How to Calculate Training ROI (Part 2 of 2)

In Part 1 of How to Calculate Training ROI, we covered the basics of calculating legal training return on investment (ROI).

But we left out 1 absolutely critical element:

How do you calculate the benefit of training your employees?

Let's take a step back for a minute and revisit the formulas you'll need to determine legal training ROI: 

As you can see above, the quantitative benefit to legal training is avoiding the cost of noncompliance events - e.g., lawsuits, attorneys' fees, regulatory inquiries, etc.

Unfortunately, it is extremely difficult to isolate the training effect to calculate what costs you avoided due solely to your legal training.

Although each organization will have have a unique ROI measurement due to unique training objectives, it is possible to use a general formula (based on the Philips ROI model) to calculate legal training ROI.

The model uses 4 factors to help determine the ROI for your legal training:

  1. Engagement
  2. Learning
  3. Application and Implementation
  4. Business Impact

Here are the steps to calculate ROI:

1. Figure out what you want to measure (i.e., what's the "benefit"?)

Before you ever train an employee, you should have a goal in mind. What actions do you want employees to take? What risks do you want them to avoid?

Let's go back to the environmental issue we discussed in Part 1. In that example, we had an employee who didn't understand certain environmental rules before dumping solvent into the stream behind one of your facilities - resulting in a $150,000 noncompliance event. 

Here, your goal is to train employees to follow proper materials handling rules so you avoid any further environmental fines related to improper dumping.

The benefit we'll calculate for ROI purposes is the total amount saved by the company because employees now understand (due to the training) not to dump solvent in the stream. 

PS: if this is sounding like a ton of work, you may be interested in our custom legal training services!

2. Were employees satisfied with the training?

Engagement

Next, it's important to get a sense of whether employees feel that the training you provided is relevant and targeted to their job. If it's not targeted, employees will likely not be committed to changing risky behavior. 

You can get data on employee engagement through a quick post-training survey. Although this factor does not produce a quantitative number to use in the ROI calculation, it will help you isolate and qualify the training benefit.

3. Did employees actually learn anything?

Learning

A critical part of any employee training is the assessment. If you want to understand the "benefit" of training employees, you must know whether they actually learned anything during training. 

You can collect this data in a number of ways, but for compliance training, the best way is to measure pre and post training understanding over time. Basically, each time you train an employee, measure comprehension both before and after training.

Keep employee-specific data over the period of time they are employed. 

Again, although this factor does not produce a quantitative number to use in the ROI calculation, it will help you isolate and qualify the training benefit. If the assessments indicate that your training is not effective, you can't possibly demonstrate that it is responsible for any reduced noncompliance benefit.

4. Are employees applying your training?

Application and Implementation

Now that you know employees understood your training, you need to test if (and to what extent) the training is actually being applied and implemented in employees' day-to-day jobs. 

How you will collect this data will depend on what you're trying to analyze. In our example of environmental training for proper materials handling, you can perform a simple audit of the new process for dumping solvents. 

For a more complex issue (such as anti-bribery/anti-corruption training), you will need to conduct detailed 360 degree surveys of employees and their supervisors to understand whether they've stopped engaging in certain risky behaviors or better understand how to conduct themselves in certain risky situations. 

By conducting surveys and audits on training application, you will get a good sense of whether the training has been effective.

Again, although this factor does not produce a quantitative number to use in the ROI calculation, it will help you isolate and qualify the training benefit. Basically, you can't attribute any benefit of noncompliance avoidance to your training if employees' post-training behavior hasn't changed. 

5. What's the quantitative business impact of your training?

Business Impact

Okay, let's get down to the numbers.

What are the isolated quantitative consequences of your training program?

There are 2 parts to the business impact calculation: (1) the benefit calculation and (2) the isolation calculation.

Calculating the consequences

What is the quantitative benefit to avoiding a noncompliance event? And did you actually accomplish avoidance? To what extent?

As you will see, this calculation is highly individualized for each company and issue.

Going back to our environmental issue, we gave a total "all-in" cost of noncompliance event - the $150,000 fine (including any attorneys' fees, increased premiums on any insurance, incidental costs, etc.). 

If over the next 1 year after training, you don't have this specific noncompliance event, then the benefit measurement is easy - it's $150,000. 

But what if you haven't had a noncompliance event in the past? Then your task becomes much more difficult - calculating the benefit avoiding hypothetical legal risks.

Moreover, how do you isolate the effect of training in calculating the benefit if there are a number of factors that will play into the lack of a noncompliance event in the past (e.g., if you don't sell outside the US, it's much less likely your company will violate FCPA - not because of your training, but because of your sales geography)? 

Well, you can either run a full Phillips ROI analysis (which will likely get you a more accurate answer, but will take up enormous amounts of time) or you can give it your best guess!

Calculating the Consequences - Best Guess Approach

Let me give you an example of the "best guess" approach, which is good enough for the time-strapped corporate counsel.

Let's use an example of FCPA compliance for Company X - a medical equipment manufacturer. Here are the stats:

  • Company X is US-based
  • Company X has $10,000,000 in total revenue from international sales.
  • Company X doesn't expect any revenue increase this year.
  • Company X only sells direct. 
  • Only 15% of international sales are sold to government-run hospitals (the rest go to smaller, private clinics).
  • Company X only has 4 international salespeople, each of which contribute 25% of international sales
  • Due to the nature of Company X's products, the largest order they've ever received during a 1 year period for 1 customer is $1,000,000 total. 
  • Company X's products have a blended profit margin of 35%

How would the calculation work to determine the cost of a hypothetical noncompliance event for Company X during any given year?

To begin, you need to understand how costs get calculated for noncompliance events (e.g., for FCPA: profit disgorgement, attorneys' fees, increased cost for compliance program, etc.).

Now you calculate.

Here's how I would approach it:

  1. How often could a noncompliance event occur? Typically FCPA violations occur with a single noncompliance event - not a widespread bribery scheme involving all salespeople and all foreign government customers. 
  2. How much revenue would be involved? Accordingly, it's important to analyze the potential cost using the $1M per/transaction limit - i.e., assuming the noncompliance event would occur with a single order. NOTE: there are many other ways to calculate the revenue in this example depending on your business model.
  3. What is the profit margin on the revenue? The total profit that would be disgorged on a $1M sale is likely $350,000.
  4. What are the other costs? Other costs could include attorney's fees (est. $100,000), compliance program cost increases (est. $50,000), and other miscellaneous costs ($10,000). Total - $160,000.
  5. Final noncompliance hard cost - $350K + $160K = $510,000

Finally we arrive at a final hypothetical benefit - $510,000 in savings (for 1 year) if the noncompliance event does not occur due to your FCPA training. Again, this hypothetical analysis is highly subjective, so it's important to be conservative with your calculations. 

Isolating the benefit of Training

Okay, so you've calculated the benefit of avoiding a noncompliance event, but how do you know it's solely attributable to your training?

Environmental example

It's easy enough to isolate if we go back to our environmental hypothetical. Before the training, we measured employees' understanding of the dumping law (see Learning section above) nobody understood. 

We then trained employees on where they can properly dispose of certain materials. Our post-training assessment showed that 95% of employees understood where they could dispose of hazardous materials (see Learning section above).

After 1 year, we had no further incidents of improper disposal - a cost savings of $150,000.

There are no other new initiatives at the company addressing disposal of these materials, and no new managers have come on board who already understand the laws. 

Employees are applying your training in their day-to-day jobs (See Application section above).

Accordingly, we can attribute the entire $150K benefit to the training. Please note, this is extremely rare!

But what about the more complex FCPA example?

Can we attribute the entire $510K savings to our FCPA training?

This is much more complex and absolutely must take into account the results you've received from sections 2-4 above. To make this determination, you need to know at a minimum (1) whether employees understood the training and (2) whether employees are applying the training.

This information must be compared with other factors, namely: (1) the effects of any other company initiatives involving anti-corruption, (2) employee attitudes regarding the topic and training, and (3) any business factors such as decreasing/increasing international revenue, macro-economic trends, etc. that may contribute to avoidance of a noncompliance event. 

You can try to gain an understanding of how to weight each factor through employee surveys, but no method is perfect. Again, you're trying to get a basic ROI calculation.

Ultimately, you may need to apply a percentage to the benefit which is attributable solely to the training. For example, if we determine that the avoidance of an FCPA noncompliance event is only 25% due to training, then we would say the training benefit is only $127,500 (25% of $510K). 

6. ROI: bringing it all together

Once you've isolated the benefit of training and calculated all the costs, you plug it into the ROI formula in Part 1

(Total FCPA Noncompliance Costs Avoided ($127,500) 

- Total FCPA Training Program Costs ($20,000)) 

/ Total FCPA Training Program Costs ($20,000)

x 100

Grand Total: 537.5% ROI

It's important to note that this training ROI calculation does not take into account any "soft" benefits of training including improvement in company culture, engaging employees, preserving company reputation, etc.  

Even though calculating training benefits is often difficult and imprecise, it's incredibly important to make an attempt to quantify training ROI so you can show business people the incredible effect that engaging training can have on the bottom line. 

If you want to hear more on this topic, head over to the Comply Ethic Podcast where I talk more in depth about Training ROI.

Let us know how you calculate ROI in the comments below!