How can the ROI on employee training costs be calculated?

It is often difficult to establish and justify training budgets, since demonstrating the company's return on investment for training can be a challenge. But by tying training directly to a quantifiable factor, such as improved productivity or process improvement, you can come up with a dollar figure that reflects the value of the training to your company's bottom line. Choosing the right factors to measure, both before and after training, enables you to show how training has resulted in benefits to your employees and your company. The standard formula for computing your ROI for training is ROI (percentage) = ((Monetary benefits – Training Costs)/Training Costs) x100. ROI may also be measured in terms of decreased per-item product cost or time.

Choose discrete items to measure, based on what type of training is being offered and what areas of your business it is designed to impact. If the training is intended to teach a new, faster process to make widgets, for example, your baseline criteria to measure against are how long it takes the average employee to make one widget and at what cost.

Measure how long it takes the average employee to make the widgets before the training. If the average number of widgets produced per employee is60 per40-hour, five-day work week, the employee averages12 per day, or1.5 widgets per hour.

Calculate the company's pre-training, per-widget production cost. It costs the company $180 per week per employee for all costs, including wages, materials, equipment, facilities, distribution and overhead. The employee makes60 widgets each week, so each widget costs the company $3 to make. The same60 widgets are sold for $4 apiece, for a profit of $1 each, or $60 per week. Over the course of a50-week work year, assuming the standard two weeks of vacation time, the employee makes enough widgets to earn the company $3,000 in profits.

Provide the process improvement training to the employees, at a cost of $1,000 per employee, for this example. If the training is successful, you should expect to see a greater number of widgets produced per employee, per hour.

Measure the amount of time it takes the employees to make widgets after they have successfully completed the training program. If the employee now makes80 widgets each week, or16 widgets per day, the average number of widgets produced per employee is now two per hour. This reflects a25 percent increase in per-hour production by the employee following the training -- a clear improvement.

Calculate the new per-widget production cost. Since receiving the training, each employee is now averaging two widgets per hour. The weekly per-employee operating costs are the same -- $180 per week -- but the employee is now producing80 widgets each week, so the cost per widget drops to $2.25. The widgets are still sold for $4, but since the production cost has dropped, the per-widget profit is now $1.75. So the employee is now producing a profit for the company of $140 per week, for a total profit of $7,000 per year -- another clear increase.

Figure out the net benefit to your company -- in this example, the benefit is the increased profit produced for the company by the employee over a year. Before training, the annual profit produced was $3,000 per employee, based on3,000 widgets a year making $1 profit each. The employee now makes4,000 widgets each year, at a per-widget profit of $1.75, so the total annual profit from that employee's widget production is $7,000. The increased profit is $4,000.

Calculate the ROI for that employee's training, using the standard formula. Use the net benefit -- increased profit -- and training costs noted above. In this example, ROI (percentage) = (($4,000 -1,000)/1,000) x100, or (3,000/1,000) x100, or3 x100, for a percentage return on investment of300. This training can thereby be shown to have been effective and worthwhile, since you are getting a return of $3 for every $1 spent on training.

Find out the difference in revenue (Sales or the services, as the may be) before and after training. This is called incremental revenue. Divide the incremental revenue by training cost and multiply by100 to arrive at ROI on employee training cost

By the employee training there must be knowledge of the weaknesses or strengths of the employee

Monitor the productivity of the work on the impact of production and profit to take advantage of the time and yield

Make sure the training helped in developing the performance of the employee

Ensure training contributed to the production work

Make sure the training impact on staff around him

This indicates the extent of the employee benefit from the training and the impact on the work and on the administration and all workers

For calculating ROI, let's collect the information on the following-

1. Complete or the full load cost of the program, participant time and on costs

2. Net program benefits

ROI =  (benefits/costs) x100

Another way of looking at ROI is through Payback period  where-

payback period = costs/ monthly benefits