Business executives make decisions driven by quarterly and annual earnings. These decisions are typically predicated on reliable return on investment ("ROI") calculations for each company initiative.
However, unlike other areas of the business, it's not often that lawyers are asked to provide data on the effectiveness or ROI of their actions (especially for training). This is likely for a few reasons:
- Calculating legal ROI is very difficult
- Ethical behavior is an end-goal in and of itself - not necessarily one that everyone feels should be subject to an ROI calculation
Regardless of your feelings on the above, it's important to speak the quantitative language of business executives. Therefore, calculating ROI is critical to show that your legal training (a cost center) is a worthwhile investment - both of time and money.
What are some other reasons corporate counsel should calculate ROI for legal training?
- To determine the effectiveness of the legal training;
- To provide evidence of success/improvement to management;
- To evaluate training methods; and
- To justify a training budget (time and money)
What does ROI mean in the context of legal training?
ROI can really be boiled down to a simple cost-benefit calculation:
ROI (as a %) =
(Benefit - Cost) / Cost x 100
The goal for the company is striking a healthy balance between the cost of noncompliance events and the cost of compliance infrastructure (e.g., legal training).
In other words, how much money do you need to spend to avoid costly events such as a bribe, a missed regulatory filing, a discrimination lawsuit, a breached contract, etc.?
Simple ROI is the calculation of whether you've successfully avoided more cost due to noncompliance events than you spent to avoid those events through training. In addition to cost avoided due to noncompliance events, ROI could measure other intangible benefits like improvement in corporate culture, communication skills, etc. Unfortunately, those intangible benefits are extremely difficult to measure.
For the math aficionados out there, here's the formula:
ROI (as a %) =
(Total Noncompliance Costs Avoided - Total Training Program Costs) / Total Training Program Costs x 100
For a (very) simple example, let's say you've recently gotten slapped with a $150,000 environmental fine due to illegal dumping (your employee didn't know they couldn't dump solvent in the local stream out behind the facility - oops).
As a good corporate counsel, you hire a consultant to create a training presentation focused on dumping regulations at a cost of $10,000. You rolled out this training in your current online learning management system with no extra cost. As a result of your training, your company hasn't had any dumping fines in the past 3 years.
What's your ROI (hard costs only)?
(Total Noncompliance Costs Avoided ($150,000)
- Total Training Program Costs ($10,000))
/ Total Training Program Costs ($10,000)
Grand Total: 1,400% ROI
You may be thinking that calculation seems too easy.
Unfortunately in the real world, calculating the total noncompliance costs avoided and isolating the training benefit can be extremely difficult.
Check out how to calculate and isolate the training benefit in the 2nd part of our series: How to Calculate Training ROI - Part 2.
PS: if this is sounding like a ton of work, you may be interested in our custom legal training services!