Training
Cost-Benefit Analysis:
An Admittedly Superficial Overview
A web-published article by Michael Greer
Some numbers you will need:
Direct costs for each course, each person attending, each time the course is run. These costs include:
 | Instructional development |
| Materials |
| Travel |
| Room, equipment, catering |
| Instructor fees |
| Participant salaries |
| Fringe benefits |
| Other |
Indirect costs (annual costs divided by the number of courses run) such as:
| Administration (record keeping, etc.) |
| Clerical, typing, other support people |
| Ongoing course maintenance/development efforts |
| Catalogs, mailings, programs, shipping, telephone |
| Other |
Performance indicators (numbers indicating how well workers are performing before and after the training). These measure performance in three dimensions:
| Quality: error rate, number of changes or reworks required, waste, supervisor interventions, new business, return business, etc. |
| Timeliness: completion rate (expected hours vs. actual hours), delivery rate (on-time deliveries vs. late deliveries), etc. |
| Cost: budget variance (expected vs. actual costs), overtime, employee turnover, administration, etc. |
The cost-benefit analysis process, in a very small nutshell:
- Track your training organization's costs (direct and indirect) and gather data on performance indicators. (Hint: Always do this, since you never know when you'll need the data or how you might want to analyze the data.)
- Define the question to be answered by the analysis. For example, "How much money could we save by providing a course on how to assemble widgets?" or "How much money are we saving by teaching managers to be better project planners?"
- Quantify the actual or potential benefits. (See performance indicators above.)
- Compare the benefits to the costs. (That is, figure return on investment or ROI.)
- Repeat steps 1 - 4 for other alternatives. Typical comparisons might include purchase of a packaged course instead of custom development, hiring trained people instead of training existing staff, job redesign instead of training, and so on.
- Decide which alternative is best for your organization and situation.
The bottom line: Analyzing the costs and benefits of training requires lots of quantifiable details about the way you do business, the way you develop and administer training, and the specific, measurable business results you want to achieve. It can't be done in a "quick and dirty" fashion. You need plenty of historical data and you will need to quantify possible alternatives.
For lots of details, formulas, and so on, see "Evaluating the Return on Investment of Training" by Eric A. Davidove, Performance and Instruction, January 1993, Vol. 32, Number 1, pg 1. or "Calculating the Return on Investment in Training: A Critical Analysis and A Case Study," by Harold D. Stolovitch and Jean Gabriel Maurice, Performance Improvement (formerly Performance and Instruction), October 1998, Volume 37/Number 8, page 9.
(C) Copyright 2004 from Michael Greer's Project Management Resources web site. The URL is http://www.michaelgreer.com. For more information, send e-mail to greers_pm@yahoo.com. -- Feel free to copy and distribute for informational (not-for-profit) purposes.
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