Second to the learning process, training practitioners have one objective: demonstrating that their efforts deliver business value. You may fear the moment business leaders question how your work delivers value for the organization. The answer lies with how your leaders conduct a return on investment (ROI) evaluation.
Demonstrating how training delivers business value isn’t simply about applying a formula. It requires respecting the fundamental business and financial rules that leaders learn and apply contextually. Here are some things to keep in mind.
1. Think Business.
Learning is a business function within a business. Discover early the business expectation, and myopically focus on it. Committing to this shift in perspective allows you to develop more business-aligned learning solutions. It will also help you think like a business leader.
2. Differentiate Between Expense and Investment.
Your leaders think in accounting and financial terms. Even though both are costs, they differentiate between expenses and investments. Leaders typically refer to actual training activities as a expense, because it is a cost that occurs at a specific moment for which future benefits are uncertain. Alternatively, investments are tangible items to develop and deliver training. Leaders consider these items (assets) long-term investments that contribute long-term value throughout their useful life.
For example, let’s say you develop an e-learning program. Expenses include the time involved in your developing and delivering the content and employees taking the e-learning courses. The software and hardware required to develop the course and track learning is an investment that increases organizational value over time beyond the specific training activity. Prepare to explain how these investments will deliver long-term value for future training efforts and the business overall.
3. Align to Business ROI.
Understanding how leaders apply ROI is fundamental, considering the increasing need for learning technology and equipment.
Leaders never measure the ROI of an expense, only long-term investments. While fundamental formulas exists, leaders apply more precise ROI tools to evaluate business impact. These tools include a cost-benefit/break even (cost-volume-profit or CVP) or net present value (NPV) analysis.
A Cost-Benefit Example
Here’s a simple example to demonstrate cost-benefit analysis. ABC company sells a productivity software for $200 and currently sells 4,000 units. The cost to make the software is $120 per unit, resulting in a $80 profit per unit. ABC recently released a new version.
The CEO believes an e-learning course could help the sales team increase sales by 700 units and avoid work disruptions. The course, including equipment, technology, content and design, will cost $60,000. ABC currently has $200,000 in fixed costs.
Before approving the course, the CEO wants to know if it makes financial sense. The learning practitioners’ instinct is to say, “Yes, it makes sense, since sales will increase by 700 units, or $140,000, for an e-learning investment of $60,000. ABC will be ahead by $80,000.” ABC’s business leaders, however, see it differently.
At the current sales level of 4,000 units, ABC is earning $120,000 in operating income (column 1). By adding an additional $60,000 in e-learning fixed costs, along with the sales increase (column 2), ABC is now losing $4,000, dropping operating income to $116,000. Naturally, the CEO won’t support the course.
Even though ABC won’t gain 700 units in additional sales, it won’t incur the additional fixed costs of e-learning. At worst, it’ll maintain current profit levels.
To obtain CEO support, one of two things must happen: Either the learning practitioners find a way to reduce the e-learning development costs by $4,000, or they work with their colleagues to increase sales by 50 units. Either will bring the decision to what business leaders refer to as “break even.”
Ideally, leaders want to do more than break even. To do so requires either decreasing costs by more than $4,000 or increasing sales by more 50 units respectively. At this point, e-learning will help ABC improve profitability.
The learning function should review every e-learning course element, from the technology to the development process, to identify the “must-have” items. The rest? Well, they’re the “nice-to-have” elements and won’t convince the CEO to invest further.
However, the cost analysis is half the story. Leaders expect to hear about the benefit of the investment decision, and this is where you can shine. Since leaders expect learning investments to benefit the company for multiple years, you have the opportunity to present the qualitative aspects they expect. For example, ABC’s learning practitioners could say that the investment in e-learning technologies will benefit the sales team over future periods, leading to potential increases in sales surpassing first-year expectations.
No one expects you to become a financial professional, but you should be business-literate and financially aware. Expense and investment decisions don’t happen in a vacuum and certainly not through training ROI formulas your leaders don’t recognize. Work with the actual business methods leaders know, and don’t do it on your own. Develop a relationship with the internal finance team to build a robust business case. As a bonus, you’ll impress your leaders, even if you don’t get approval.
Want to learn more? Our Midwinter Month of Measurement is leading up to our next virtual conference, TICE Virtual Conference: Metrics Matter, a Focus on Strategic Planning, Analytics and Alignment. Learn more and register for the free event here.