ROI CALCULATION

As explained in chapter 2, ROI is reported in one of two ways: the benefit-cost ratio (BCR) and the ROI percentage. In simple terms, the BCR compares the economic benefits of the program with the cost of the program. A BCR of 2 to 1 says that for every $1 invested, $2 are provided in benefits.

The ROI formula, however, is reported as a percentage. The ROI is developed by calculating the net program benefits divided by program costs times 100. For example, a BCR of 2 to 1 translates into the ROI of 100 percent. This says that for every $1 spent on the learning program $1 is returned, after costs are captured. The formula used here is essentially the same as ROI in other types of investments, where the standard equation is annual earnings divided by investment.

For example, if after you convert Level 4 measures to money and you follow the five steps described previously, you find that the monetary benefits of a learning program result in a sales increase of $350,000, and the learning program cost $200,000, the BCR and ROI are:

The BCR explains that for every $1 invested in the learning program, the total financial benefit returned is $1.75. The ROI explains that for every $1 invested in learning, that $1 is recovered plus a net return of $0.75. ROI is the “return” on the investment, where the BCR is the total benefit including the investment itself.

So when do you use which? Many times both metrics are reported to give both perspectives. Because the BCR comes from the public sector, it is more often used in public sector reporting. However, the ROI is also gaining traction in those settings. For private sector organizations, the ROI is the primary metric.

Occasionally, a stakeholder will ask to see the time at which an investment will “pay off.” This payoff period is the estimated time at which a program will break even. It is then assumed that any time after that period will result in added benefit. The payback period equation is simply the BCR equation turned upside down. Take the total investment of the learning program, divide it by the benefits, and multiply by 12 to get the number of months. Using the previous numbers as the basis for the example, the payback period for the initiative would be:

This indicates that in approximately seven months, you can expect to break even on the investment.

INTANGIBLE BENEFITS

As described earlier, intangible benefits are those benefits that are not converted to monetary value; but they are important and sometimes just as important as the actual ROI calculation. When reporting as a result, there must be a connection to these intangibles. Typical intangible benefits not usually converted to monetary value are job satisfaction, organizational commitment, teamwork, and customer satisfaction. These could be converted to monetary value; however, when job satisfaction, organizational commitment, teamwork, and customer satisfaction are improved, the organization is usually satisfied with the improvement in these measures and the dollar value with that improvement is not necessary. The good news is that more of these measures are now being converted to money.

When you report ROI, always balance it with the intangible benefits. This balance places the ultimate benefits of the learning program into perspective.

FINAL THOUGHTS

This chapter discussed the various important aspects of ROI analysis. After following the steps in chapter 3 to collect data, it is important to analyze the data in a credible way. Perhaps the most important aspect of analysis is the isolation of the effects of the learning program on the data. It is crucial to know how this particular program affected the data, outside other influences. Another important part of data analysis is the conversion data to monetary value, various methods were discussed. Finally, the chapter discussed intangible benefits, or those not converted to monetary values. All of these items are critical in the ROI analysis. The next chapter focuses on communicating and using the results of the analysis.



 
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