitored. Over a three-month period, the average number of invoices processed per month increases to 1200. This increase in production results in a monthly cost of production per invoice of $20 ($24000/1200). This reflects cost savings of $4 per invoice processed. If 14,400 invoices are processed per year (1200 invoices per month x 12 months), this results in an annual cost savings of $57,600.
The cost of the training program was $1,800. The cost of travel to the location, lodging and meals was $1,000. The lost time for the manager to be out of the office for three days is the annual salary plus benefits calculated at a daily rate times the 3 days; in this case, approximately $750. Therefore, the direct and indirect cost of providing the training for the manager is $3,550.
The formula for calculating the ROI is as follows:
Net gain (total benefit - total costs)
________x 100 = _________
Total Costs
In the example: ($57,600 - $3,550) = 15.22 x 100 = 1522
$3,550
Was it worth it for the manager to go to the training course? You bet! With a return on investment of 1522% the answer is absolutely.
Calculating an ROI requires that a certain amount of information be available. In the example, there must be some way to quantify what the department does; in this case, bills processed. If it were a department that had customer service, the quantifiable aspect might be customer satisfaction rates. As long as there is something that can be quantified and the amount of both direct and indirect costs can be calculated, an ROI can be calculated.
In some instances, a ROI may not be able to be calculated because the individual or department output cannot be quantified. Or, the program provided is a more global concept like employee morale or diversity training. In that case, a value benefit may be found by looking at the company at a macro level. This view may provide some indication of program effectiveness. An annual survey conducted by the American Society for Training and Development provides some helpful information. In its annual state-of-the industry report based on its benchmarking studies, ASTD analyzed training programs of more than 800 organizations. The study found that companies that spend the most on training also make the most money per employee. In 1997, the ASTD survey found that net annual sales per employee for companies that were positioned in the top half for training expenditures totaled $386,171 as opposed to net sales of $245,091 per employee for those companies in the bottom half of the distribution. The study also found that publicly traded firms that spend more money on training tend to have higher net sales and gross profit per employee and are valued more highly on Wall Street.
Summary
Human resource development costs money. Being able to determine and document the cost/benefit of providing the development activity is a key ingredient in justifying the provision of development opportunities. The methods discussed in this paper can provide some of the information needed to demonstrate that human resources development provides an added value to a company and that the value of what is provided exceeds the cost of delivering it.
Endnotes
1 Mills, T. "Human Resources - Why the New Concern?" Harvard Business Review, 1975 (March-April), 120-134.
2 Cullen, J.G., Sawzinb, S.A., Sisson, G.R., and Swanson, R.A. "Training: What's It Worth?" Training and Development Journal, 1978, 32 (1), 24-29.
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