1© 2010 by Nelson Education Ltd. Chapter Twelve The Costs and Benefits of Training

2© 2010 by Nelson Education Ltd. Learning Outcomes  Explain why trainers should calculate the costs and benefits of training and development programs  Describe the different approaches for costing training programs  Describe the difference between cost- effectiveness and cost-benefit evaluation  Describe how to calculate the benefits of training programs

3© 2010 by Nelson Education Ltd. Learning Outcomes  Describe how to conduct a net benefit analysis, benefit-cost ratio, and return on investment  Define utility analysis and describe how to calculate the utility of training programs  Discuss the importance of credibility when estimating the benefits of training programs

4© 2010 by Nelson Education Ltd. Costing Training Programs The process of identifying all the expenditures used in training A critical element in the ISD model both in the design and evaluation stages

5© 2010 by Nelson Education Ltd. Costing Approaches 1. According to stages Needs analysis, program development, delivery and evaluation 2. According to nature or kind of costs Five cost categories: direct costs, indirect costs, development costs, overhead costs, and trainee compensation

6© 2010 by Nelson Education Ltd. Comparing the Costs of Training Programs Table 12.4 demonstrates some important aspects of costing and comparing training program alternatives: 1.Costing sheets can be modified to meet an organization’s needs 2.Level of detail varies according to needs 3.There is choice regarding what to include 4.Identifies the cheapest option

7© 2010 by Nelson Education Ltd. The Benefits of Training Programs  Cost-effectiveness evaluation: A comparison of the monetary cost of training to the benefit of training in monetary terms  Cost-benefit evaluation: A comparison of the cost of training in monetary terms to the benefits of training in non-monetary terms

8© 2010 by Nelson Education Ltd. The Benefits of Training Programs  Net benefit: the estimated value of the performance improvement minus the cost of improving performance  Benefit Cost Ratio: the benefit divided by the cost of the training program

9© 2010 by Nelson Education Ltd. The Benefits of Training Programs May have cost effectiveness and want to determine cost benefit. Will have to convert measures to monetary values Step 1: Focus on a single unit Step 2: Determine a value for each unit Step 3: Calculate the change in performance Step 4: Obtain an annual amount Step 5: Determine the annual value See Trainer’s Notebook 12.1 for more details

10© 2010 by Nelson Education Ltd. Return on Investment (ROI) A comparison of the cost of a training program relative to its benefits. This involves dividing the net benefit by the cost of the training program Return on Investment = Benefits-Cost of the program Cost of the Program

11© 2010 by Nelson Education Ltd. Utility Analysis A method to forecast the financial benefits that result from human resource programs such as training and development

12© 2010 by Nelson Education Ltd. Utility Analysis Important factors to consider in calculating the utility of training program 1.Effectiveness (effect size) 2.Standard deviation of job performance in dollars of untrained employees 3.Number of employees trained 4.Duration training benefits will last

13© 2010 by Nelson Education Ltd. Utility Analysis Utility of a training program ΔU = (T)(N)(d t )(SDy) – (N)(C) Δ U= utility, or dollar value of the program T= number of years the training has a continued effect on performance N= number of people trained d t = effect size SDy= standard deviation of job performance in dollars of the untrained group C= cost of training each employee

14© 2010 by Nelson Education Ltd. Break-even Analysis Finding the value at which benefits equal costs and utility is equal to zero

15© 2010 by Nelson Education Ltd. The Credibility of Estimates  Costing not an exact science  Assumptions and judgements have to be made  Important to ensure there is credibility in process of determining cost-effectiveness  Management and clients must perceive benefits estimates as credible, believable, and acceptable  Trainers need to be wary of promising more than they can realistically deliver; manage expectations

16© 2010 by Nelson Education Ltd. The Credibility of Estimates Increasing credibility of benefit estimates 1.Take a conservative approach 2.Use credible and reliable sources 3.Explain approaches and assumptions 4.Results must appear realistic 5.Use hard data See Trainers Notebook 12.2

17© 2010 by Nelson Education Ltd. Instructional Systems Design Model  All three stages of the ISD model have now been described  The critical elements are identifying, developing, delivering, and evaluating training within the organization  Failure to manage any of the critical elements will have negative impacts on the training and the achievement of the training related goals

18© 2010 by Nelson Education Ltd. Summary  Methods and approaches for calculating costs and benefits of training programs were described  The differences between cost-effectiveness, cost- benefit analysis were discussed as were examples of the calculation of costs, benefits, net benefit, BCR and ROI  Importance of this information for budgeting and comparing costs, and training evaluation were highlighted  An alternative approach - Utility analysis - was described  The importance of credibility when estimating the financial benefits of training was discussed