Whether itâ€™s cost-based analysis (CBA) or ROI, todayâ€™s learning leaders need to have the tools and methods to make informed decisions.
May 31, 2009
The answer may be moot, but smart decision making requires an up-front analysis of the impact of a learning initiative on business outcomes. Whether it’s cost-based analysis (CBA) or ROI, today’s learning leaders need to have the tools and methods to make informed decisions.
Meticulously planned and executed training and development programs can yield a harvest of tangible benefits for a corporation. One of the primary tasks of a learning executive, however, is to separate the wheat from the chaff and discern which learning initiatives have the potential to generate bottom-line impact and which ones don’t.
“One of the things CLOs strive for is to ensure that the services they provide their constituents within the organization have significantly more value than the perceived cost,” said Cushing Anderson, vice president for project-based services research at IDC, a provider of market intelligence, advisory services and events for the information technology, telecommunications and consumer technology markets.
Fortunately, learning executives have more resources at their disposal than a crystal ball. Cost-benefit analysis helps weigh the time and energy expended with the expected outcome and allows learning leaders to arrive at shrewd business decisions.
The ABCs of CBA
In its simplest form, cost-benefit analysis is literally what its name suggests — the process of weighing the benefits of an investment compared to its costs.
“Cost-benefit analysis is attempting to isolate the impact of a [particular] training initiative and its ultimate value to the organization,” Anderson said. “It includes calculating the cost to develop and deliver training, and subtract from that or add to that the business value impact — usually in dollars — of the change in behavior that the training results in.”
Whereas traditional financial analyses often are characterized almost exclusively in financial terms, cost-benefit analysis is sometimes characterized in nonfinancial terms and is therefore a broader approach to examining the return on a commitment of resources, said Michael Echols, executive director of strategic initiatives and director of the Human Capital Lab at Bellevue University.
At CDW Corp., a provider of technology products and services for business, government and education, the learning organization employs the cost-benefit analysis method to make business choices about learning investments and to prioritize resources.
“Cost-benefit for the learning investment at CDW is about deciding go/no-go [points],” said Alysa Parks, director of talent development at CDW. “[It involves] a proactive approach on [evaluating] initiatives and [determining] which ones to prioritize first and which ones are going to generate the best value.”
At PricewaterhouseCoopers, a provider of services in the fields of assurance, tax, human resources, transactions, performance improvement and crisis management, there are two factors that Chief Learning Officer Thomas J. Evans considers when conducting cost-benefit analysis of learning initiatives.
The first revolves around the financial piece and must include careful considerations such as: “Was I fiscally responsible in terms of my design and therefore in execution? Was I conservative enough to ensure that I negotiated the best prices, and was I careful about how the money was spent?”
Evans said the second part of performing an optimal cost-benefit analysis — albeit a slightly more complex process than the first — is to address the issue of: “Is the [initiative] actually making a difference [in terms of] helping the business achieve its business goals, and will it achieve its people goals as you link it to the strategy and the direction of where the business wants to go?”
Distinguishing CBA from ROI
“Unfortunately, there isn’t a governing body out there that defines ‘return on investment’ and ‘cost-benefit analysis’ in very clear ways,” said Kent Barnett, founder and CEO of Knowledge Advisors Inc., a provider of learning and talent management solutions.
Both terms have similar connotations to most people, he said. However, they often are distinguished by how they’re communicated.
“People [oftentimes distinguish] the outcome — the actual metric — as opposed to the actual analysis itself,” Barnett said.
For instance, people often denote benefit-to-cost as a ratio, while others in the HR and learning industries refer to ROI analysis as a percentage, Barnett explained.
Evans said that in its simplest sense, the two terms could indeed be used interchangeably.
“[However], one is truly looking at [it] as a cost, and the other is looking at it as an investment,” he said. “So conceptually, if you’re approaching [an initiative] as a cost, what’s a good cost and what’s the benefit you’re going to get out of it?”
According to Echols, cost-benefit analysis is inherently distinct in that it has broader implications than ROI.
“[Cost-benefit analysis is] not captured or strictly defined by the rules of GAP, or general accounting principles,” Echols said. “It’s a more diverse set of methodologies that allows other kinds of comparisons between benefits and costs than the pure financial analyses of standard accounting processes.”
Aligning Learning With Business Goals
Part of conducting any comprehensive cost-benefit analysis is to make sure the learning initiative is aligned with the company’s goals.
“[Cost-benefit analysis has to] start with the strategy. The first step is to establish a strategy that focuses on initiatives that align with strategic priorities for the organization at the vice president level versus trying to address every individual learning request,” Parks said. “While we care about individual development needs, we know from experience we’re making the best investments when we’re helping them move the needle at the enterprise level.”
CDW addresses a number of questions when conducting a cost-benefit analysis or determining the go/no-go point for specific learning investments:
1. Does it align with the business strategy?
2. What is the priority level at the vice president level?
3. Will it result in increased productivity?
4. How many people is it impacting?
5. Taking into account legal risks, what is the potential cost of not implementing certain initiatives?
6. From a growth standpoint, how will this propel the company?
Echols highlighted three parameters that are critical to take into account prior to considering the implementation of any major learning initiative:
1. What outcome are you trying to create?
2. How do you know that the outcomes you defined are related to the learning intervention and not something else?
3. What does it cost to do the evaluation?
Conducting Cost-Benefit Analysis
Barnett said the best cost-benefit analyses take into consideration financial and nonfinancial impacts. Say, for instance, the organization is considering the inception of a new leadership development program.
The first step would be to make a comprehensive list of the pros and cons that may result from the program’s implementation. Benefits could include factors such as building up bench strength and being in a better position to meet future growth. The cons could include the financial cost to the company and other factors that may impact productivity.
“[In addition], it’s going to be a distraction when we have employees undergoing the training and development programs,” Barnett said. “We’re going to take our high potentials out of the work environment for a while, and that will probably have some impact on our ability to run our business day-to-day.”
The time element is another significant consideration. “If I put people through a leadership program, what are my hard costs, and when am I going to incur them?” Barnett said. “Often in a leadership program, you’ll have to invest a lot up-front before you get a return, so in my cost-benefit analysis I would try to determine how much it’s going to impact me in terms of cost and for how long that’s going to happen before I start getting returns.”
This process usually serves as a starting point to determine whether or not to move forward with a particular initiative. Still, conducting cost-benefit analysis is not a single, standardized process that can be applied to different companies. But one underlying factor that learning professionals typically take into account is to question whether or not the company is making wise spending decisions, Evans said.
“Are we seeing through our quality assurance functions any trending that within effect could suggest that the training investment we’re making is missing the mark or hitting the mark?” Evans said.
Say, for instance, there was an increasing incidence of employees within the organization having difficulty with certain types of technical information.
“[When] the work is reviewed, is there a lower incidence of the finding as a result of the training that we put [them] through?” Evans said. “[A cost-benefit analysis can be conducted] in a very targeted way at areas where you know you have had a trend that suggests that there may be something you need to address — such as a technical weakness.”
Additionally, the company also utilizes control groups and focus groups to track and gather data to determine the impact of a learning initiative on a certain segment of the population.
“We do those on a very targeted basis to determine whether or not a true investment has a real return to the firm — especially when you’re outside the simple technical areas [and] into things that are more on the softer side, more behavioral,” Evans explained.
An example is a program that teaches new managers about the roles and responsibilities of becoming a manager. “Can we design a program and, based upon that design, see an increase in retention or productivity in terms of their performance? Or if I do have turnover, is there a suggestion that I’m retaining them longer than I originally anticipated?” Evans said.
Identifying and defining a set of measurement criteria is key. “[The next step is to] create your survey and measurement questions that will direct you towards the items you decide you want to track,” Evans said. “[We ensure that] the indicators we’re tracking are indicators that are valued by management.”
In the aforementioned example, one of the indicators is financial — ascertaining how much it would cost to develop a manager over time. “If you have that as a metric point, you can then measure what’s the benefit and the value proposition associated with retention,” Evans said.
The second measure is based on the retention statistics and cost of turnover at the company. “What’s the value of retaining these people to the firm on the assumption that if I lost, I’d have to go out and recruit to replace?” Evans said. “If I can show that I don’t have to replace as often because I’m retaining more — [that’s] a financial metric you can measure.”
Learning in Challenging Economic Times
Many companies have undertaken cost-cutting measures as a result of the recession. Even so, some learning organizations are using the economic downturn as an opportunity for growth and a way to create long-term value.
“In an economic crisis, there might be things you have to do that are very short-term and focused in nature, but they also create an opportunity to create a long-term paradigm shift,” Evans said.
For instance, an unstable economic environment is likely to challenge a company’s culture that insists that all educational programs be face-to-face. Alternatives to flying people around the world — such as virtual learning — become increasingly enticing. In this case, virtual technology can be an enabler to create a paradigm shift, Evans said.
“It’s an opportunity to educate management on the real value proposition associated with virtual — where it works well and where it doesn’t — and the broader implications of implementing technology on the organization’s culture and the demands it places on its people,” Evans said. “It can be a short-term cost-saving opportunity, [but] it also can be a longer-term cultural and paradigm shift on how you look at learning and development.”