Mastering Cost-Benefit Analysis in L&D

Jun 07 2023
5 min read
Mastering Cost-Benefit Analysis in L&D

Performing cost-benefit analysis in L&D can be a tough task, but there’s no getting away from it. Especially for organizations that need to watch their wallets, proving ROI is critical for getting executive approval to keep going with your L&D initiatives. However, some programs are more difficult to evaluate than others. 

The Crisis of L&D Cost-Benefit Analysis

A business runs on numbers. Profit is only one of them. To understand if a department is performing up to standard, most companies rely on metrics as an objective evaluation tool. For many teams known as “revenue centers,” the math is simple – subtract how much you sell from how much it costs you to sell. 

But HR departments don’t have it so easy because they are “cost centers.” A lot of what they do, like organizing learning and development programs, improving job satisfaction, and hiring effectively, doesn’t always show a quantifiable value. 

Nowhere is this more problematic than in the learning of soft skills, the importance of which is now at least equal to that of hard skills. Because the quality of soft skills is often subjective, it is difficult to measure. For example, what is a good communicator – a person who gets the point across quickly, or someone who gives you important details? It all depends on various factors, especially the preferences of the person who is doing the evaluation.  

For reasons such as these, more than 80% of L&D departments don’t have a clear path for evaluating their courses, while only 8% of L&D professionals assess the ROI of their programs. As a result, upper management is often reluctant to continue funding for initiatives that have definite costs but no clear value.  

The Issue of Timing

An important aspect of cost-benefit analysis is time period. It can take a while for an L&D program to have the desired effect. For instance, a client service employee who takes communication skills training might not see a better customer satisfaction score until they have had a certain number of client encounters. HR needs to examine results during several time periods (such as over a few quarters) to really understand the ultimate benefit of training. 

The Basics of a Cost-Benefit Analysis

Defining exactly what counts as a benefit is at the core of this challenge. The trick is to link the cost – i.e. the L&D program – with the resulting quantifiable improvement (or lack thereof). Let’s look at several measurable workplace factors and how they relate to soft skills training.

Engagement Rates

Engagement is a focus of many L&D programs due to issues like Quiet Quitting and the Great Resignation.

Figuring out your organization’s engagement rate can be accomplished through tools such as Gallup’s Q12 Survey. You can examine improvements in engagement rates after a related L&D course (the cost) and assign a value to it (the benefit). 

To this end, there are various estimates regarding how much a disengaged employee costs an organization which can be used as a guideline. Simply use that figure to estimate the financial benefit for every employee who moves from disengaged to engaged. If a disengaged employee costs the company $2,000 per month, then every newly engaged employee represents a $2,000 benefit.        

You can also match historical increases/decreases in engagement rates and link them to productivity. If workers in a certain department show a 10% improved engagement rate, and their output goes up by an average of $100, you can assume that every 10% increase in engagement has a benefit of $100 for that department (this figure should be reevaluated periodically).   

Turnover Rates

It’s a similar story with employees who quit. It is estimated that every employee who leaves unexpectedly costs their organization up to twice their annual salary to replace. Although this figure varies widely, you can look at your company’s historical figures to understand the replacement cost of workers in different departments. Then, after (for instance) high-risk employees go through a retention-based course, you can examine improvements in retention rates and assign a value to it. 

Productivity and Customer Satisfaction

These two factors can indicate when an L&D program has been successful. They are effective at showing if an organization-wide change has had a quantifiable benefit (in the case of customer satisfaction, you should link its statistics with customer retention rates). However, productivity and satisfaction numbers might not be totally connected to individual improvements. An increase in productivity might result from a new process or better managerial control instead of a training course. 

What About the Rest?

There are a lot more L&D courses out there than those that are officially titled “Engagement Initiatives” or “Retention Programs.” However, it’s important to realize how many courses are related to one of the quantifiable factors mentioned above. For example, a retention program might cover initiatives for career pathing, continuous development, and mentoring. You might not be able to connect how much career pathing affects retention directly, but if you notice that retention improves after a course, you can assume that there is a relationship.    

Workplace Analytics Can Help

One of the abilities of workplace analytics (AKA people analytics) is to analyze the connection between L&D programs and operational improvements. Although competency in workplace analytics requires training, this process can have major advantages for understating cost-benefit.  

Build Benefits Beforehand with Growthspace

Growthspace plays an essential role in the value of any L&D course. In the past, many companies saw low ROI because employees were not getting the effective training they needed for the skills that were specific to them. 

No longer. Growthspace enables organizations of any size to beat the one-size-fits-all dilemma. With a global network of outstanding coaches, mentors, and trainers, Growthspace helps HR find the experts they need for personalized training with a platform they’ll love for its easy administration.

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