To kick off evaluation month we turn to Ashridge's Dan Griffin who asks a pertinent question about L&D's return on investment.
What does ROI mean?
The textbook answer is that ROI stands for Return on Investment. It is a measure used to evaluate the efficiency of expenditure against objectives and can be used to compare multiple investments against each other. Traditionally, ROI has been associated solely with financial measurement.
Traditional formula: Return on investment (%) = (Net profit / Investment) × 100
The reality however is that a lot is made of ROI across all industries and professions; the need to financially quantify the results of our actions is strong, especially in a struggling economy where every action and investment counts for more than ever. In the real world, ROI usually represents the net benefits of an action, whether this is a financial figure or a non-tangible benefit to the business or individual. This demand for information on returns has spread from the boardroom and finance departments across entire companies; ROI is now a hot topic in HR communities worldwide and it is rare to attend a HR conference or event without at least one speaker covering the ROI of L&D.
Many people refer to the sudden interest in HR measurement as a passing fad in the HR space, forced by over-anxious executives looking to make quick cuts during hard times, but is this trend here to stay? The real question is whether there are any real benefits to measuring ROI and how important these calculations are to both to the HR department and to business stakeholders in general.
Is ROI important in L&D?
It would be a mistake to just follow the crowd and not question why we should be measuring the ROI of our actions - especially as all this measurement will take up our time and resources. It makes sense to first outline just who would have an interest in the ROI of L&D and why:
Business owners: While finances are important to any company, business owners must also keep a strategic view on the long term goals and actions of their companies. As such, business owners will be interested in the direct financial ROI of any project but will also have an interest in the non-traditional metrics such as employee morale and performance as well.
Finance: As businesses struggle to compete in harsh economic conditions, finance must evaluate the impacts of each department and how their spending is affecting the bottom line of the company; unfortunately central units such as HR tend to be the first in the firing line in hard times.
HR: The importance of ROI to HR professionals will vary depending on your company; some will be bombarded with demands to prove ROI, whereas others will never have to worry. But even if the CFO isn’t knocking your door down for returns, should you worry about ROI? The reality is you probably should, ROI can be used to build a business case for an increase in elearning budget as well as to help communicate the value of HR to other business units.
Learners: While learners may show no direct interest in the financial benefits of a campaign, they will be encouraged to know whether a particular training campaign is actually successful at implementing change in their workplace and whether it is worth their time and effort to attend. This method of communicating ROI can enthuse learners and increase participation levels in your online campaigns.
Research: What does ROI mean to HR and executive sponsors?
A survey carried out by Ashridge Business School with 270 Europe-based businesses explored the views of both L&D practitioners and executive sponsors regarding the evaluation of executive education. The research summarised that there is an ‘ROI hardcore’ who see the pursuit of what has been described as ‘the ROI Holy Grail’ as worthwhile and necessary, and who in some cases are putting in effort to try to achieve their goal. These professionals view ROI as an important addition to their reporting methods and pro-actively attempt to identify and measure the returns of their activities.
However, there is also a significant section of organisations where there is a rather more rounded view of what outcomes are needed from evaluation. For this group, ‘pure/financial’ ROI is less interesting than developing a better understanding of how individuals have benefited from a campaign and how they have been able or unable to apply learning at work.
Some quick facts that the research demonstrated:
85% of HRD respondents believe that ROI evaluation will become more important over the next three years. However, 43% of HR professionals stated that it was often impossible to measure the ROI of executive education using objective measures.
86% of respondents regularly evaluate using participant reactions to training. A very wide range of evaluation methods are used, but the post training ‘happy sheet’ is still by far the most commonly used, reported as being used by 89% of respondents.
Only 11% of respondents report regularly evaluating impact at the organisational level, and only 3% regularly assess the financial ROI of executive education.
When asking executive sponsors how they would describe ROI when referring to L&D campaigns, only 8% described ROI as a financial metric. In contrast, 88% of respondents focused on improving individual performance and positioning the company for long term strategic success.
So is ROI important?
Measuring ROI allows a business to ensure its investments are sound. If a particular project or expenditure provides no returns, the business can identify this and react accordingly. On the other hand, return on investment also allows managers to demonstrate the effectiveness of an investment and argue a case for further spending. While ROI is a simplistic measurement, it allows a manager to communicate the value of a project quickly to finance departments and ‘speak their language’. This is especially useful for HR managers who can struggle to communicate value effectively to finance and executives. The problem occurs when you try to measure L&D benefits in a purely financial model; instead we should be looking at other ways of measuring ROI which can be used in the same way for similar benefits.
But what if you cannot measure ROI?
Up until now we have assumed that everyone will be assessing ROI on a strictly financial basis, but is this traditional ROI calculation reflected in real life? Are real organisations like yours measuring the financial ROI of their L&D campaigns? According to our research, only 3% of HR departments regularly assess based on financial ROI and only 8% of executive sponsors are looking for financial ROI in their reporting. So if the traditional measurement is not in demand, what is?
What if you are a HR manager who has to justify your spending on the latest elearning library or LMS? Using the traditional formula, you know how much the project costs (your investment) but how do you measure your net profit with so many other factors, all of which are effecting the bottom line making it impossible to separate out the training’s effect?
Many HR managers often rely on gut instinct with this decision as ROI is almost impossible to calculate via traditional means. But with an increasing focus on profitability and return in every industry, it is becoming more difficult to approve expenditure based on this approach.
Daniel Griffin is marketing manager at Ashridge Business School. Download Measuring the ROI of eLearning here. Click here for more info about Virtual Ashridge
