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  Title: How to...measure returns on HR investment. By: Phillips, Jack, People 
  Management, 13586297, 11/22/2001, Vol. 7, Issue 23
  Database: Business Source EliteHOW TO...MEASURE RETURNS ON HR INVESTMENT 
Contents
  1 PLAN THE DATA COLLECTION, ANALYSIS AND CONVERSION 
  THE DATA COLLECTION PLAN 
  THE ROI ANALYSIS PLAN 
  2 COLLECT THE DATA AND SEPARATE OUT THE DIRECT EFFECTS OF THE TRAINING 
  3 CONVERT THE DATA INTO A MONETARY VALUE 
  4 CAPTURE THE COSTS OF TRAINING AND CALCULATE THE RETURN ON INVESTMENT 
  5 IDENTIFY INTANGIBLE BENEFITS 
  CONVERSION TOOLKIT 
  EVALUATION SCORECARD 
  ROI TIPS 
  FURTHER READING 
How do you quantify the benefits of training and other HR initiatives? Many 
efforts have been made to develop robust methods of measuring the return on 
investment [ROI) in HR, and here is one adaptable system that has been refined 
over the past 20 years. It has been used by hundreds of companies worldwide, 
including Vodafone and Rolls-Royce in the UK.
The process is designed to reduce subjectivity and inconsistency, to achieve 
accurate, credible results. This flexible model can be used to any depth 
required and applied in ways to meet the needs of most organisations. The same 
process can be used to evaluate a whole range of HR functions and programmes.
A comprehensive evaluation system has important building blocks: the first is 
identifying the types of data required -- that is, the "evaluation scorecard" 
(see panel, opposite page). Although in most cases the ROI calculation itself is 
likely to rely mainly on information about the impact of the programme on 
business, you need to collect data at all levels for a full assessment.
The second building block is to set some guiding principles for data collection 
and analysis. These might state, for example, that when there is more than one 
way of analysing data the most conservative should be chosen; and that extremes 
should not be included in ROI calculations. This should ensure that the results 
are stable, objective and credible.
The third building block is to establish how the process of collecting and 
evaluating data will work in your organisation. Who will carry out the task? How 
can it be fitted into your systems and practices? To work consistently it needs 
to be an integral part of the HR function, and this in turn raises questions 
about strategies skills, communications, roles and responsibilities.
Once these are in place, it's time to begin the ROI process itself.
1 PLAN THE DATA COLLECTION, ANALYSIS AND CONVERSION 
First, work out which programmes will be measured, and to what extent. It won't 
usually be cost-effective or helpful to conduct an ROI assessment on every 
single training and development initiative that takes place.
As well as what you assess, be clear about why you're assessing it. It could be 
to discern whether a programme is meeting its objectives, or to help with the 
internal marketing of future courses. This will often help to define which 
information you collect and how. The usefulness of the result will depend 
entirely on how the data is captured and analysed. So you'll need specific plans 
for both.
THE DATA COLLECTION PLAN 
Evaluation instruments. The crucial thing is to make your methods appropriate 
both to the programme you are measuring and to your time and budget constraints. 
Typical techniques include surveys and questionnaires, workplace observation, 
interviews, focus groups, assignments, performance monitoring and the collection 
of financial data.
  Evaluation levels. From which categories on the evaluation scorecard will you 
  collect the data? You should refer to both "hard" measures such as output or 
  costs, and "soft" data such as work habits and attitudes. 
  Evaluation timing. When will the data be collected? Two phases are usually 
  needed: tracking people's reactions and learning during the programme and, 
  afterwards, looking at its application to the job and its benefits. You 
  usually get the best results when the evaluation is planned into training at 
  the outset. Another important decision is duration: for how long after a 
  programme will the benefits be tracked? Is the programme likely to yield its 
  benefits over the long term, or will results be evident quickly? 
THE ROI ANALYSIS PLAN 
This establishes how the effects of training will be isolated from other 
factors. The plan is vital for credibility and, although it may seem obvious, it 
is often poorly addressed. There are many approaches, such as:
  simultaneously evaluating "control groups" who hadn't attended the training 
  and development programme; 
  analysing pre-training performance trends to predict what would have happened 
  without the programme; 
  asking participants, their supervisors and managers what improvements have 
  been made -- and to what extent the training has been responsible for them; 
  seeking input from customers (in one case at a high-street bank, clients' 
  perceptions that counter staff had become more knowledgeable were easily 
  ascribed to a training course); 
  looking at other factors that could have caused a change, and gauging their 
  impact. For example, increased sales could result from heavier advertising 
  rather than improved performance. 
The plan must also identify how the data will be converted to financial figures. 
This can be tricky, applying to both hard data and soft data, which is less easy 
to convert but still critical. You can take a methodical approach by choosing 
appropriate techniques from the "conversion toolkit" (see panel, opposite page).
Against this, you must also establish the training programme costs. You might 
include, for example, fees, materials, preparation and delivery time, salaried 
time of the participants (including benefits), venue costs, travel, 
accommodation, and training department administration.
Include a measure for the anticipated intangible benefits of the programme. Some 
factors will always be unmeasurable or too subjective to convert to monetary 
value -- job satisfaction, perhaps, or organisational commitment.
Lastly, identify who will see the evaluation results.
2 COLLECT THE DATA AND SEPARATE OUT THE DIRECT EFFECTS OF THE TRAINING 
Once the planning is completed, the next steps in the ROI measurement process 
should be carried out in sequence, using the methods and techniques set out in 
the plan.
3 CONVERT THE DATA INTO A MONETARY VALUE 
Once you've decided upon a suitable measurement unit for each indicator, you 
need to work out its value and how it has improved over, say, a year.
For example, a hospital was trying to improve its client satisfaction index 
through customer-service training. It needed to work out the monetary value of a 
given increase in this index. Senior managers were asked to explain what a 
better result meant for the hospital, and to estimate the monetary value of a 
one-point improvement. The answers were then averaged and used to calculate the 
value of improvements over time.
If a benefit proves to be too difficult to convert, you'll need to treat it as 
an intangible factor, to be reported separately along with the others already 
identified.
4 CAPTURE THE COSTS OF TRAINING AND CALCULATE THE RETURN ON INVESTMENT 
This is where the financial return is established. One way of looking at the 
results of training is a benefit/cost ratio. In simple terms, a benefit of 
£4,000 from a training course costing £1,000 would give a ratio of 4:1.
ROI analysis takes this further and produces a more useful figure: a percentage 
for the return after costs have been covered. Its formula is:
(programme benefits -- programme costs) x 100/programme costs
An ROI of zero would mean that the costs are merely recovered, while in the 
above example the return on investment would be 300 per cent.
5 IDENTIFY INTANGIBLE BENEFITS 
• both anticipated and those that have emerged during the process. Although 
these have not been used for calculation, they should still be mentioned in the 
final analysis as qualitative supporting evidence.
There are many myths surrounding ROI analysis, and possible barriers to its 
implementation, including a fear of the results, a feeling that senior managers 
do not want it, or a belief that it will be complex and time-consuming. But the 
pressure to '" measure may well become hard to ignore. With discipline and 
planning, this approach can help your organisation to gauge its ROI in a 
balanced, credible way.
CONVERSION TOOLKIT 
How do you give a monetary value to the improvements achieved through a training 
programme? The following techniques are typical:
  Measuring the contribution of improved output to profits. 
  Working out the value of quality, whether in terms of the cost of the 
  materials or time needed to do work again, or the value of business lost as a 
  result of quality problems. 
  Converting staff time to costs using pay and benefits figures, applied equally 
  to time spent in training (a cost) and to benefits such as time "gained" 
  through reduced absenteeism; 
  Using historical cost data. This is often available for items such as 
  accidents causing a loss of working time; 
  Referring to external sources for particular information -- for example, 
  industry-wide estimates of staff turnover costs. 
  Seeking the views of participants, managers and staff. (It is important to 
  apply a weighting to adjust for how confident respondents are in their views). 

EVALUATION SCORECARD 
This sets out the type of information you are seeking. There are six key 
categories:
  the participants' reaction to the training and what they plan to do as a 
  result; 
  changes in knowledge, skills or attitudes; 
  how the training s applied on the job; 
  measurable business results, such as more sales or better-quality products; 
  the calculated return on investment; 
  intangible measures that cannot be converted to financial values. 
ROI TIPS 
  ROI analysis works best when you have already conducted a clear training needs 
  analysis. 
  A conservative approach when developing benefits and costs enhances accuracy 
  and credibility. 
  When comparing training ROI with other financial returns, explain the context 
  and calculations. 
  Involve management in developing the return. 
  Write up case studies on programmes as you move forward, documenting how ROI 
  was evaluated. 
FURTHER READING 
Jack Phillips, Return on Investment, Gulf Publishing Company, 1997.
Jack Phillips, Patricia Pulliam Phillips and Ran Stone, The Human Resources 
Scorecard, Gulf Publishing Company/ Butterworth-Heinemann, 2001.
~~~~~~~~
By Jack Phillips
Jack Phillips has written five books on ROI evaluation. He is founder of the 
Jack Phillips Centre for Research, now a division of global performance 
solutions company Franklin Covey. For more information on performance consulting 
and measurement, contact Franklin Covey Europe on 01295 274139 
(www.franklincoveyeurope.com).


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