CHAPTER TWELVE The Costs and Benefits of Training

LEARNING OUTCOMES § Explain why trainers should calculate the costs and benefits of training programs § Describe how to calculate the cost of training programs § Explain the difference between costeffectiveness and cost–benefit evaluation § Describe how to calculate the benefits of training programs © 2013 by Nelson Education Ltd. 2

LEARNING OUTCOMES § Describe how to conduct a net benefit analysis, benefit–cost ratio, and return on investment § Define utility analysis and describe how to calculate the utility of training programs § Discuss the importance of credibility when estimating the benefits of training programs © 2013 by Nelson Education Ltd. 3

COSTING TRAINING PROGRAMS The process of identifying all the expenditures used in training § Critical consideration in training design, development, delivery, and evaluation § Is difficult, but necessary to determine value or return on investment to organization § Increasing pressure to calculate © 2013 by Nelson Education Ltd. 4

COSTING APPROACHES Costing Approaches 1. According to stages § Needs analysis, program development, delivery, and evaluation 2. According to nature or kind of costs § Five cost categories: direct costs, indirect costs, development costs, overhead costs, and trainee compensation © 2013 by Nelson Education Ltd. 5

COMPARING COSTS Table 12. 1 demonstrates some important aspects of costing and comparing training program alternatives: 1. 2. 3. 4. Costing sheets can be modified to meet an organization’s needs Level of detail varies according to needs There is choice regarding what to include Identifies the cheapest option © 2013 by Nelson Education Ltd. 6

BENEFITS § Cost-effectiveness evaluation: A comparison of the monetary cost of training to the benefit of training in monetary terms § Cost–benefit evaluation: A comparison of the cost of training in monetary terms to the benefits of training in non-monetary terms © 2013 by Nelson Education Ltd. 7

BENEFITS § Net benefit: The estimated value of the performance improvement minus the cost of improving performance § Benefit–cost ratio: The benefit divided by the cost of the training program © 2013 by Nelson Education Ltd. 8

BENEFITS May have cost-effectiveness and want to determine cost–benefit – will have to convert measures to monetary values: Step 1: Focus on a single unit Step 2: Determine a value for each unit Step 3: Calculate the change in performance Step 4: Obtain an annual amount Step 5: Determine the annual value See Trainer’s Notebook 12. 1 for more details © 2013 by Nelson Education Ltd. 9

RETURN ON INVESTMENT A comparison of the cost of a training program relative to its benefits § This involves dividing the net benefit by the cost of the training program Return on Investment = Benefits–Cost of the program © 2013 by Nelson Education Ltd. 10

UTILITY ANALYSIS A method of forecasting the financial benefits that result from human resource

UTILITY ANALYSIS Important factors to consider in calculating the utility of training program: 1. Effectiveness (effect size) 2. Standard deviation of job performance in dollars of untrained employees 3. Number of employees trained 4. Duration training benefits will last © 2013 by Nelson Education Ltd. 12

UTILITY ANALYSIS Utility of a training program: ΔU = (T)(N)(dt)(SDy) – (N)(C) where ΔU = utility, or dollar value of the program T = number of years the training has a continued effect on performance N = number of people trained dt = effect size SDy = standard deviation of job performance in dollars of the untrained group C = cost of training each employee © 2013 by Nelson Education Ltd. 13

BREAK-EVEN ANALYSIS Finding the value at which benefits equal costs and utility is equal

CREDIBILITY OF ESTIMATES § Costing not an exact science § Assumptions and judgments have to be made § Important to ensure there is credibility in process of determining cost-effectiveness § Management and clients must perceive benefits estimates as credible, believable, and acceptable § Trainers need to be wary of promising more than they can realistically deliver; manage expectations © 2013 by Nelson Education Ltd. 15

CREDIBILITY OF ESTIMATES Increasing credibility of benefit estimates: 1. 2. 3. 4. 5. Take a conservative approach Use credible and reliable sources Explain approaches and assumptions Results must appear realistic Use hard data See Trainer’s Notebook 12. 2 © 2013 by Nelson Education Ltd. 16

INSTRUCTIONAL SYSTEMS DESIGN MODEL § All three stages of the ISD model have now been described § The critical elements are identifying, developing, delivering, and evaluating training within the organization § Failure to manage any of the critical elements will have negative impacts on the training and the achievement of the training related goals © 2013 by Nelson Education Ltd. 17

SUMMARY § Methods and approaches for calculating costs and benefits of training programs were described – this is increasingly important in today’s economy § The differences between cost-effectiveness, cost–benefit analysis were discussed as were examples of the calculation of costs, benefits, net benefit, BCR, and ROI § Importance of this information for budgeting and comparing costs and training evaluation was highlighted § An alternative approach – utility analysis – was described § The importance of credibility when estimating the financial benefits of training was discussed © 2013 by Nelson Education Ltd. 18