I’m Gonna Make You a (Workforce Training) Offer You Can’t Refuse...
Are you using the right ROI formula when determining the cost of training?
Spending money on redesigning something you already have developed may be challenging in these economic times. And to successfully transition an Instructor Led Training (ILT) to a virtual class requires designers to first think about the business case they make, before the design or technology they propose. To be successful, you need to rethink the traditional way of calculating your Return of Investment (ROI).
When you need to transition your traditional Instructor Led Training (ILT) into a virtual version, you may be focused on an instructional or a technological perspective. But before you can get to that phase, you’ll need to explore the financial perspective by first making the business case. After all, you’ll need executive approval to spend time and resources to develop it. However, spending money on redesigning something you already have may be challenging in these economic times. If that’s your situation, consider revisiting the formula you use to calculate your Return on Investment (ROI)- you may be using the wrong one.
Traditional ROI Calculation
A traditional way of calculating the ROI of any training program uses 1) the investments made to develop the content and 2) the value gained/returned through them. The formula is basic:
ROI = Value Returned / Development Cost + Hosting Cost
To have a high ROI, you want to maximize your value returned and minimize your development and hosting costs. Since the costs of hosting the courses are typically fixed at the enterprise level, most cost conversations about redesigning training focus on minimizing the costs to develop the content. But doing so is a losing proposition. That’s because there’s only so much you can cut from a development budget before it impacts the quality of education. But there is also a more significant problem- your formula is missing a key variable.
The Problem with Traditional ROI Calculation
To understand what’s missing from the traditional calculation, let’s first explore what happens when you redesign your ILT into a well-designed virtual version. A key benefit of this redesign is to slash the training time. When designed well, the virtual version can reduce training time by 30-70%, without sacrificing the quality of the training (more on that in another blog).
A New ROI Formula
So how do you include a reduction in training time in your ROI calculation? You do so by replacing “Development Cost” with “Implementation Cost”.
Implementation Cost = Development Cost + Cost to Take the Course
Let’s explore how to calculate the cost to take the course. Again, this is very straightforward. It’s calculated by multiplying the number of hours to take the training by the average hourly rate of the workers by the number of workers taking the training.
Cost to Take the Training = Training Hours x Average Hourly Rate x Workers
Comparing the ROI of ILT and Virtual Versions of the Same Course
Let’s break this down with an example that compares the ROI of an existing ILT course with a newly designed Virtual version. Remember, the goal is to get a lower Implementation Cost. For this example, let’s make a few assumptions:
- The Value Returned of both designs (ILT and Virtual) is the same
- The Hosting Cost of the Learning Management System (LMS) is a sunk (the money has already been spent and won’t be recovered)
- The ILT course is 7 hours
- The Virtual course is 2 hours
- The average hourly rate of the workers is $50
- 500 workers need to get trained annually
- Development costs to create the Virtual course is $70,000
- Development costs to create the current ILT course was $40,000
Development Cost + (Training Hours x Average Hourly Rate x Workers)
||= 40,000 + (7 x 50 x 500)
||= 40,000 + (175,000)
|Virtual (Yr 1)
|| = 70,000 + (2 x 50 x 500)
||= 70,000 + (50,000)
|Virtual (Yr 2)
||= 0 + (2 x 50 x 500)
||= 0 + (50,000)
In this example, the implementation cost for Virtual in the first year is $95,000 less than ILT, that’s a savings of 42%, even after considering the cost of developing the Virtual version. In the second year, the implementation cost is only $50,000, since the development cost will have been sunk. This is where the real savings of the Virtual course is realized: The implementation cost of Virtual after the first year is $165,000 less than ILT- that’s a savings of 77%.
Calculating Your ROI
Of course, your training program and the variables you’ll use (number of hours, average rate, number of workers) will be different. However, now you can more accurately calculate the true cost of implementation of your training programs. Empowered by this new analysis, you can better make the business case that redesigning your training to virtual is an offer your executives can’t refuse.
Johnny Hamilton is a thought leader, author, and full-stack learning designer who has led projects that have resulted in over a dozen industry awards in corporate learning innovation from Brandon Hall, BIG Innovation, eLearning Magazine, and the American Business Association.