In the #lrnchat last night, there was discussion about “selling” training to management. I saw this morning that there is an active discussion in the ASTD National LinkedIn group responding to a request for help in presenting on the Return on Investment (ROI) of training. I thought I’d take a step back and reflect.
Training professionals assume that they need to sell training proposals using ROI calculations. While the ROI calculation may feel like a familiar financial concept to managers, it is not a recommended technique for analyzing and evaluating investment alternatives in managerial accounting. This is because it can lead to incorrect investment decisions due to the fact that it ignores the time value of money.
The recommended technique for analyzing investment alternatives is the discounting technique. Two different methods fall under this technique. The first is the net present value (NPV) and the second is the internal rate of return (IRR). The NPV is the Holy Grail as it is theoretically superior to other techniques, but the IRR is easier to compute and interpret.
The typical capital budgeting techniques include: discounting, ROI, payback, and urgency. Payback is perhaps the simplest calculation to interpret: When do I get my money back? However, like ROI, payback ignores the time value of money. The urgency technique simply requires an estimation of potential costs, which are usually the focus of training interventions (e.g., compliance training) — stop the financial bleeding. An important observation is that all the capital budgeting techniques except the urgency technique require forecasts of future cash flows.
Beyond the urgency perspective
If a manager requests an ROI, this is essentially a request for a quantified cost / benefit analysis. If you can’t convert the benefits into a quantitative form, then another representation for those benefits is probably required that accounts for the intangibles (i.e., stories, examples, etc.).
If you want to propose a new technology project that will require a capital outlay, then a NPV calculation using discounted cash flows is recommended. These cash flows could be increased sales (easiest to interpret) or more likely expressions of productivity improvement (as is typical of technology). Quantifying these productivity increases is important for capital decision making, but expressing these increases in ways that users understand is perhaps more important (i.e., WIIFM). How will the new technology not add to the work the user already does? How will it save them time? Ideally, it would save enough time that some of that time could be given back to users while some of it could be reinvested by management into greater increased earnings.
From ideas to implementation plans
All of this quantified talk is really only important assuming a solid understanding of the problem that includes clear distinctions of its symptoms. The training project or performance improvement technology should be a recommended solution to the identified problem or opportunity. This is the first step. The typical strength, weakness, opportunity, and threat (SWOT) analysis ideally comes next. If the idea seems worthwhile based on the SWOT, a cost/benefit analysis is necessary to ground the idea. If it is still worth pursuing and involves significant capital, then a net present value based on discounted cash flows should be calculated. That is my theoretical model of how an idea turns into plan that is ready to be implemented.
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