Those involved with workplace learning (or training) must possess a sense of curiosity coupled with the expertise to develop learning interventions. Curiosity, however, is more than identifying when and how learning is an appropriate solution. It’s also about thinking critically, which means questioning everything you’re presented — even the truth.
Many practitioners, however, are selective, often subconsciously, when questioning learning methods or approaches.
Let’s assume that the reason training return on investment (ROI) continues to be applied and considered valid is largely because it’s anchored to a substantiated financial methodology. This is how most myths start and avoid being questioned — at least for a while.
Let’s unpack and debunk the myth of using training ROI to measure training impact. There are numerous reasons why you should avoid applying this methodology.
The Kirkpatrick Model
The training ROI methodology is an extension of The Kirkpatrick Model’s four levels of evaluation. The current iteration of Level 4 is meant to correlate precise metrics, specifically improved performance, with an indirect relationship to business results. Training ROI proponents are subtly moving toward a performance-based evaluation approach, recognizing their manufactured ROI calculations are not credible. A performance-based evaluation approach — like Kirkpatrick’s Level 4 — is how stakeholders evaluate learning impact to improve operational results.
Next, stakeholders never measure a cost center’s financial profitability according to managerial accounting texts (taught in all leading business schools), accounting standards and common sense. Naturally, training is a cost center (support), but referring to it as a cost center is not meant to be demeaning.
The Four Responsibility Centers
The four responsibility centers are referred to as revenue, profit, cost and investment centers, and each one applies to every internal operational activity. Each is evaluated according to how it’s categorized and the value it delivers. Training is a cost center because it supports primary profit-center activities. But training isn’t the only cost center. Any operational activity that supports primary business objectives is a cost center, like production, finance, marketing and human resources. A cost center receives funding either through a budget or paid by a profit center. The cost center then uses this money to demonstrate relevant, sustainable value contributing to the profit center’s output, not for it to be profitable itself.
Cost centers never have to justify tangible financial returns, as costs are not expected to deliver an ROI in the factual sense (accounting standards). If it did, it would imply that training, on its own, improved the profit center’s results without acknowledging the input of other operational factors. If the training is successful, it negates the value of otgher contributing operational inputs. If unsuccessful, training will shoulder the blame for the failure even though the cause may be a result of other operational factors. Either way, every practitioner should learn about responsibility centers and how they function.
As far as those manufactured training ROI calculations, you’ll never find these formulas in any finance or accounting text. Yes, you will find ROI calculations, but stakeholders don’t measure a cost center’s financial output. Actual ROI calculations are more than the simple Dupont ROI formula most are familiar with. Your stakeholders apply more involved ROI calculations to evaluate financial impact for profit-center activities or the contribution of significant investments (capital expenditures).
Calculating ROI requires accumulating cash outflows (related cost and expenses) and cash inflows (revenues) for the activity or investment measured over a period. This calculation even involves a taxable benefit. Granted, training is one of the included costs. But training’s financial value, as with other cost center expenses, is not directly evaluated. Stakeholders are evaluating training’s contribution value to improving the activity’s overall profitability. Again, they strive to reduce waste and minimize all cash outflows to increase overall profitability for the activity or investment.
Subsequently, using learning technology can help make your effort lean, which is about reducing training costs, delivering training through more efficient methods. Doing so gains stakeholder support and helps to increase the activity’s overall ROI. For years, practitioners have been wishing for more tools and technology. But if you receive approval to acquire new learning technology, you should know it comes with underlying conditions. You see, stakeholders expect every new investment to improve performance, productivity or efficiency. The investment should deliver some type of cost reduction, revenue increase or a combination of both, to increase profitability. So, the next time training is part of a major operational effort, leverage existing learning technologies to answer the questions asked previously.
But should you need new technology, know that stakeholders will expect an ROI evaluation before they approve your investment request. Stakeholders never measure the ROI for learning, but they do measure ROI for operational investments. Don’t worry: You don’t need to break out your calculator or your limited financial knowledge. Your finance department will do that for you, so be sure to enlist their help. You’ll need to answer questions such as, “Why you need it?” and, more importantly, “What performance, productivity or efficiency improvement will it offer to the learning initiative and consequently, for the organization?” Do your best to provide reliable financial estimates associated with these three criteria. Then feed this information, along with the complete life-cycle investment cost, to your financial allies.
But how do you assess the viability for your training efforts if it’s not applying training ROI? First, embrace that training is a cost and evaluating its effectiveness arrives through the value it delivers to improving profit-focused activities. This causal relationship is the basis for evaluating impact.
To that end, there are many credible financial approaches to assess impact. Consider something like a cost-benefit analysis. This managerial accounting approach evaluates the cost of the effort in relation to its intended benefit. Another approach is calculating cost-volume profit, also known as break-even analysis. Here, adding an additional fixed cost, like training, requires your organization to evaluate how much revenue must increase or how much to reduce variable or other fixed costs.
Finally, and probably the most relevant, is aligning your training efforts with precise operational key performance metrics. Kirkpatrick attempts to evaluate this through Level 3 and 4. Doing so allows you to demonstrate tangible contribution and help precisely target poorly performing operational areas. The key performance metrics you seek are available within your organization’s performance management framework. It is also something that can provide tangible results.
Believing in an approach not substantiated within any business methodology undermines your credibility. Especially an approach, such as training ROI, developed by a private organization without professional financial or accounting designations recognition. You don’t need to be a financial expert, but stakeholders expect you to be business and operationally literate, capable of asking and answering the right questions. Remember, the training function is an operational business role, within a business, expected to contribute to business results.
Before jumping on the next unsubstantiated training methodology, make sure to consider its source, question its viability and challenge its underlying assumptions. Better yet, become familiar with the existing business methodologies that your stakeholders apply, and you’ll never go wrong.