Methods for Calculating ROI and Bottom-Line Impact

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METHODS FOR All ROI calculations involve converting change
into a dollar value (benefit) and comparing it to
A W H I T E P AP E R B Y
CALCULATING
the investment required to produce the change
(cost). The methods described in this white
P AU L B E R N T H AL
ROI AND
paper describe variations on how the benefits
M A N A G E R
D D I C E N T E R F O R
A P P L I E D B E H A V I O R A L
BOTTOM-LINE
and costs may be calculated. The classic ROI
formula appears below:
R E S E A R C H
Benefit – Cost = ROI

IMPACT
Cost
There are many methods for measuring the
CLASSIC UTILITY ANALYSIS: TRACKING
impact of a training program on bottom-line
AND VALUING CHANGES
company performance. Many studies have
Many programs can be evaluated by quantifying
repeatedly demonstrated the value of training,
the value of a particular bottom-line result. For
and there is no doubt that training can have
example, dollar values can be calculated for one
many positive benefits.
unit of turnover, one grievance, or one defect
on a production line. If a training program is
Although return on investment (ROI)
designed to affect one of the outcomes, we can
calculations can be compelling, it’s important to link improvements in the outcome to the
keep ROI estimates in perspective. Because so
program. Although we cannot be sure that a
many factors can affect an organization’s
cause-effect relationship exists between the
business outcomes, we know that training is
training and the bottom-line outcome, if an
only one of many factors that can effect
improvement appears after the training
changes in bottom-line results. A program’s
program is introduced, it’s reasonable to assume
success and impact will be mitigated by factors
that the two events might be related. Usually,
such as the work environment, the economy,
the involvement of a control group can help
company culture, one-time events (such as
determine if the effects can be attributed to
downsizing), and a host of other variables.
some other outside influence. Normally,
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This is why DDI recommends a complete
analyses such as these must be bolstered by the
evaluation plan that incorporates multi-
addition of other training impact measures.
perspective measures on training outcomes.
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ROI studies are rarely calculated in a vacuum.
PACT
Usually, organizations include a broad range of
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measures to create an overall body of evidence
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in support of training impact.
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Example A:
return based on salary. For example, imagine
Training Program—A training program was
the following conditions:
designed to reduce turnover by increasing
• Fifty employees each are paid an average of
leaders’ effectiveness, which had been found
$50,000 annually.
(through exit interviews) to be a significant
• This group attends a training program that
factor in determining employees’ willingness to
addresses 25 percent of the total skill set
stay with the organization.
needed to perform effectively on the job.
Costs of Training—The cost per leader was
• The group has a 10 percent improvement in
$2,000, which included materials, facilities,
their skills that can be attributed to the
salaries, etc. Fifty leaders were trained. Total
training.
training costs were $100,000 (50 x $2,000).
From this information we can calculate a training
Dollar Value of Training—The training reduced
benefit of $62,500:
turnover from 20 percent to 15 percent in the
unit where leaders were trained. No
Benefit = Number of trainees x
improvements were observed in an untrained
Average Salary x Percentage of
control group. One percentage point of
Skills Trained x Percent
turnover was estimated to cost the company
Improvement, or
approximately $70,000 (lost productivity, hiring
$62,500 = 50 x $50,000 x .25 x .10
costs, etc). Therefore, the training might have
helped the company save approximately
By comparing the benefit to the costs of the
$350,000 (5 x $70,000)—a return on investment program, an ROI can be determined using the
of 250%.
standard formula and assuming a training cost of
$15,000.
Benefit – Cost = ROI
Cost
Benefit – Cost = ROI
Cost
$350,000 – $100,000 = 250%
$100,000
$62,500 – $15,000 = 317%
$15,000
Example B:
($3.17 for every $1 invested)
This model uses average participant salary to
determine benefits. The idea is that employees
Please note that this does not necessarily mean
are organizational assets that bring back to the
that the organization’s revenue will now jump by
317 percent. We have shown an increase in asset
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organization what they are paid. For instance,
if an employee is paid $50,000 a year, the
value, meaning that the trained employees are
person should return at least that amount of
now more capable and worth more to the
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organization. The possibility remains that the
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value to the organization; otherwise, he or she
skills they have learned will be derailed by other
PACT
must be considered a losing investment. Ideally,
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influences in the work environment, preventing
H
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employees bring back more than what their
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the ROI from being realized.
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organization pays them, thus producing profit.
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In cost-benefit analysis employees can be

valued based on what they are paid. By
showing that employees have improved their
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ROI AND BOT
skill levels to some degree, we can calculate a
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LEADER ESTIMATES
C. What percentage of this positive
Leaders are asked to describe improvements in
improvement do you feel was directly
critical outcomes that have occurred since the
influenced by the program?
training was introduced. Based on their
_______% (Range: Not caused by the program
experience, leaders assign a dollar value (or
[0%] to Completely caused by the program [100%])
range) to the observed improvements. Then,
they estimate the degree to which the training
PERFORMANCE MANAGEMENT
influenced the observed outcomes and the level ESTIMATES
of confidence they have in their estimates. An
In this method of analysis, performance review
average dollar value benefit is then calculated
data is used to estimate the impact of training.
based on the group’s perceptions.
Trainees work with their leaders to determine the
Steps:
impact training had on their achieving one or
more of their performance goals. The value of
1. Identify a sample of at least 20 leaders (or
achieving the goal is then quantified. The degree
other associates) who have had the
to which the performance goal is achieved can
opportunity to observe the impact of
be converted into an estimate of training impact.
training.
Steps (see corresponding data summary):
2. Create a form that allows leaders to rate the
following:
1. A sample of leaders choose a performance
objective that can be affected by upcoming
•
Observed improvements since training.
training.
•
Dollar value of improvements.
2. Leaders are asked to estimate in dollars the
•
Leaders’ confidence in their estimates.
expected gain—revenue or savings—likely to
•
Degree to which training influenced
be realized from meeting the performance
the improvements.
objective (column A).
3. Summarize impact across leaders.
3. Training is implemented.
Example:
4. At the next performance review, leaders
determine the degree to which they were
Please describe a positive outcome that has
able to achieve the targeted performance
occurred since the program was introduced.
objective (column B).
A. For the fiscal year, what is the approximate
5. Leaders estimate how much (in percent) the
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dollar value of this change?
training contributed to achieving the
B. How confident are you of your dollar value
objective (the “contribution estimate,”
estimate?
column C).
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_______% (Range: Not at all confident [0%]
6. Each leader then assigns a “confidence
PACT
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to Completely confident [100%])
estimate” (in percent) that indicates how
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much confidence he or she places in the
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contribution estimate (column D).
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7. The expected gain (column A) is multiplied
9. The two estimates are compared, and the
by the degree to which the objective was
lower figure is selected as the one to be
met (column B), the contribution estimate
included in the final tabulation of training
(column C), and the confidence estimate
results (column “Final Gain”). (Revenue
(column D) to produce an “adjusted gain
estimates also can be adjusted to account for
estimate” (column E).
the percent that would be taken to the
8. The adjusted gain estimate is reviewed with
bottom line.)
the leader’s manager, who is asked to either
10. Individual estimates are tabulated and then
confirm or adjust the figure, based on his
calculated with program cost data to
or her knowledge of the situation (column
produce a figure that estimates the return on
“Manager Adjustment”).
investment.

Example:
E

A B C D
(A x B x C x D)


Degree to
Which
Expected
Objective
Contribution Confidence Adjusted Gain Manager
Final
Leader
Gain
Was Met
Estimate
Estimate
Estimate
Adjustment
Gain
A $2,500
80%
65%
90%
$1,170
$1,170
B $20,000 100%
75%
80%
$12,000 $10,000 $10,000
C $600 100%
56%
75%
$252
$500 $252
D $8,000
95%
95%
60%
$4,332

$4,332
E $15,000
50%
25%
85%
$1,594

$1,594
F $200,000
90%
30%
75%
$40,500 $35,000 $35,000
G $20,000 100%
50%
90%
$9,000

$9,000
H $9,000 100%
60%
100%
$5,400

$5,400
I $52,000 100%
30%
85%
$13,260

$13,260
J $12,000 100%
40%
80%
$3,840

$3,840
K $800
75%
95%
65%
$371

$371
L $42,000
75%
15%
75%
$3,544
$4,000 $3,544
M $10,000 100%
80%
40%
$3,200

$3,200
N $30,000 100%
25%
80%
$6,000

$6,000
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O $100,000 100%
40%
95%
$38,000

$38,000
P $85,000
90%
60%
100% $45,900 $30,000 $30,000






SUM $164,963
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PACT
Cost of Training per Leader
$2,000
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Number of Leaders Trained
16
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Cost of Training

$32,000
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Benefit of Training

$164,963




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ROI AND BOT
ROI (benefit – cost)/cost
415.5%
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TREND ANALYSIS
4. Introduce
training.
Business outcomes (such as productivity,
5. Continue monitoring outcomes 6–12
customer satisfaction, turnover, absenteeism)
months after training is introduced.
that can be linked to a trained group of
individuals are tracked over time. By comparing 6. Summarize data for the trained and control
trends in the outcomes before and after the
group over time. Indicate the point at which
training, changes in the outcomes can be linked
training was introduced.
to training.
7. If a significant deviation in the outcome
Steps:
appears after training, determine the unit
cost of a 1 percent change in the outcome.
1. Identify the primary business outcomes
For example, one day of absenteeism could
that were targeted by the training. Ideally,
be calculated as one day of lost salary.
outcomes should be measures that are
Depending on the percentage of employees
already tracked. However, new measures
absent in a given time period, the lost value
can be introduced if necessary.
can be calculated.
2. Monitor the trend over a period of 6–12
8. Look at the difference in outcomes for the
months before training. If the data exists
trained and untrained groups. Calculate the
in an archived format, summaries of past
savings based on the information from step
trends can be created by reviewing records.
7. For visual impact the results can be
3. Ideally, monitor past trends in outcomes for
depicted in a line graph (see Figure 1).
both the trained group(s) and a similar
control (untrained) group.
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Figure 1: A Comparison of Absenteeism Rates Before and After Training
Absenteeism Rates
5.0%
Before Training
After Training
4.5%
4.0%
3.5%
3.0%
Team 1 (trained)
2.5%
Team 2 (control)
2.0%
1.5%
1.0%
0.5%
0.0%
Jan-99 Feb-99 Mar-99 Apr-99 May-99 Jun-99
Jul-99
Aug-99 Sep-99 Oct-99 Nov-99 Dec-99
Jan-99 Feb-99 Mar-99 Apr-99 May-99 Jun-99
Jul-99
Aug-99 Sep-99 Oct-99 Nov-99 Dec-99
Team 1 (trained)
3.5%
3.0%
2.8%
3.1%
2.5%
3.0%
1.5%
1.0%
0.8%
1.0%
0.5%
1.2%
Team 2 (control)
3.0%
3.2%
4.0%
2.9%
3.0%
2.9%
3.2%
2.0%
3.0%
3.2%
2.0%
2.5%

CONTACT INFORMATION
CONCLUSIONS
For more information on ROI and related

WORLD HEADQUARTERS
DDI recognizes that any investment in human
offerings, contact your DDI representative or
412.257.0600

capital is a potential target for evaluation. It is
visit our web site (www.ddiworld.com).
E-MAIL: INFO@DDIWORLD.COM

important for an organization to see that these

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investments have an impact on bottom-line
results, such as financial performance, employee
satisfaction, customer satisfaction, and
productivity. DDI has conducted many studies
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of organizational impact and can help our
clients to establish ROI. In particular, DDI’s
Center for Applied Behavioral Research
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(CABER) offers proven models and methods
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for conducting valid studies.
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