Is ROI really that important!?!
Measuring ROI allows a business to ensure its investments are sound. It’s not rocket science to know that if expenditure provides no returns, the business can identify this and react accordingly. In an ideal world, a comprehensive financial plan would be put together to predict return on investment allowing managers to justify a case for further spending. As a previous L&D manager I often found the biggest challenge was getting the business to understand that if everyone was working at full capacity, all doing what only they could do, then that was a good starting point! People not being utilised effectively, or staff being unskilled, reduced the potential of any return because the investment was starting with an un-achievable perspective!
The difficulty lies in being able to make the training budget work and knowing how to prove that training is effective. I found the problem occurs when you try to measure L&D benefits in a purely financial model; which got me thinking – instead shouldn’t we be looking at other ways of measuring ROI which can be used in the same way for similar benefits? We don’t do an ROI analysis on office furnishing spend, although furnishing an office is often a huge cost. Maybe there are other ways of looking at ROI for topics such as L&D, office infra structure and other similar areas which support the working environment as a whole.
This lead me to ask the question, “What does ROI actually mean?”
It is often used as the latest L&D ‘buzz’ word, but I am not sure anyone is actually able to demonstrate it! So, in my quest to find the ROI truth it’s no immediate surprise that the textbook answer is that ROI (Return on Investment) is a measure used to “evaluate the efficiency of expenditure against objectives, using multiple investment comparisons against each other”. Traditionally, ROI has been associated solely with financial measurement.
Traditional formula: Return on investment (%) = (Net profit of the project / Investment) × 100.
Training can often be seen by the business as a drain on finance and time … if we prove a return we may be able to educate the business that training is in fact an investment.
A survey carried out by Ashridge Business School with 270 Europe-based businesses explored the views of both L&D practitioners and executive sponsors regarding the evaluation of executive education. So if business sponsors /executives are putting pressure on us to demonstrate an ROI, they must be actively applying it within their owns areas then right?… actually no!
The research demonstrated:
When asking executive sponsors how they would describe ROI when referring to L&D campaigns, only 8% described ROI as a financial metric. In contrast, 88% of respondents focused on improving individual performance and positioning the company for long term strategic success.
Only 11% of respondents report regularly evaluating impact at the organisational level, and only 3% regularly assess the financial ROI of executive education.
85% of HRD respondents believe that ROI evaluation will become more important over the next three years. However, 43% of HR professionals stated that it was often impossible to measure the ROI of executive education using objective measures.
86% of respondents regularly evaluate using participant reactions to training. A very wide range of evaluation methods are used, but the post training ‘happy sheet’ is still by far the most commonly used, reported as being used by 89% of these businesses.
Up until now we have assumed that everyone will be assessing ROI on a strictly financial basis, but is this traditional ROI calculation reflected in real life? Not according to the statistics above! Are real organisations like yours measuring the financial ROI of their L&D campaigns? According to the Ashridge research, only “3% of HR departments regularly assess based on financial ROI and only 8% of executive sponsors are looking for financial ROI in their reporting”.
So, this made me wonder, if the traditional measurement is not in demand, what is?
I work with HR & L&D managers every week that are constantly being told to demonstrate an ROI using the traditional formula, you know the financials of what the training costs, but how do you measure your net profit with so many other factors, all of which are effecting the bottom-line making it impossible to separate out the training’s effect? And – no-one paying attention to it anyway!
I remember having a conversation with the deputy CEO of a national newspaper about the challenges of justifying and demonstrating a ROI. His view was that “if you’re a good leader, you know what your people need and so do they because they are anticipating how they can always improve and be the best they can be”.
“It’s easy” he said – “I rely on gut instinct. If we have the right people, with the right forward thinking mindset, the ROI becomes a constant evolving internal cycle of their behaviour to demonstrate what they know, what they can do to improve, and constantly striving to continue to be the best – if you keep throwing the financials at people very quickly they feel like just another cost where the real value is forgotten and not utilised.”
The ultimate ROI for training is of course changes in behaviour that save or earn money. Better decisions, less time wasted and major risks avoided because people are prepared. These factors can in fact be measured and presented to senior staff as clear financial gains to the business because of changes in behaviour.