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How Your Leaders Approach ROI

Have you ever thought about the impact your training costs have on a business project or investment? Your leaders do all of the time. They have many validated methods available to evaluate profitability, or at least the financial benefit, of major business initiatives, such as purchasing equipment or launching a new product—and training ROI isn’t one of those methods.

I recall working with a major pharmaceutical company that was launching a new prescription drug. The product launch required educating the medical community and sales team about the drug’s use. Management expected 15 years of revenue growth and to incur most of the internal costs, including training, in the first three years, levelling off for the rest of the product life. They expected a 15 percent return from investing in this product.

Leaders refer to this as capital budgeting, applying a proven return-on-investment method called net present value, or NPV, analysis. NPV takes into account the value of the activity’s cash flows during its life based upon an expected rate of return (or, as leaders say, “discounted”).

Simply, NPV is the difference between the present values for every year of cash inflows, typically the revenue or savings it generates, and the present value for every year of cash outflows, usually expenses to support the project. 

When the present value of total cash inflows is greater than the present value of total cash outflows, NPV is positive and the investment accepted. Naturally, when the present value of total cash inflows is less than the present value of total cash outflows, NPV is negative and the investment is rejected.

In my pharmaceutical example, leaders weren’t achieving their expected level of profitability over the product’s 15-year life. Naturally, they conservatively forecasted revenue, so increasing it to reach their profit target was out. All they could do was re-evaluate and hopefully reduce internal costs. 

The leaders recognized that training was core to ensuring compliance and legal requirements. They asked training to reassess their efforts and identify cost reduction or reallocation opportunities without degrading the learning effort. As a result, we reduced overall costs by 10 percent and, along with reductions from other support activities, the leaders exceeded their product’s profitability expectations. 

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The point here is that your leaders and finance department determine ROI, not you. They measure a project’s profitability contribution applying this ROI rate. When it doesn’t meet this rate of return, they’ll seek other areas to invest that will. 

For any training investment or training contribution to a major project, prepare to answer these questions: 

• What is the initial cost of the investment?
• How long will the training and training asset last or be used?
• What are the expected operational costs to support the investment?
• What positive financial results or savings will it offer over its life?

Again, I don’t expect you to become financial professionals. But I do encourage you to work closely with your finance team to work through this ROI calculation.

Prepare to know the financial requirements for your training investments or the cash outflow impact the training will have on the organization’s project. This type of business acumen and financial awareness will impress your business leaders. (If you enjoyed this article, please visit my recent Lynda.com Train-the-Trainer e-learning course designed for both recent and seasoned trainers.) 

© 2017 ATD, Alexandria, VA. All rights reserved.

About the Author
Ajay Pangarkar is is a co-founder of CentralKnowledge.com and LearningSourceOnline.com, and co-author of The Trainer’s Balanced Scorecard: A Complete Resource for Linking Learning to Organizational Strategy. He is a Chartered Professional Accountant (CPA), Certified Management Accountant (CMA), and a Certified Training and Development Professional (CTDP).
TK
About the Author
Performance management expert Teresa Kirkwood is co-founder of CentralKnowledge.com and LearningSourceonline.com. With Ajay M. Pangarkar, she is co-author of The Trainer’s Balanced Scorecard: A Complete Resource for Linking Learning to Organizational Strategy. blog.centralknowledge.com.
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