You can judge training's ROI.

One of the most basic calculations central to remaining profitable is return on investment (ROI). Before any major expense is taken on, or any capital spent, a good company knows when and how that money will be recouped, so that the operation, equipment or initiative in question can begin operating "in the black."

In these increasingly high-tech times, when an educated, skilled workforce is becoming indispensable to manufacturing firms, training represents an ever larger expenditure. Yet few companies calculate the ROI for this expense. This column looks at reasons why, and offers ways you can begin to tabulate the payoff of investment in the "human asset."

ROI Reluctance

The most common reason training and education have not been subject to the same economic scrutiny as say, a molding-line expansion, is the traditional belief that it's value cannot be measured in dollars.

In addition, the results of training are often difficult to measure. Improved production rates or decreased scrap may be influenced by a number of more tangible factors, making it difficult to attribute an improvement to a dollar spent teaching the worker. Therefore, few people believe that training and education can be measured in a meaningful way. Also, many trainers are stronger in, and focus on, the soft-skills arena and consequently are not prone to measure the economic value of training.

Perspectives on Training

In today's competitive environment, people are beginning to place emphasis on demonstrating training's worth and showing its relationship to the bottom line. This is particularly true in small businesses with limited resources. In large, diversified corporations, there is often little concern with training's ROI. The profit-generating areas of the firm can "carry" the training department.

However, small businesses (which comprise the majority of U.S. foundries) are pressed for time and money, and feel forced to concentrate on production. Furthermore, they are unsure of the payoff. A common refrain is "If I train the employees, they will take the skills elsewhere." That is certainly a risk. But they may leave anyway! Statistics show that trained employees are more likely to stay because of perceptions about their career growth and the management's regard for their well-being.

Many firms use training as a "perk," a reward for a job well done. Once through the training, however, the employee too often finds there is no avenue to apply what he or she has learned. In such an inconsistent, ill-planned application of training, there will of course be no ROI, and the employee is disappointed that there is no way to show his or her new skills.

Another mistake stems from the belief that if training is applied to a specific problem, the problem will disappear. But training is no "quick fix," and it certainly can't resolve a situation that may have roots in other areas. There are probably many foundries in which this "cookie cutter" training has been applied without success, dimming management's regard for the value of training. But its ROI can only be measured over time, and therefore requires a long-term commitment.

A Formula for ROI

Now that some of the perceptions of training have been established, we can demonstrate two ways of measuring training's ROI. Both have valuable components and, used separately or together, they can become an important management tool.

The first method measures the cost of nonconformance (CONC). Developed by Guy Wallace, Svenson & Wallace, Inc., Naperville, Illinois, it refers directly to the number of errors made in the course of performing a job. The errors reflect back to current performance levels and show the potential value of improved performance. The following formula is used to calculate the difference between these two levels:

Number of Performers x Salary x Work Proficiency % = Performance Value.

Example:

Potential Value (PV)

5 x $27,090 x 100% = PV $135,450

Actual Value (AV)

5 x 27,090 x 60% = AV $81,270

If these values are projected over two years, the results show an AV of $162,540, compared to a PV of $270,900. Therefore, the CONC for two years is $108,360. If we take this down to the scale of the individual worker, and training improves his work proficiency 40%, the employees value has increased $10,863. The CONC probably far exceeds the cost of the training.

The second method of ROI measurement is simpler, but effective. It is calculated by tracking items that are important to you (you may already track some of them). These items could be scrap, rework, returns, cycle time, overtime, employee turnover or absenteeism.

Once a record is established of these items and their value is defined, subtract the money spent on training from the value of the improvements in this area for your ROI. Obviously, most of these items are not solely affected by training. Nevertheless, training will have had a significant impact.

While there is no way under this method to know the direct mathematical contribution of training to improvements, properly implemented training initiatives have an undeniable influence on quality, productivity, absenteeism and safety. In both of the above methods, it is easy to see the correlation between training and your business goals. A word of caution: as with any serious initiative, this information is useless unless someone has direct, overall responsibility for tracking training's ROI.