CHAPTER TWELVE

The Costs and Benefits

of Training

© 2013 by Nelson Education Ltd. 1

 LEARNING OUTCOMES

 Explain why trainers should calculate the costs

and benefits of training programs
 Describe how to calculate the cost of training
programs
 Explain the difference between cost-
effectiveness and cost–benefit evaluation
 Describe how to calculate the benefits of
training programs

© 2013 by Nelson Education Ltd. 2

 LEARNING OUTCOMES

 Describe how to conduct a net benefit

analysis, benefit–cost ratio, and return on
investment
 Define utility analysis and describe how to
calculate the utility of training programs
 Discuss the importance of credibility when
estimating the benefits of training programs

© 2013 by Nelson Education Ltd. 3

 COSTING TRAINING
PROGRAMS
The process of identifying all the expenditures
used in training
Critical consideration in training design,
development, delivery, and evaluation
Is difficult, but necessary to determine value or
return on investment to organization
Increasing pressure to calculate

© 2013 by Nelson Education Ltd. 4

 COSTING
APPROACHES
Costing Approaches
1. According to stages
 Needs analysis, program development, delivery,
and evaluation
2. According to nature or kind of costs
 Five cost categories: direct costs, indirect costs,
development costs, overhead costs, and trainee
compensation

© 2013 by Nelson Education Ltd. 5

 COMPARING COSTS

Table 12.1 demonstrates some important

aspects of costing and comparing training
program alternatives:
1. Costing sheets can be modified to meet an
organization’s needs
2. Level of detail varies according to needs
3. There is choice regarding what to include
4. Identifies the cheapest option
© 2013 by Nelson Education Ltd. 6
 BENEFITS

 Cost-effectiveness evaluation: A comparison of

the monetary cost of training to the benefit of
training in monetary terms

 Cost–benefit evaluation: A comparison of the

cost of training in monetary terms to the benefits
of training in non-monetary terms

© 2013 by Nelson Education Ltd. 7

 BENEFITS

 Net benefit: The estimated value of the

performance improvement minus the cost of
improving performance
 Benefit–cost ratio: The benefit divided by the cost
of the training program

© 2013 by Nelson Education Ltd. 8

 BENEFITS

May have cost-effectiveness and want to

determine cost–benefit – will have to convert
measures to monetary values:
Step 1: Focus on a single unit
Step 2: Determine a value for each unit
Step 3: Calculate the change in performance
Step 4: Obtain an annual amount
Step 5: Determine the annual value
See Trainer’s Notebook 12.1 for more details
© 2013 by Nelson Education Ltd. 9
 RETURN ON
INVESTMENT
A comparison of the cost of a training program
relative to its benefits
This involves dividing the net benefit by the cost
of the training program

Return on Investment = Benefits–Cost of the program

Cost of the program

© 2013 by Nelson Education Ltd. 10

 UTILITY ANALYSIS

A method of forecasting the financial benefits that

result from human resource programs such as
training and development

© 2013 by Nelson Education Ltd. 11

 UTILITY ANALYSIS

Important factors to consider in

calculating the utility of training program:
1. Effectiveness (effect size)
2. Standard deviation of job performance in
dollars of untrained employees
3. Number of employees trained
4. Duration training benefits will last

© 2013 by Nelson Education Ltd. 12

 UTILITY ANALYSIS

Utility of a training program:

ΔU = (T)(N)(dt)(SDy) – (N)(C)
where
ΔU = utility, or dollar value of the program
T = number of years the training has a continued effect on performance
N = number of people trained
dt = effect size
SDy = standard deviation of job performance in dollars of the untrained group
C = cost of training each employee
© 2013 by Nelson Education Ltd. 13
 BREAK-EVEN
ANALYSIS
Finding the value at which benefits equal costs and utility is equal to
zero

Utility = 0

© 2013 by Nelson Education Ltd. 14

 CREDIBILITY OF
ESTIMATES
 Costing not an exact science
 Assumptions and judgments have to be made
 Important to ensure there is credibility in process of
determining cost-effectiveness
 Management and clients must perceive benefits
estimates as credible, believable, and acceptable
 Trainers need to be wary of promising more than
they can realistically deliver; manage expectations

© 2013 by Nelson Education Ltd. 15

 CREDIBILITY OF
ESTIMATES
Increasing credibility of benefit estimates:
1. Take a conservative approach
2. Use credible and reliable sources
3. Explain approaches and assumptions
4. Results must appear realistic
5. Use hard data

See Trainer’s Notebook 12.2

© 2013 by Nelson Education Ltd. 16

 INSTRUCTIONAL SYSTEMS
DESIGN MODEL

 All three stages of the ISD model have now been

described
 The critical elements are identifying, developing,
delivering, and evaluating training within the
organization
 Failure to manage any of the critical elements will
have negative impacts on the training and the
achievement of the training related goals

© 2013 by Nelson Education Ltd. 17

 SUMMARY

 Methods and approaches for calculating costs and benefits

of training programs were described – this is increasingly
important in today’s economy
 The differences between cost-effectiveness, cost–benefit
analysis were discussed as were examples of the calculation
of costs, benefits, net benefit, BCR, and ROI
 Importance of this information for budgeting and comparing
costs and training evaluation was highlighted
 An alternative approach – utility analysis – was described
 The importance of credibility when estimating the financial
benefits of training was discussed
© 2013 by Nelson Education Ltd. 18