The return on investment concept for learning has been around since Jack Phillips introduced it about 40 years ago. You might think by now the confusion over its use would have diminished, even if the controversy had not. Not even close. I continue to see the concept abused and misused on a monthly basis.
Here is an example from an email I received: “Anyone who is involved in the business world is familiar with the concept of ROI. It’s punchy, with its relatively simple calculation, and can make or break a purchasing decision. But when it comes to learning initiatives, gathering the necessary data to calculate ROI is difficult to put it mildly.” The writer goes on to say that learning initiatives implemented as an integral part of business strategy can be measured by the success of that strategy.
Return on Learning
There are several issues with the blog. First, ROI used in the business world, should not be confused with ROI used in the learning world. Typically, a financial ROI is calculated to make the business case for an investment, such as a new product line or facility. The definition of this financial ROI is not the same as the learning ROI. The numerator of the financial ROI is the net present value, NPV, of the increase in profit due to the investment. The denominator is the cost of the asset required for the project, such as the cost of a new facility. This will be capitalized as an asset on the balance sheet and depreciated each year.
Contrast this with the learning ROI which has (usually) one year of contribution to profit in the numerator (so no need for NPV) and no asset in the denominator. Instead, the denominator is the cost of the learning initiative, which is an expense item from the income statement. So, two different definitions, and the calculation for the financial ROI is actually more complicated than that for the learning ROI. Interestingly, it was exactly this difference in formulas which led my colleagues in accounting at Caterpillar to tell me that I could not keep referring to learning ROI as “ROI” since it was confusing our leaders. So, I renamed it “return on learning” or ROL in 2002. The take away here is to remember the two are not the same and let those in your organization know that learning ROI is calculated differently.
The next point is that learning ROI is difficult to calculate. The ROI calculation itself is very easy: simply, the net benefit of the initiative divided by the total cost. Net benefit is the gross benefit minus total cost. Generally, total cost is easy to calculate, but the sticky part is the gross benefit which is the increase in profit before subtracting the cost of the initiative. The gross benefit, in turn, depends on the isolated impact of the learning initiative, such as a 2 percent increase in sales due to the learning. Likely, this is what the writer had in mind when complaining about the difficulty of calculating ROI.
However, isolation need not be that difficult. The learning team can work with senior leaders to agree on a reasonable impact for planning purposes and once the program is completed, there are several methods available to estimate actual impact which do not require any special training or the hiring of a consultant. Often, it will suffice to simply ask the participants and the supervisors what they believe the impact was and then reduce the estimate some to allow for the inherent error in any estimate. While not precise enough for an academic journal article, this is usually all we need in the business world to make appropriate decisions (such as go/no go after a pilot) or identify opportunities for improvement. It will also be close enough to determine if the investment in learning more than covered the total costs.
Impact of Learning
Last, the writer suggests that if the learning is integrated into the business strategy, its success can be measured by the success of the business goal. I strongly agree that we should always start with the end in mind (the business goal) and design the learning so it directly supports the business goal. Further, we need to work in close partnership with the business goal owner to ensure that the learning is provided to the right target audience at the right time and then reinforced to ensure the planned impact is realized. While this does provide a compelling chain of evidence that learning probably had the intended impact, it does not tell us how much impact the learning had or whether the investment in learning was worthwhile. Instead of a measurement, then, we are simply left with a “mission accomplished” statement.
The question remains how much sales would have risen without any training. If sales would have increased the same amount without training, the training clearly was not worth doing. How about if sales would have increased almost as much without training? Was it worth doing for the small improvement in sales? We still need to isolate the impact of training and calculate net benefit or ROI to answer this ultimate question of value – not to “prove” the value of the training but to enable us to make better decisions about programs going forward and avoid investing when the return does not justify the cost.
So, the debate goes on. A friend asked me recently if I still believe in ROI. Yes, I do, but we need to use it wisely. It should not be used defensively to try to prove the value of an initiative or an entire department. In other words, it is not an exercise to deploy at the end of a program or fiscal year when you are under fire. Rather it should be used to help plan programs to ensure they deliver value and to identify opportunities for improvement going forward. It should be used to help decide which programs to continue and to identify ways to optimize programs. ROI will never take the place of careful planning, building relationships with goal owners or smart execution. You will always have to get the basics right first. Once you have done that, then ROI can be a powerful tool to make you a better manager.Filed under: MeasurementTagged with: Calculating ROI, learning ROI, Return on Learning, ROI, ROI Institute