ROI [1] - (Return on Investment) - The Calculation

Return on Investment (ROI) or justification for invested capital, time, etc. is an important concept for training organizations.  Again, this is the language of business and you must know and understand how to demonstrate the value of your training programs to the company.

To calculate the Return on Investment for Performance Solutions (Training) can be easy or difficult due to the nature of Learning Events or Training Interventions.

The ROI formula is simple:

ROI  =  The Net Training Event Benefits
                   The Training Costs

For example:

Cost of Training Program = $195,000
Benefits of Training Program (1st year) = $350,000
then:
ROI  =  $350,000 - $195,000  =  $155,000  = 0.80 X 100  =  80% return in one year
                  $195,000                    $195,000

or if converted to a time period it would be:  80% / 12 months = 15 months to recover costs
Therefore the project will pay for itself in a little over a year.  ROI can be calculated on an annual basis or a two or three year recovery period.  It is critical that the recovery period is clearly stated.  For most programs the calculation is based on an annual return and extrapolated over the life of the program.

ROI is usually expressed as a percentage value like - 50% or 125% and is normally annualized.  A 25% ROI would say that the total investment costs will be recovered in four years.  25% of the costs each year.  A 100% ROI would say that all the investment costs will be recovered in the first year.

Of course the difficult part of this example is how to determine the $350,000 figure (the actual business benefit).  In future posts we will look at some examples of how to determine this value as well as other ways to express the business benefit of Training.

See also:
ROI - The Process
ROI - 2 - Cost Benefit Analysis - COSTS
ROI - 3 - Cost Benefit Analysis - BENEFITS
ROI - 4 - The Four Evaluation Levels (future)

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