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A Report On

Cost-Benefit Analysis in Training and Development

Under the Guidance of Prof. Rangana Ghatak

Submitted By Name Darshan Patil Pankaj Patil Priyanka Patil Sachin Pawar Roll No. M-11-37 M-11-38 M-11-39 M-11-40

Cost-benefit Analysis in Training and development

Acknowledgement

We extend our sincere gratitude to Prof Mrs Rangana Ghatak, prof, IES MCRC, Mumbai for giving us the opportunity to do this study and undergo the process of learning. We thank her for all the support and guidance she has provided us which has helped us in better understanding of our research work. We would also like to thank her for all the trust and faith she has posed on us and we only hope that we have been able to live up to her expectations. We would also like to thank all our HR personnel from different organisations who have given us valuable insight and helped us in our research work.

Cost-benefit Analysis in Training and development

Table of Content

Topic
Introduction Cost Benefit Analysis Return on Investment(ROI) Utility Analysis Methodology of Primary Data Collection Primary Data Analysis Conclusion

Page No.
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Cost-benefit Analysis in Training and development

Introduction
It is very important to evaluate the benefits of the training & development and be able to put that in terms of numbers. Training comes at a cost and therefore any organisation would be interested in knowing the return on investment. Organisations use different methods to assess the benefits of training in terms of numbers i.e. the profits. Some of the frequently used methods are Cost Benefit Analysis, ROI and Utility analysis. There are many costs that are associated with the training apart from the direct and apparent costs. These costs can be described as follows: There are costs incurred towards the training needs analysis, compensation of the training program designers, procurement of training material and various media like the computers, handouts, props, gifts and prizes, audio visuals etc. Then there is another category is costs incidental to the training session itself such as trainers fee / salary, facility costs / rental etc. Finally there are costs involved is losing a man day of work (for those who are sent for training), travelling, boarding and lodging and training material that cannot be reused in some other training program. So training & development is a costly affair for an organization. One method of determining whether training is financially feasible is to conduct a cost-benefit analysis. This analysis compares the cost of training and the benefits that result from it. This analysis helps a trainer determine whether training is the solution to a problem, what priorities the company should have in developing training programs, and whether any given program is beneficial to the company. Hence Cost-Benefit analysis is crucial in Training and Development.

Cost-benefit Analysis in Training and development

Cost Benefit Analysis

Cost-benefit analysis is a decision-making technique that involves explicitly considering the position outcomes (benefits) as well as the negative outcomes (costs) of different decision alternatives. It is used to make decisions more consistently, systematically and correctly. It is also useful in communicating about decisions with others. Traditionally, such analysis has been used in many areas of management (such as Marketing, Finance and Operations), but has received much less attention in Human Resource Management (HRM). Often, this means that decisions about HRM programs are presented in less quantitative terms than decisions in other management areas. Training and Development Program is one of the key functions of Human Resource Management and in todays competitive and dynamic world the organisation needs a tool to evaluate its Training and Development program. One method of determining whether training is financially feasible is to conduct a cost-benefit analysis. This analysis compares the cost of training and the benefits that result from it. This analysis helps a trainer determine whether training is the solution to a problem, what priorities the company should have in developing training programs, and whether any given program is beneficial to the company. Although many complex formulas have been developed, cost-benefit analysis can be made relatively simple. There are three basic steps to a cost-benefit analysis: 1. Calculating costs 2. Calculating benefits 3. Comparing the results There are many costs of training both direct and indirect that should be included in the cost calculation. The three primary costs involved in training are: - Personnel and labor costs. This includes the salaries, consulting fees, and wages (including lost production) involved in the design, development, and delivery of a training program. - Training materials. This includes the development and delivery of expendable training materials such as handouts, workbooks, flip charts, or food, and nonexpendable training materials such as reusable slides, instructor manuals, and permanent transparencies. - Delivery costs. This includes the wages and salaries of both the trainer and the trainees, travel costs, equipment and facility rentals, meals, and site-tour fees.

Cost-benefit Analysis in Training and development

Return on Investment (ROI) Model

What is ROI? Return on Investment (ROI) in training and development (T&D) means measuring all the economic returns generated from an investment in a T&D programme. These returns are then compared with the true cost of the programme to determine an average annual rate of return of the investment. All capital assets need to earn a rate of return for the business to make a profit and stay in business; ROI is about judging the investment in T&D on similar criteria to other investment in the business. Some returns can be easily measured, such as increase in sales after a sales training programme, but others such as customer/employee satisfaction, turnover rate, and complaint levels require conversion to a monetary amount. Some costs can also be easily measured, such as hire of training rooms; however other costs need further analysis to determine, such as the cost of administration of the T&D department. The intense focus on performance in public companies has made ROI increasingly important. The only way to guarantee that projects and programmes receive funding is to show how they boost the bottom line. An ROI evaluation fulfils senior managements requirement to justify training budgets and investments.

Benefits of ROI: With knowledge assets far surpassing physical assets and the increased focus on people development, senior management requires ROI analysis to demonstrate the value generated from training and related Human Resource Development programmes. In this aspect, ROI is to HR what accounting is to spending on capital assets. Thus ROI: 1. Validates training as a business tool; training is seen as one of the many actions an organisation can take to increase its performance and profits. This validation benefits the organisation, the HR department and the employees. The organisation benefits since it becomes more aware of the mechanisms for profitability and the HR department benefits because it is seen as a strategic partner in the business rather than a necessary but non-strategic overhead. Finally, the employees in the company benefit because the organisation validates their personal development and so managers can encourage them to attend training rather than condoning no-shows on training courses due to pressure of work.

Cost-benefit Analysis in Training and development

2. Justifies the costs incurred in training. This helps HR and T&D departments avoid being the victim of cost cutting in the next economic downturn. If training is seen as one of the levers to achieve revenue growth, then there is no economic sense in reducing training if revenues fall. In fact, ROI can ensure that investment in training is targeted at the programmes that have the most impact on the organisations performance. 3. Helps improve the design of training. In order to achieve training programmes that are effective on an organisations bottom line, programmes can be improved on the basis of a formal ROI evaluation rather than simply relying on training evaluation forms (happy sheets) filled in by participants at the end of a programme. If an ROI analysis flags up that a training programme is having no effect on the intended performance criteria but is having a beneficial effect on other criteria, then the programme could be re-designed or re-designated. 4. Helps select training methods. There are many ways that training can be delivered from classroom-based and on-the-job to self-study and e-learning. ROI can be used to evaluate which delivery mechanism will achieve the programmes learning objectives for the participants in the most cost-effective manner.

Basics for ROI: There are great benefits to be achieved from ROI; the question is how to achieve them? In order to start to answer this question, one should consider the following: How do I determine whether ROI is applicable to my requirements? How do I construct an ROI evaluation? What are the issues associated with designing and developing a solution? What products and tools do I use to support the delivery of the programme?

Cost-benefit Analysis in Training and development

ROI Objectives: Like all implementations, once the objectives are clear the chances of success are greatly increased. These objectives need board-level buy-in for three reasons in particular: The results of the evaluation may produce data that has implications for the boards strategy. The profile of the HR department as a strategic partner is re-enforced. There needs to be cross-functional co-operation between HR (or T&D), Accounting and also in some cases the IT functions (this mirrors the cross-functional approach needed in e-learning, where both HR and IT functions need to work together). Some example objectives in an organisation are that they want to: Evaluate the ROI of a high profile training programme, which was implemented recently. Evaluate the ROI of a conversion to e-learning for a series of knowledge-based programmes they currently deliver using a mixture of classroom and self-study learning. Review the profile of investment in training for each organisational competency. The criteria on which the programmes will be evaluated also have to be decided.

Evaluation Criteria for ROI: Other criteria that could be used can be classified into hard and soft data. Hard data is objective data that can be extracted from an organisations accounting or Enterprise Resource Planning system and is more easily convertible into a monetary amount. Soft data is more subjective and needs to be extracted from the HR or Training databases or by conducting additional research, and is not so easily convertible into monetary amounts.

Cost-benefit Analysis in Training and development

Example:

ROI Dynamics: The process begins with defining the objectives of the ROI evaluation and selecting the most appropriate criteria for the evaluation. Then the actual evaluation is carried out by building a model and isolating the impact of non-training related effects. This results in a report, which both specifies the ROI of the training programmes evaluated and the plan for implementing changes in training design, assuming that the training needs are unchanged. Thus the process is a dynamic and seamless element of the evaluation phase of the training cycle, rather than simply ending with a report and leaving implementation to the HR department. These dynamics are illustrated below: Assess Training Needs

Training Evaluation

ROI

Training
Design

Training Delivery
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Cost-benefit Analysis in Training and development

ROI: Define Objectives of ROI evaluation Select Appropriate Criteria Extract data, Build Model and evaluate data

Report

Critical factors: There are various factors that are critical to the success of an ROI evaluation project: 1. Sponsorship from a strategic HR function An ROI evaluation will be more expensive than the more typical Kirkpatrick .Level one. Evaluation however this is compensated for by its increased validity and strategic implications. For these two reasons, there must be firm sponsorship from the HR function. This is more easily achieved if HR has already clearly aligned their functional objectives with the organisations objectives, since ROI is simply a method of evaluating training from the perspective of achievement of organisational objectives. 2. Board level sponsorship Sponsorship at the HR level is the first step to achieving board level sponsorship. Such senior level sponsorship is needed due to the cross-functional nature of ROI, since not all of the data will be easily accessible to the HR function. It is also needed due to the initial costs involved in the evaluation. However, the investment in a professional ROI evaluation will repay itself with increases in organisational performance from training targeted at increasing that organisational performance. 3. Readiness for change New approaches are always the subject of some concern. There is the traditional fear of change that needs to be overcome, as well as the more deep-seated fear that may exist about the consequences of negative ROI on the HR and T&D functions. 4. Partnership with other functions Just as the implementation of e-learning needs the partnership of the IT, HR and T&D functions, so does an ROI evaluation need the partnership of the accounting, resources planning and HR/T&D functions. It is important to build alliances at an early stage in the project for productive exchange of information and resources. For
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Cost-benefit Analysis in Training and development

ROI to continue beyond the project stage, these alliances must form the basis of longterm cross-functional relationships that are of great benefit to any organisation. 5. Discipline and planning A successful ROI implementation needs a lot of planning and a disciplined approach to keep the process on track. There need to be implementation schedules, evaluation targets, ROI analysis plans, measurement and evaluation policies and follow-up schedules. The HR function needs to have enough planning and discipline to stay the course, which again is assisted by board-level sponsorship.

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Cost-benefit Analysis in Training and development

Utility Analysis
Utility analysis is a quantitative method that estimates the dollar value of benefits generated by an intervention based on the improvement it produces in worker productivity. Utility analysis provides managers information they can use to evaluate the financial impact of an intervention, including computing a return on their investment in implementing it. Basic Assumptions: The first assumption of utility analysis is that human performers generate results that have monetary value to the organizations that employ them. This assumption is also the basis on which people claim compensation for the work they do. The second assumption of utility analysis is that human performers differ in the degree to which they produce results even when they hold the same position and operate within like circumstances. Thus, salespersons selling the same product line at the same store on the same shift will show a variation in success over time with a few doing extraordinarily well, a few doing unusually poorly, and most selling around the average amount for all salespersons. This assumption is broadly supported in common experience and in research. It is, for example, the basis on which some performers demand and receive premium compensation.

Basic Needs for Analysis: In completing the analysis, the performer needs to generate the following:

A method for measuring role productivity. A way to assign monetary value to role productivity. The distribution of productivity among performers of the role. The dollar value of a one standard deviation difference in role productivity (SD$). A method to measure the intervention's impact on role productivity.

With these elements of information, the analyst can compute the utility of the intervention in dollars. To accomplish the analysis, the analyst must be skilled in the methods of quantitative analysis in general and utility analysis in specific. This person needs to be aware of the variety of ways one can measure human productivity, determine its monetary value, and gauge the affects of interventions on participant performance.

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Cost-benefit Analysis in Training and development

Given that there are a variety of methods for computing utility, the exact resources needed for the task will depend on the method the analyst selects. The least set of resources anyone will need are:

Access to the people who will be using the results of the study to make decisions. The identity of the intervention whose utility you will measure. A subject matter expert who is knowledgeable of the intervention. A description of each affected role including its duties, outputs, and success criteria. The compensation scale for each affected role. A subject matter expert who is knowledgeable of the role(s) affected by the intervention.

Following steps should be carried out in order to get ready for the analysis: 1. 2. 3. 4. 5. 6. 7. Understand the people whose decision-making the study will support. Learn about the intervention you will assess. Learn about the role(s) whose productivity is affected by the intervention. Determine how to measure the productivity of the performers of each role. Determine how to value role productivity in dollars. Decide how to measure the affect of the intervention on role productivity. Create a plan for the utility analysis.

Steps to Carry Out the Analysis: 1. Determine the productivity of performers. 2. Determine the dollar value of a one standard deviation difference in role productivity (SD$). 3. Compute the effects on performer productivity associated with the performer's participation in the intervention being evaluated. 4. Compute the dollar value of productivity improvements generated by the intervention. Steps to do Follow-Up: 1. Add context to the findings. 2. Report the results of the analysis.

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Cost-benefit Analysis in Training and development

Methodology for Primary Research

Web based questionnaires: A new and inevitably growing methodology is the use of Internet based research. This would mean receiving an e-mail on which you would click on an address that would take you to a secure web-site to fill in a questionnaire. This type of research is often quicker and less detailed. Some disadvantages of this method include the exclusion of people who do not have a computer or are unable to access a computer. Also the validity of such surveys is in question as people might be in a hurry to complete it and so might not give accurate responses. Questionnaires often make use of Checklist and rating scales. These devices help simplify and quantify people's behaviours and attitudes. A checklist is a list of behaviours, characteristics, or other entities that the researcher is looking for. Either the researcher or survey participant simply checks whether each item on the list is observed, present or true or vice versa. A rating scale is more useful when behaviour needs to be evaluated on a continuum. They are also known as Likert scales. For this research, an online questionnaire using GOOGLE Documents was developed and the responses of concerned people were registered online. The link to the questionnaire is as follows: https://docs.google.com/spreadsheet/viewform?formkey=dHJ5OXlOT3FjTnBNeTR 0SGVOT0V6Ync6MQ

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Cost-benefit Analysis in Training and development

Findings and Observation

The Findings and observation is based on the primary research conducted, here the aim was to get the responses from Industry personnel to get a better exposure of the topic. The total number of respondents in the primary research was 14. These respondents work in prestigious organisation like Tata Consultancy Services (TCS), Wipro, Capgemini India Pvt Ltd, Protivity etc. Majority of the respondents worked in service organisation where the employee strength is more than 5000. Analysis: To know about the training and development programs in the organisation, the respondents were asked to given their opinion about In-house and OutSourced training program. Here we observed that majority of the respondent said that they have In- House training program. And this training and development is majority of the time focussed on developing the technical skill and the overall personality of the employee. Though majority of the employees said outsourcing of Training and Development is more cost effective, the HR personnel respondents gave a different story citing that In-House Training and Development is more cost effective.

Opinion on Cost effective Training Program.

33% 67%
Inhouse outsource

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Cost-benefit Analysis in Training and development

From the analysis we also got to know that the reason why companies go for outsourcing is because they can concentrate more on their core HR activities. When the same question is asked to the HR personnel they felt that CostCompetitiveness is the key factor while deciding on the outsourcing of Training and Development.

Parameters to consider before taking decision relating to Outsourcing of T & D

17% 50% 33%

Company intending to focus on core activities.

Competitive cost provided by outsourced firm

Specialised service of outsourcing firm

Majority of the HR personnel said that their expenditure on training development is between Rs. 100000 to Rs. 500000. Because of the huge expenditure the company needs to keep a track of the returns it will be getting. When asked whether there is a method to evaluate the training and development program majority of the respondents said that they dont have a defined method to evaluate their Training and Development Program. From the study we also got to know that the method used to evaluate the improvement/ learning in the employees in by way of presentations, examinations, assignments etc. To evaluate the success of the training and development program one method cited by respondent is ROI i.e. Return on Investment.

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Cost-benefit Analysis in Training and development

When asked whether their organisation use Cost and Benefit analysis in the training and development, all the respondents said yes. This indicates that majority of the organisation do cost and Benefit Analysis to know what is their current position of Training and development Program. Also all the respondents believed that this Cost Benefit Analysis in training and Development helps the HR personnel to take better decisions. Also helps them to identify the controllable and uncontrollable direct and indirect costs. From the Cost benefit analysis angle the most important resources highlighted by the respondents is time followed by all the resources which involve Funds, Personnel with required skills and Technology.

From Cost benefit point of view most significant resources are:

8 7 6 5 4 3 2 1 0 Time Funds Personnel Technology with analytical and technical skills All of the above Series1

From the study we also got to know that majority of the respondents feel that their present system of evaluation of training and development program is satisfactory.

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Cost-benefit Analysis in Training and development

Conclusion

Cost Benefit Analysis, ROI and Utility Analysis all these techniques helps organisation to evaluate their training and development Programs. Also in todays competitive world all the functions of the management have to have a competitive sense and need to work towards better performance and productivity and that to at the least possible cost.

From Human Resource Management point these kinds of techniques helps managers to evaluate their present performance and also set guidelines and strategies which could be useful in future. Training and Development is very significant part of an organisation, so to ensure there is optimum utilisation of resources and better returns the company should go for Cost Benefit Analysis or ROI or Utility Analysis.

The primary research helps in getting idea of the implementation of the Cost Benefit analysis. This research indicates that though in some organisation Evaluation techniques are not their but they still believe that technique like Cost and Benefit Analysis should be there in the organisation to handle the present program in a better way and also plan for future course of program based on the present evaluation of the cost and benefit analysis.

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