Considering Hard and Soft Benefits in ROI

Resources

December 30, 2008

Resource: Blog Industry: Industrial
Tags: Online Training

Hard Benefits and ROI

Benefits can be broken down into hard benefits and soft benefits. Hard benefits are those that (a) can be attributed solely to the training program and (b) can be assigned a specific financial value. Soft benefits are those that (a) cannot be solely attributed to the training program and/or (b) cannot be readily assigned a specific financial value.

An example of a hard benefit of a training program is the reduction in total costs of that program when compared with the previous program. In the examples above, the Convergence training program costs $420,000 and the company’s current training program costs $600,000 over the same period. A hard benefit of the Convergence program, then, is the $180,000 saved.

Because soft benefits are difficult to assign a financial value to, some companies stop here when determining ROI.

Placing our figures in the equation, we get:

ROI = [Benefits/Costs] x 100, we find that:
= [$180,000/$420,000] x 100
= .4285 x 100 = 42.85 percent over the eight-year time period

We can convert the ROI over the eight years to an average of 5.35 percent per year (42.85/8 = 5.35). Considering only the hard benefits of the Convergence training program, the break-even point is just under twenty years.

Considering Soft Benefits in ROI

To create a more accurate assessment of ROI, many companies go on to consider the training program’s soft benefits as well.

The soft benefits of a more efficient, effective training program could include things like increased company productivity, safer workers, reduced absenteeism, greater customer satisfaction, an improved reputation amongst the company’s customer base, and higher employee morale. In each case, it’s reasonable to assume that a more effective training program could contribute to the outcome, but it’s impossible to say the training program was solely responsible and/or to assign a financial value to the benefit.

One way to assess the soft benefits of a training program is consider them in the context of the achievement of specific, quantifiable goals. A company considering a new training program could identify areas where improvement could be achieved and set a goal to address each area of concern.

For example, one goal might be to decrease the downtime of a paper machine. Statistics measuring the machine’s downtime, before and after the training program is implemented, can be compared providing one measure of the training program’s soft benefits. More sophisticated analyses would take multiple factors into consideration—machine downtime, savings from regulatory infractions, savings on employee sick pay resulting from injuries, and more—to find more soft benefits of the program.

For demonstration purposes, assume that before implementing a new training program, a facility’s paper machine typically produced 7 tons of tissue per hour, and that tissue was sold at a market rate of $2,000 per ton. Downtime, lost time, and quality issues resulted in an overall machine efficiency rating of 90 percent, meaning that the machine produced saleable rolls only 90 percent of the time. The ten percent downtime over one year equates to $12,264,000 in lost revenue.

Now assume the company installs a new training program and sets a goal to increase the overall machine efficiency by two percent. Assuming the goal is met, the increase in the machine’s efficiency will result in $245,280 of additional revenue in the first year. Over an eight-year period, the increased revenue totals $1,962,240; Chart D below illustrates the increase in revenue.

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It is not possible to attribute all of this increased revenue solely to the training program, yet it is reasonable to assume the training program played a role and some portion of the increased revenue should be considered a soft benefit of the training program. Some percentage of the $1,962,240 in increased revenue over the eight-year time period could be assigned as a soft benefit of the training program; each company will make its own decision how much.

Businesses typically assign anywhere from 10-50 percent of the value of their soft benefits to ROI calculations. For demonstration purposes, let’s make the conservative estimate that only 20% of the soft benefits of decreased machine downtime can be assigned to the training program’s ROI. That means the training program’s soft benefit would be an increase in revenue of just over $380,000 over the eight-year period.

We can now adjust our ROI calculation to the following:
ROI = [(Hard Benefits + Soft Benefits)/ Costs] x 100
= [($180,000 + $380,000)/$420,000] x 100
= [$560,000/$420,000] x 100
= 1.33 x 100 = 133 percent over eight years

We can then convert the ROI to a figure for one year: 133/8 = 16.625 percent per year. Using this ROI calculation, the break-even point of the training program is just over 6 years (100/16.625 = 6.01).

It’s reasonable to assume the training program would provide additional soft benefits beyond merely the increase in paper machine operating time. To more accurately assess ROI, those additional soft benefits should also be considered. Examples could include such hard-to-quantify elements as improved employee morale, greater customer satisfaction, and a resulting increase in the company’s public reputation. Adding these additional soft benefits to the calculation would increase the ROI and reduce the break-even point even more.

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