In an economic climate where every organization needs to “do more with less,” workplace learning is more essential than ever.
Everyone agrees that training is important, but it’s notoriously hard to prove the direct link between learning and business outcomes.
In the past, it was enough to suggest a correlation between learning and the bottom line. But the rules of the game have changed.
Now, every team is under pressure to show the hard Return on Investment (ROI) of their training efforts.
This is a challenge, but you’re not alone. The very best trainers are skilled at quantifying the ROI of each of their major training initiatives.
They measure the business impact of their work in concrete dollar terms. As a result, they’re highly effective at advocating for budget, headcount, and training time – regardless of the economic climate.
We created this guide to make it easy for you to do the same.
We’ll walk you through 4 different approaches that other trainers have used to prove the ROI of training. While every organization is different, we’ve found that these 4 approaches (or a combination of them) cover most scenarios.
In the next few sections, we’ll describe the data you’ll need to collect or estimate, and we’ll show the key calculations for each approach.
When you’re ready to try the calculations yourself, we’ve created a template for each approach that you can download and use to forecast the ROI of your planned training. And if you’re eager to dive right in, you can download the free templates here.
Ready to prove the dollar value of your work? Let’s begin.
Training ROI = Bang for your Buck
When leaders ask to understand the ROI of an initiative, what they’re really asking is “How much benefit did we get out of this project relative to its cost?”
In short: “How much ‘bang’ did we get for the ‘buck’ we invested?”
You can calculate the ROI of training using the formula below:
As you can see, you only need 2 data points to calculate training ROI:
- The Benefit of the training initiative (measured in dollars)
- The Cost of the training (measured in dollars)
The cost of the training is usually the easiest to estimate, so let’s start there.
Add up all the new expenses you incurred for the initiative. Common categories include additional team time, software expense allocation, and the cost of new content.
Halfway done! But that was the easy part.
How do you measure the benefit of training in dollar terms? This part is more challenging to quantify. We recommend one of the following 4 approaches:
- Calculate the dollar impact of improving new employee onboarding.
- Calculate the dollar impact of reducing employee turnover.
- Calculate the dollar value of reducing costly operational errors.
- Calculate the dollar value of improved job performance.
In the following sections, we’ll walk you through each approach.
Approach #1: Calculate the dollar value of improving employee onboarding
The first days of new employee training can feel like drinking from a firehose. New team members need to master huge volumes of industry knowledge and company-specific information to succeed in their jobs.
For companies, it’s expensive and time-consuming to onboard new employees. And, too often, it’s a waste of time and money. According to the Harvard Business Review, it typically takes 8 months for a newly hired employee to reach full productivity, and 33% of new hires start looking for a new job within their first 6 months.
You can create major financial gains for your company by improving your onboarding program. By reducing the time it takes for new employees to become fully integrated into their roles, companies can save large amounts of money.
A better onboarding program can improve your company’s bottom line in 4 measurable ways:
- Fewer days onboarding: Reduce the number of days that new employees need to spend training (instead of doing their jobs).
- Faster ramp-up of new employees: Reduce the time it takes for fresh hires to become fully productive team members.
- Reduced churn (during onboarding): Reduces the number of new hires who “wash out” and leave the company during the first 6 months of their job.
- Cost savings: Reduces costs associated with the onboarding program itself (trainer time, travel, materials, etc.).
How to calculate the dollar value of better onboarding
- Number of new employees to onboard per year.
- Average salary + benefits for a new employee.
- The cost to hire a new employee. Consider advertising and recruiting costs, plus the team time spent interviewing candidates.
- The typical number of days employees work per year. This figure will help you calculate a daily cost figure.
- Expected one-time costs associated with creating the improved onboarding program. This might include additional team time, software expense allocation, and/or the cost of content.
Next, estimate the following figures before any improvements to the onboarding process and after you improve the process:
- Number of days new employees spend onboarding.
- Turnover of new employees within the first 6 months.
- Onboarding costs per new employee.
- New employee ramp-up schedule. In other words, how quickly do they reach full productivity?
With this data, you can estimate the dollar value of better onboarding (and the ROI of the initiative) using the following calculations:
- Productivity benefit of shorter onboarding period: Decrease in onboarding days * Employee cost per day * # of employees onboarded.
- Productivity benefit of faster ramp-up: Increase in new employee productivity (per month) * Ramp-up schedule * # of employees onboarded.
- Value of reduced new employee turnover: Reduction in new employee turnover * Cost to hire a new employee * # of employees onboarded.
- Value of reduced onboarding costs: Reduction in onboarding costs per employee * # of new employees onboarded.
Now that you’ve calculated the total value of an improved onboarding program, you’re only 1 step away from calculating ROI:
Approach #2: Calculate the dollar value of reducing employee turnover
Every time a skilled employee leaves your team, it costs your company money to replace them.
Research suggests that the cost of employee turnover can total 150% of that employee’s annual compensation. For managerial and sales roles, that number is significantly higher: 200-250% of annual compensation.
In other words, for a company with an average salary of $50,000, the cost of turnover is $75,000 per departing employee per year. For a company of 500 with a 10% annual turnover rate, that works out to $3.8 million per year!
Through better training, you can give that money back to your company. Deloitte estimates that effective training can reduce employee turnover by 30-50%.
How can you calculate the true cost of turnover in your organization? Consider 4 cost categories:
- Covering the position: Include the cost of covering the vacant position with temporary or existing employees. If you’re unable to cover the position, you’ll want to account for the cost of lost productivity.
- Filling the vacant position: Include the cost of advertisements, recruiter costs, and hours spent screening and interviewing candidates.
- Onboarding costs: Include materials, travel, and trainer time.
- Ramp-up costs: When new employees first join your company, they’ll spend more time learning than producing. Therefore, you’ll want to estimate the ramp-up time for new team members and account for lost productivity costs.
How to calculate the dollar value of reducing employee turnover
- The total number of employees at your company.
- Your company’s average employee turnover rate (before implementing an improved training program).
- The average salary + benefits for departing employees.
Next, build out an estimate of how much it costs your company to replace a single experienced employee using the cost categories we defined above. Ideally, you’ll have access to this data for your company. If not, you can make reasonable estimates and test your logic with colleagues. You’ll want to estimate:
- The number of months it takes to fill a vacant position.
- The costs of filling the vacant position (including advertising costs, recruiter fees, and team time interviewing, evaluating, and selecting candidates).
- Onboarding costs per new employee.
- New employee ramp-up schedule. In other words, how quickly do they reach full productivity?
With this data, you can estimate the dollar value of reducing employee turnover (and the ROI of the initiative) using the following calculations:
- Turnover cost for a single experienced employee: Cost of covering the vacant position + Cost of filling the vacant position + Cost of onboarding + Cost of ramp-up.
- Total value of reducing turnover of experienced employees: Turnover cost for a single employee * Reduction in churn rate * Number of employees at the company.
Now that you’ve calculated the dollar value of reducing employee turnover at your company, simply incorporate the cost of the training initiative to complete your ROI calculation.
Approach #3: The value of reducing costly operational errors
Operational errors cost your company money every day. Therefore, if your training can reduce or eliminate the highest-impact mistakes employees make, you can drive significant business impact for your company.
Start by thinking broadly about the full range of things your employees need to do in their jobs. Over the last 3-6 months, what kind of operational mistakes have you observed?
To decide where to focus your training, you can estimate the relative business impact of each mistake.
To do that, brainstorm the range of potential consequences that could result from each error. Each consequence has a potential cost, and those costs fall into 3 broad categories:
- Hard costs: These are the easiest to measure. When you need to provide a refund, comp a service, or otherwise pay money to make things right, include that expense as part of the cost of the mistake.
- Soft costs: Consider manager time required to address the mistake, the impact on the customer experience, or the cost to your company’s reputation.
- Opportunity costs: Think about this in terms of lost future revenue. In a sales context, you might consider the cost of a lost sales opportunity, and in a customer service example, you could consider the cost of a customer not returning to your business.
How to calculate the annual cost of a mistake
This approach will give you the full potential cost of a single mistake. The next step is to weigh each mistake based on probabilities.
How many times is the given mistake likely to occur each year? When the mistake occurs, how likely are you to experience each of the hard, soft, and opportunity costs you identified? You can use historical data to estimate these probabilities.
In our work with customers, we’ve found that this methodology is powerful for prioritizing where to focus training first. We’ve created a detailed guide (+ free calculation templates) that makes this process easy to customize for your own organization.
Approach #4: The value of improved job performance
Effective training makes employees better at their jobs. Therefore, one of the best ways you can prove the ROI of training is to measure the concrete business impact of specific employee training programs.
Since every company is different, there’s no one-size-fits-all way to do this. But we’ve noticed that the best trainers follow a common approach.
First, align on the metrics that matter most for your organization. What strategic initiatives have your leaders committed to driving in the next 6-12 months?
Then, clarify how your learners’ job performance connects to those objectives. What KPIs do they need to achieve, and what will be the business impact of those outcomes?
Finally, connect your training efforts to your learners KPIs. How will you know if your training is successful? Which of your learners’ KPIs will it improve? What would be the business impact of that improved performance?
Here’s an example to illustrate how this process works in practice.
Imagine that you lead sales training for a major automotive manufacturer. Your company has just launched a new line of Electric Vehicles (EVs) and is investing heavily in marketing the new product line. While this has driven significant customer foot traffic, sales have been sluggish.
Headquarters has trained sales reps thoroughly on the new vehicle features and tech specs. That’s not the problem.
The reason why reps are losing sales is because customers are asking other types of questions that reps don’t know how to answer. These questions center on the Total Cost of Ownership for an EV. Is the car a good deal over the long term? How much does it cost to install a home charger? What are state-specific tax incentives for purchasing a vehicle?
Imagine if as soon as you learned about this knowledge gap on your sales team, you could quickly deploy a short, focused training module on this topic. If you could increase the percentage of reps who hit quota this year, what would be the impact of that on your company’s bottom line?
How to calculate the dollar value of improving job performance
- The number of sales representatives at your company.
- The average annual quota for a sales representative.
- The percent of sales reps who achieve quota. To make this analysis more accurate, you may want to segment your sales force into 3 categories: High Performers (attain 100% of quota), Average Performers (attain 60% of quota), and Low Performers (attain 40% of quota). Remember that these performance thresholds are placeholders that you can modify for your own organization.
Next, estimate how sales rep performance could improve as a result of a focused training initiative on the knowledge gap that you identified. To do that, simply estimate:
- The share of sales reps who attain 100% of quota in the period (top performers).
- The share of sales reps who attain 60% of quota in the period (average performers).
- The share of sales reps who attain 40% of quota in the period (low performers).
With these before and after estimates, it’s easy to estimate the incremental revenue that the sales team generated and the ROI of your focused training initiative.
Prove ROI with confidence
Now that we’ve walked through 4 different approaches to calculate the dollar value of your training initiatives, you have everything you need to calculate the hard ROI of training. Simply plug the “Cost” and “Benefit” figures into the ROI equation, and you’re all set!
We know that this guide has been extremely tactical. It’s full of data points to estimate, numbers to plug into Excel, and calculations to run.
Now that you’ve finished, pause for a moment, zoom out, and reflect on what you just accomplished. While most leaders give up on trying to measure the business benefits of training, you didn’t and now you have the insights you need to make informed decisions about your training program. Your efforts will pay off in the long run and help ensure that your organization is learning from its training investments.
Download your copy of the ROI calculator now!
You’ve shown your leaders that you’re committed to linking your training to business outcomes that matter for your company. Download these templates for free to prove your training ROI!