by Jae Freitas
Return on Investment (ROI) is a performance measure used to
evaluate the efficiency of an investment or to compare the
efficiency of a number of different investments. It is probably the
most important calculation one needs to make regularly to ensure
the long-term viability of the business. Calculating ROI is not an
easy task; however this article will introduce you to the basic
concepts behind ROI.
ROI is expressed as a percentage and is based on returns over a
period of time and is calculated as follows:
ROI = [(Payback - Investment)/Investment]*100
Where payback = the total amount of money earned from your
investment and investment = the total amount of resources (in
monetary value) that was put into generating the payback.
Because ROI is a percentage, it can clear up confusion caused by
looking at Rand value outputs. For example, if Company A made R
100000 from an investment and Company B made R 5m, most people
would assume that Company B's investment is the better one.
Now let's take into consideration the costs of these
investments. Company A invested R50000 while Company B invested
R400m. This would mean that Company A's ROI is 200% and Company B's
is only 1.25%. The rand value on a return is thus meaningless
without considering the cost of the investment.
Businesses often misunderstand the actual amount of investment.
As a result, ROI calculations can be skewed. Most small
business owners often undervalue their own time. Remember,
"investment" is defined above as the total resources in monetary
value. This includes "human resources" or "time".
So how do we use ROI Calculations to accurately evaluate the
benefits of investing in training programs for our human capital?
Firstly, we need to shift the perception of training as an expense
to an investment aimed at improving organisational performance that
will add to organisational effectiveness and, ultimately,
profitability.
In order to measure organisational effectiveness, one needs to
determine the monetary value of the individuals in their current
status. Once the training intervention has taken place, the learner
performance must be measured again.
Training is a continuous process in achieving organisational
effectiveness. Employees need to receive training on an ongoing
basis to enable application to their daily activities. The
information acquired to reinforce learning, will be converted to
knowledge application once the specific task is performed more
efficiently and effectively. Only then can the ROI be calculated
through a cost- benefit analysis by determining the cost
(investment in training) versus the benefit of the learning that
has taken place, i.e. the benefit of learning as a result of
training.
Training managers know that ROI must be measured, yet few are
actually performing this task. The King Report on Corporate
Governance states clearly that accountability must also be reported
in the area of human capital management, of which training is an
essential component. ROI's should be measured monthly and
annually. It is important to follow appropriate guidelines
for the effective application of the ROI measurement process
by:
- Creating awareness for ROI in the organisation
- Building capacity for ROI by training staff to understand
ROI
- Quantifying information before the training in order to
obtain a baseline and then converting this data into a monetary
value
- Allocating resources for ROI
- Developing a culture for measurement and accountability
among staff
- Starting with only one course as a pilot programme to
practise ROI skills
- Communicating results to training staff and the whole
organisation
- Designing improvement plans for training programmes in order
to increase ROI
- Utilising the data to market future learning programmes
Measuring ROI is not a one-person show. It is a powerful tool
that enables training managers to prove the value of training,
gaining credibility for the value added and a contribution to
achieving organisational effectiveness. It enables them to report
to management in quantifiable terms. Measuring ROI is about
accountability and taking responsibility for measuring the impact
training has on the organisation. Measurement is about becoming a
strategic business partner that adds value and provides integrated
business solutions. Measuring ROI can be done!
Educos Vision Services (Pty) Limited provide fully integrated HR
and Payroll solutions which provide you with the invaluable tools
you require to store, track and evaluate Employee Training and
Development records, critical to assist you with the management
tools to measure your ROI in training. Do you have the
tools you need to measure your ROI in Training? We have the
expertise you need; we are ready to help!