On The Job Training – Cost Analysis

Written by: Kyle Kaan

Overview:

“It is very important to evaluate the benefits of the training and be able to put that in terms of numbers. Training comes at a cost and therefore any organization would be interested in knowing the return on investment (ROI).” (Cost Benefit Analysis for Training)

Relevance:

Cost analysis of on the job training is crucial for upper management in order to make the best decisions for the organization. If the training program does not provide sufficient financial benefit to the organization it will be management’s responsibility to decide whether or not to continue with the training. However, in almost all cases, HR training programs provide a positive return on investment and are a critical investment to improve the operations of the organization.

Key Points:

Training employees is not cheap, so organizations should be interested in knowing the return on investment. The return on investment formula is as follows: Return on Investment (in percent) = Program benefits/Costs x 100. This formula demonstrates how successful the training program is in terms of how much capital was spent on the training and how the performance of the employees increased after the training was complete.

The costs associated with the return on investment formula are relatively easy to calculate in comparison with the program benefits. The basic training costs can usually be broken down into two broad categories: course development and training execution (this is easy to calculate when using an external company because they will give a set amount for any given program). The in house training costs can be broken down into smaller categories: designing structure based on learning objectives, designing training materials, preparing pre course material, preparing course hand outs, preparing evaluation tools, travelling expenses, and refreshments for the trainee’s.

There are other costs associated with human capital in regards to the trainers. The organization must consider the hours that the mentor will not be able to carry out their normal duties. The trainer will not have time to carry out their regular tasks within the organization, so someone else within the organization will have to complete the trainer’s assigned tasks during their absence. Or the mentor will have to work overtime, which costs the company more, and the overtime costs should be recorded in association with the training costs. There will also be costs in regards to the trainee’s time and the administration and management costs.

The program benefits are more difficult to calculate. “The HRD staff should collect both hard data (representing output, quality, cost, and time) and soft data (including work habits, work climate, and attitudes)” (Shaw). The benefits can be measured using various metrics: follow-up questionnaires, program assignments, action plans, performance contracts, and performance monitoring. All of these metrics require a collection of data before and after the training is complete. “The important challenge in this step is to select the data collection method or methods that are appropriate for both the setting and the specific program” (Shaw).

Theory:

As per the textbook “A widely used financial measure that can be applied to measure the contribution and cost of HR activities is return on investment, which is a calculation showing the value of investments in human resources. Return on investment is stressed because it is used in most other functions in an organization and is the language used by financial staff and top management.” (Mathis - HRM textbook p.65)

Take Away Points:

All activities performed within the organization have costs associated with them. The role of management is to determine whether or not these activities are worthwhile. Return on investment and other various cost analysis metrics are necessary for every aspect of business, including HR training programs. It is essential to determine whether the job training is going to be a financial benefit to the organization and will help the company grow financially. The return on investment analysis will also determine if it is more beneficial to outsource the HR training programs or keep them in house.

Works Cited:

"Cost Benefit Analysis for Training." Managementstudyguide.com. N.p., n.d. Web. 31 Mar. 2013. <http://www.managementstudyguide.com/cost-benefit-analysis-for-training.htm>.

Cotterill, Rob. "Best Practice Guidance on Training for Small and Medium Sized Enterprises." Epsc.org. N.p., May 2004. Web. 31 Mar. 2013. <http://www.epsc.org/data/files/PRISM/Training%20Guidance%20Rev%201.pdf>.

Shaw, Jack. "Evaluating Training and Results (ROI of Training)." Evaluating Training and Results (ROI of Training). Carter McNamara, MBA, PhD, Authenticity Consulting, LLC., n.d. Web. 31 Mar. 2013. <http://managementhelp.org/training/systematic/ROI-evaluating-training.htm>.

Mathis, Robert L., and John Harold. Jackson. Human Resource Management. 13th ed. Mason, OH: Thomson/South-western, 2011. Print.