1. 1© 2013 by Nelson Education Ltd. CHAPTER TWELVE The Costs and Benefits of Training

2. 2© 2013 by Nelson Education Ltd. LEARNING OUTCOMES  Explain why trainers should calculate the costs and benefits of training programs  Describe how to calculate the cost of training programs  Explain the difference between cost- effectiveness and cost–benefit evaluation  Describe how to calculate the benefits of training programs

3. 3© 2013 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. 4© 2013 by Nelson Education Ltd. COSTING TRAINING PROGRAMS The process of identifying all the expenditures used in training  Critical consideration in training design, development, delivery, and evaluation  Is difficult, but necessary to determine value or return on investment to organization  Increasing pressure to calculate

5. 5© 2013 by Nelson Education Ltd. COSTING APPROACHES 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. 6© 2013 by Nelson Education Ltd. COMPARING COSTS Table 12.1 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. 7© 2013 by Nelson Education Ltd. BENEFITS  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. 8© 2013 by Nelson Education Ltd. BENEFITS  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. 9© 2013 by Nelson Education Ltd. BENEFITS 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. 10© 2013 by Nelson Education Ltd. RETURN ON INVESTMENT 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. 11© 2013 by Nelson Education Ltd. UTILITY ANALYSIS A method of forecasting the financial benefits that result from human resource programs such as training and development

12. 12© 2013 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. 13© 2013 by Nelson Education Ltd. UTILITY ANALYSIS Utility of a training program: ΔU = (T)(N)(d t )(SDy) – (N)(C) where 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. 14© 2013 by Nelson Education Ltd. BREAK-EVEN ANALYSIS Finding the value at which benefits equal costs and utility is equal to zero Utility = 0

15. 15© 2013 by Nelson Education Ltd. CREDIBILITY OF ESTIMATES  Costing not an exact science  Assumptions and judgments 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. 16© 2013 by Nelson Education Ltd. 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 Trainer’s Notebook 12.2

17. 17© 2013 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. 18© 2013 by Nelson Education Ltd. SUMMARY  Methods and approaches for calculating costs and benefits of training programs were described – this is increasingly important in today’s economy  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 was highlighted  An alternative approach – utility analysis – was described  The importance of credibility when estimating the financial benefits of training was discussed