Ref 10.06 Measuring Sales Training Programs’ Return on Investment (ROI) Refereed paper Bassou El Mansour1, Indiana State University, Department of Technology Management Email: belmansour@isugw.indstate.edu Keywords: Benefit, cost, return on investment, sales training, ROI calculation, program impact.
Abstract: Organizations are adopting training ROI‘s metrics and measurements to make the sales force more capable and more competitive. In the case of sales force training, ROI training measurements translate the results of a training program into monetary benefits and compare them with costs of the program. The purpose of the paper is to show how to calculate ROI in sales training using cost –benefit analysis.
1
Terre Haute, IN 47809, USA, Phone: (812)237-8465, Fax: (812) 237-2655
1
Over the past several years the concept of Return on Investment (ROI) has been drawing considerable attention as a tool to attain revenue goals. While Sales occupy a vital role in most organizations, these latter are adopting training ROI‘s metrics and measurements to make the salesforce more capable and more competitive. In the case of salesforce training, ROI training measurements translate the results of a training program into monetary benefits and compare them with costs of the program. Two types of data are needed when we evaluate sales training. Hard and soft data. Hard data yields objective measurements such as quantity in sales and time. Soft data is more subjective as it deals with soft skills such as punctuality, body language, interaction with customers, and communication in general. Soft data are hard to measure as they express behaviors. However, the interest of using soft data resides in the measurements of the consequences of such skills. Training for sales performance in organization is common practice as sales generate revenues for the organization. Regardless of its focus, Sirianni (2003) defined sales training in the following : • • • • Sales training is a very broad category that includes everything from sales process, product knowledge, dealing with objections, open and closing skills, prospecting, territory management, listening skills, networking, presentation skills, and funnel administration, to name some of the assorted topics. This is not a short list. (p. 28).
In many instances, the sales of a product or services are influenced by their prices. Training has little or no effect on prices and the marketing strategy plays an important role in the sales. Therefore, we need to isolate the effect that a training program has on the overall sales. While developing competent sales personnel is a priority at most organizations , determining the economic benefits of training or retraining the sales force remains “a language you need to know how to speak, even if it is to handle the hostile questions of some manager or leader who does not agree with the budget” Dolezalek (2007 p.20). ROI is the language to use as Dolezalek wrote. In other words we need to demonstrate that the training provided to our salespeople resulted in a business- added -value. In this case the purpose of the business measure is the improvement of business sales as a consequence of a training. As Blair. D. (2007) stated “Individual course metrics are important to the overall efficiency of the training function, but measuring result is seen as critical to the long-term success of the sales training organization:” p.31. To determine the financial costs and benefits of a training, Jack Phillips’ model allows to collecte six types of data as specified by Phillips. They are reaction /satisfaction, learning, application and implementation, business impact, return on investment, and intangible measures. Organizations that focus on the effectiveness and competitiveness of their salespeople perform a cost-benefit analysis on their training activities. Cost-benefit analysis in the case of sales training is the process of determining the economic benefits of a sales training program using ROI calculations that investigate costs and benefits of the program. A number of authors ( Kearsley, G. (1982); Purcell, A (2000); Phillips. J. ,& Phillips P.(2003) Engel, S & Kapp, K, M, (2006) suggested that a cost-benefit analysis is important for many reasons;
2
1. To justify the worthiness of the program 2. To evaluate the payoff of the program 3. To assess if the training has met the objectives of the training 4. To control expenses and understand the training expenditures 5. To assess the monetary return on the training investment 6. To assess if the program has made a contribution to the organization Example of a Sales Cost-Benefit Analysis A sales training program must be linked to measurement of cost-benefit. ROI in this case compares cost with benefit in tangible measures. The purpose of the ROI is to answer the following question: Are the monetary return on investment superior to the cost of the program? As Robinson & Robinson (1989) wrote “Certainly, you hope to show that the benefits of training were greater that the costs”p.34. Cost benefit analysis is best explained by an example. .The cost of the program includes all the expenses incurred by the design , implementation, and evaluation of the program. The Benefits are the money made after the program has been administered. The benefit figures come from the accounting department or any other financial department, and from data analysis that the trainer uses. For example, the total sales during a period of one year that followed the training is $300,000 for the 20 salespersons who participated in the program. Therefore, the monetary benefit is $300,000 while the costs of the program totaled $150,000. The formula as designed by ROI Institute is: benefits –costs X 100 = ROI (percentage) Costs 300,000-150,000 X 100 = 100% . 150,000 ROI calculations show that for each dollar spent on training, that dollar is recovered and and another dollar is added. The process of calculating ROI in the case of a sales training program is to starts with a good understanding of the objectives of the training program.(Phillips & Phillips, 2005). Then plan the process of the program evaluation, isolate the effect of sales program from other factors such as marketing, prices, interest rates, new incentives, new technology, new product. Finally, convert the data into monetary figures and calculate the ROI. Isolating the impact of the training sales seems to be more difficult to adopt. However, techniques designed by the ROI institute (2007) such as the use of a control group, trend line analysis of performance, forecasting methods, participant estimates, supervisor estimates, manager estimates, and customer input, are all techniques that help calculate the actual monetary value of the training. Example of literacy skills by Phillips (1996) A literacy-skills training program at Magnavox produced benefits of $321,600 with a cost of $38,233. The BCR is 8.4. For every $1 invested, $8.4 in benefits were returned. The net benefits are $321,600 $38,233 = $283,367. ROI is $283,367 + $38,233 x 100 = 741 percent. Using the ROI formula, for every $1 invested in the program, there was a return of $7.4 in net benefits. 3
Determining costs An accounting method called cost estimating worksheet (Phillips & Phillips, 2005) can be used to calculate different costs of the sales training program. The worksheet is composed of four categories related to the expenses. They are: Analysis costs, development costs, delivery costs, and evaluation costs. Analysis costs include employee salaries and benefits, meals, travel, and incidental expenses, office supplies, printing and reproduction, registration fees and others. Development costs include salaries and employee benefits , meals , travel, and incidental expenses, office supplies, program materials such as film , videotape, audiotape, 35 mm slides, overhead transparencies, artwork, and manuals. Other itemizations include printing and reproduction, outside services, and others. Delivery costs include Participant Costs, Meals, Travel, and Accommodations (No. of Participants) , Materials and Supplies, Participant Replacement Costs, Lost Production (Explain Basis), Instructor Costs, Facility Costs, Facilities Rental, Facilities Expense Allocation, Equipment Expense. While the evaluation costs are: Salaries and Employee Benefits-WLP Staff, Avg. Salary x Employee Benefits Factor x No. of Hours on Project), Meals, Travel, and Incidental Expense, Participant Costs Office Supplies and Expense, Printing and Reproduction, Outside Services, Other Miscellaneous Expenses. Another accounting method proposed by Stolovitch & Keeps (2004) looks at calculating what the authors call “Intervention costs”. They propose to list purchases, leases, and services. Estimate number of hours for the personnel involved such as subject-matter experts, Administrative support personnel, word processing personnel, media production specialists, IT personnel, trainers, coaches, technical support, and others. Direct costs include travel, documentation, production, reproduction, facilities, communications, courier/shipping, materials, and hotels. The other costs defined by the authors regard revenues that will be lost due to persons being away from the job. This includes the payments that are made to the substitutes. The payments are itemized as cost or expenses of the training program. Robinson & Robinson (1989) suggested five categories of expenses: 1. Direct costs, expenses that are directly linked to the training activities 2. Indirect costs, expenses that support the training activities 3. Development costs, expenses that the development of the program generated 4, Overhead costs such equipment maintenance or the use of a classroom 5. Compensation for participants include salaries and benefits
4
Table1. Cost estimating worksheet ______________________________________________________________________________ Analysis Costs ____________________________________________________________________________________ Salaries & Employee Benefits - HR Staff (Number of People x Average Salary x Employee Benefits Factor x No. of Hours on Project) $16,000 Meals, Travel, and Incidental Expenses 3,000 Office Supplies and Expenses Printing and Reproduction Outside Services 1,000 Equipment Expenses Registration Fees 5,000 Other Miscellaneous Expenses Total Analysis Cost 1,200 Total $26,200 Development Costs, Salaries & Employee Benefits (No. of People x Avg. Salary x Employee Benefits Factor x No. of Hours on Project) $ 22,000 Meals, Travel, and Incidental Expenses 3,000 Office Supplies and Expenses 2,300 Program Materials and Supplies 1,000 Printing and Reproduction 500 Outside Services 1,200 Equipment Expense 2,000 Other Miscellaneous Expense 1,200 Total Development Costs Total $ 33,200 Delivery Costs Participant Costs, Salaries & Employee Benefits (Number of participants X average salary X employee benefits factor X hours or days of training time) $ 15,000 Meals, Travel, & Accommodations (Number of participants X average daily expenses X days of training) 2,000 Program Materials and Supplies Participant Replacement Costs (if applicable) Lost Production (Explain Basis) 12,000 Facilitator Costs 12,000 Salaries & Benefits 10,000 Meals, Travel, & Incidental Expense 2,000 Outside Services 0,000 Facility Costs Facility Rental Facility Expense Allocation Equipment Expense Other Miscellaneous Expense Total Delivery Costs Operations/Maintenance Salaries & Employee Benefits - HR Staff (No. of People x Avg. Salary x Employee Benefits Factor x No. or Hours on Project) Meals, Travel and Incidental Expense Participant Costs Office Supplies and Expense Printing and Reproduction Outside Services Equipment Expense Other Miscellaneous Expenses Total Operations/Maintenance Costs Eva/uation Costs 800 400 100 300 $41,800
500 400 500 100 200 100 100 100 $20,000
5
Salaries & Employee Benefits - HRD Staff (No. of People x Avg. Salary x Employee Benefits Factor x No. or Hours on Project) Meals, Travel and Incidental Expense Participant Costs Office Supplies and Expense Printing and Reproduction Outside Services Equipment Expense Other Miscellaneous Expenses Total Evaluation Costs Genera/ Overhead Allocation
5,000 500 200 100 150 200 100 100 $6,350
TOTAL PROGRAM COSTS $149,550 ______________________________________________________________________________________ __ * Template used with the Permission of ROI Institute, ROI Basics Online Certification Program, p. 17 (2007)
Determining benefits To determine the benefits of sales training, it is important to identify the benefits that were generated as a consequence of the impact of the sales training program. Monetary training impact on the business is what managers look for. However, we need to keep in mind that the majority of managers see training as an expense, therefore, convincing them of the monetary benefits of a training is an activity that must measure what the program has achieved. As Robinson & Robinson (1989) said “How do you know that the 23 % in productivity was due to training” p.34. For example, review the program objectives that will be evaluated at level 4 as necessary. In the case of sales, the objective may be an increase in the sales of DVDs. Pilot the program with a small number of salesforce. Track the data from the sales department, accounting department, record the sales per sales persons during a period of 3 months after the end of the training. Design a questionnaire to be administered to the participants 3 months after the training. To determine the benefits, data collection and analysis are necessary. First isolate the impact of the sales training solution on the changes in business variables, and then convert the data into monetary measures. As an example from the literature, one group of 20 sales trainees estimated a total monthly benefit of $336,000 related to sales increases and showed an average 70 percent confidence level with that estimate. Seventy percent multiplied by $336,000 gave a benefit of $235,200. This number was divided by the number of trainers (20) to give an average estimated cost benefit for the 20 trainees ($11,760) (Kearsley, 1982). Example of sales ROI calculation ROI is level 5 evaluation on the Phillips model. At this level cost and benefit are used to calculate the training ROI. At this point it’s necessary to caution that the mathematical formula used in ROI calculations measures only tangibles. It ignores factors such as increased team work, increased moral, reductions in communication reporting. These intangibles are benefits that add credibility and value to ROI analysis.
6
According to Johnson, J (2005) p 32, guidelines for measuring ROI are: 1. When a higher-level evaluation is conducted, data must be collected at the lower levels. 2. When an evaluation is planned for a higher level, the previous level or evaluation need not be comprehensive. 3. When collecting and analyzing data, use only the most credible sources. 4. When analyzing data, select the most conservative findings for calculations. 5. At least one method must be used to isolate the effects of the solution. 6. If no improvement data are available for a population or from a specific source, it is assumed that little or no improvement occurred. 7. Estimates of improvements should be adjusted for the potential error of the estimate. The formula for calculating return on investment is to subtract the total dollar amount of the costs from the total dollar amount dollar of the benefits. The result of the subtraction is the net benefit if the figure is positive or loss in the case of a negative figure. At this point if the costs are higher than the benefits, further calculations are not necessary. In the case of a positive number which translates into dollar value of the net benefits, then, the net benefit amount is divided by the resulting cost and then multiplied by 100 to result in a percentage. For example, to determine the ROI for a sales communication skills training program at a retail sales store, the first step is to calculate the total benefit amount returned by the training. The second step is to calculate the cost of developing, implementing, and evaluate the training. Let’s assume that the training produced a benefit of $1,866 with a cost of $327.To determine the ROI, we calculate the net benefit as follows: 1,866- 327= 1539. $ 1539 is known as the net benefit. The ROI for the sales communication skills training is obtained from the following operation: 1866-1539 divided by 327 and multiplied by 100. The result is for every one dollar invested, the training program returned $ 3.27. How do we know that $ 3.27 was the consequence of the training program only, and not the consequence of another factor such as price, marketing effort, incentives, interest rate and so forth. To ascertain that the impact of the training was the sole factor, ROI Institute developed nine techniques available to isolate program effect. They are: 1. Use of a control group arrangement 2. Trend line analysis of performance data 3. Use of forecasting methods of performance data 4. Participant's estimate of program impact (percent) 5. Supervisor's estimate of program impact (percent) 6. Manager's estimate of program impact 7. Use of expert/previous studies 8. Calculate/estimate the impact of other factors 9. Customer input Another example of ROI from the literature is illustrated in the following. A literacyskills training program at Magnavox produced benefits of $321,600 with a cost of $38,233. The BCR is 8.4. For every $1 invested, $8.4 in benefits were returned. The net benefits are $321,600 $38,233 = $283,367. ROI is $283,367 + $38,233 x 100 = 741 percent. Using the ROI formula,
7
for every $1 invested in the program, there was a return of $7.4 in net benefits. Phillips (1996) p. 20 Practical Considerations ROI calculations Some questions to ask in evaluating training according to Sirianni (2003) are : - Have our current selling skills been analyzed? - Have both objective and subjective methods been utilized in evaluating our current competencies? - What skill development strategy has been outlined to address our specific needs and sales objectives? - How well will this strategy fit into our current training, sales and marketing plans? Conclusion Developing a return on investment for a sales program may not progress any further if you cannot answer two main questions; what will I cost? How much money will it yield? These two critical questions lead us to the importance of a good evaluation of sales training. Evaluation provides information that is used to assess the effectiveness of sales training. It requires capturing the right data, and then deciding how to analyze the link between the sales program and the business results. The outcomes used in this regard include sales trainee’s feedback, learning of knowledge, skills, attitudes, transfer of knowledge or skills or attitudes, and results such sales, productivity. Look for a program that is linked to specific business need and strategies, defined by specific objectives, based on real results expectations known to all the participants, and predisposed for cost-benefit analysis.
References
Blair. D.,& Sisakhti, R.( 2007). Sales Training: What makes it work. Training &Development, 61(8), 28-31. Clayton, S. Sales Mindset Versus Training. retrieved August 15, 2007, http://www.myarticlearchive.com/articles/6/151.htm. Dolezalek. H. (2007) What’s in your budget? Training, Jul/Aug 2007, (44) 7 p.20 Engel.S.& kapp.M.K. (2006).Finding roi to ensure Training Dollars. The RMA Journal. Philadelphia: Jul/August (88)11; 27-32. Johnson,J.; Catania,M.; Freitag, D.; Gmach, M. et al (2005) evaluating field development activities: A practical road map to ROI. LIMRA's MarketFacts Quarterly. Hartford: Winter 2005. (24)1; p. 30 (4 pages). Phillips. J. ,& Phillips P.(2005)Roi at work, Best practice case studied from the real world. ASTD Press Kearsley, G. (1982) Costs, benefits, and productivity in training systems. Readings, MA: Addison-Wesley Publishing Company. Phillips. J. ,& Phillips P.(2003). Action plans to measure ROI. Performance improvement, 42, 22-31. Phillips, J. (1996) ROI: The search for best practices, Training & Development, (50) 4; pg. 20, 5 pgs. Purcell. A (2000) 20/20 ROI Training & Development, (54)7; p. 28 (6 pages). Sirianni. A. (2003) sales training: Does it Really Work? New Mexico Women Albuquerque, (16) 1; pg. 28. Robinson, D. G.& J. Robinson (1989) Training for impact, Training and Development Journal, (43) 8; p. 34
8