Working With The ROI Your Stakeholders Apply
Working with the ROI that your stakeholders are requesting
I get it. I really. There are issues that you just want to avoid, like the plague (too soon?). But as with bad tasting cough suppressants, there are things you need to know, especially for your professional development, that will improve you in what you do, although learning to do it can be intimidating and overwhelming.
Sometimes it is difficult to learn. But not learning something, especially when it is challenging, is unacceptable. Learning is more than just maintaining your professional competence; It’s about pushing yourself out of your comfort zone. It is for this reason that you decided to read this article.
This is the second in a series of articles that provide a thorough understanding of the basic business and financial concepts that matter to decision makers. I just want you to get inside their heads.
In this article, I’ll cover how executives evaluate profitability and cash flow expectations from long-term initiatives. People abbreviate this as return on investment or ROI. But it is more than the simplistic lay calculation that many recognize; it is nowhere near the myth of training ROI touted by desperate believers.
A dollar in my day …
You’ve probably heard your parents or grandparents scold us about the fact that in my day you could buy a lot more than you can now! Guess what? Thank you for sharing your first lesson on the time value of money. The time value of money is the basis for assessing the profitability and cash flow of a major investment or development of a major initiative. It is what drives the return on investment. Disagreeing? Then you’re not respecting what ROI is really about (and that has nothing to do with the myth of training ROI).
Consider this: Say I offered you a choice of either accepting $ 75 today or $ 100 a year from now, what would you accept? Many would wait for the $ 100 because it is more money … or would it? Personally, I would take the $ 75 today and find a way to increase it to over $ 100 in the next 12 months – but that might just be me.
Another example you’ve probably heard is that today you’d rather accept $ 1 million, or a dime that doubles every day for 30 days. Again, most would accept the $ 1 million. What most don’t consider, however, is the time value of money (known as compounding). If you choose double penny, you have two cents on the second day, four cents on the third day, eight cents on the fourth day, and so on. By day 18, the penny grows to $ 1,310. On the 28th day, it’s worth over a million dollars (more specifically, $ 1,342,177). On day 30, it’s worth a whopping $ 5,368,709!
With this fair value principle, stakeholders measure the return on significant investments. Executives and finance professionals refer to this as discounted cash flow. Why? Well, that’s because the $ 5.37 million from our penny example is worth it on day 30, but it’s not worth it today. What it’s worth today requires “discounting” it at a reasonable rate of return. In our first example, taking the $ 75 instantly means they’ll be worth $ 100 in twelve months, assuming a reasonable rate of return. But how do your stakeholders decide on the return? Well, that’s a conversation (or article) for another time.
Why is this relevant to learning?
The first point to note (and accept) is that learning and development is a “cost center” (read: “The 4-letter practitioners hate most … costs!”). Second, decision makers never evaluate a cost center’s ROI. It won’t be done no matter what an LD “thought leader” tells you. However, that doesn’t mean they don’t evaluate your efforts. Assessing the effectiveness of a learning effort (or cost center contribution) is about how it provides realizable value for the business objective it addresses or, more often, for specific operational initiatives. You have to pay attention to the latter in terms of ROI.
Any operational initiative, especially major acquisitions or product releases, requires a cash outlay. The saying goes that you have to spend money to make money, and one of those costs is your study / training effort. Of course, many operational expenses extend over a period of time, usually years, as do your training fee and the associated costs.
The time value principle applies here. Decision makers will first assess the potential long-term profitability. They do this by forecasting potential revenue (usually revenue) and taking into account current and future costs (both over the life of the project), and one of the costs is training. The net amount (sales minus costs) is then “discounted” to today’s (cash) value with an acceptable rate of interest (as in our previous examples). This widely used ROI calculation is known as net present value or NPV analysis.
For example, given the increasing demand for its products, suppose your organization wants to purchase new equipment costing $ 5 million to increase production. They expect the devices to last 10 years and increase sales by 5% per year. Immediate costs are the equipment and the cost to get the equipment operational. There are other necessary ancillary costs (overheads and administrative costs) (such as training) for the current period and over the 10-year life of the equipment.
Assuming the company applies a reasonable rate of return, say 8%, the stakeholders will then discount the net worth of each year (income minus costs) for each year for 10 years at that rate. Your company buys the equipment, the sum of the total net worth. If the NPV is greater than $ 0, it means the investment has a positive ROI in excess of the 8% return expected by the stakeholders. The stakeholder implies that the effort will be rejected if it does not provide a return of more than 8%. In essence, they can make 8% if they don’t go through this huge hassle.
Why is this relevant to me?
Your operational executives expect to maximize ROI for larger investments and initiatives. However, to do this successfully, they need to do one of two things: either increase sales or reduce costs. Since they have no control over projected earnings, they focus on what they can actually control, which is costs.
They evaluate all costs and ask questions like, “Can you reduce these costs?” “Do we really need this?” or “Is there a cheaper way to do this?” Chances are you’ve heard these questions or some of their variations. Here’s the deal, it’s not personal, it’s just business. They ask the same questions to those responsible for other costs. These questions are asked more often when the NPV is near or below the NPV of $ 0. Finding areas to cut costs will help them more confidently accept the larger investment. Basically, it’s about maximizing the return on your investment.
Have the courage to assert yourself if you feel that you cannot reduce training / learning costs any further without compromising quality and effectiveness. It also helps if you can achieve the same learning effect through a variety of innovative methods such as: B. More powerful elements of eLearning (read: “The double-edged sword that is learning technologies”).
Your stakeholders will not ask you to demonstrate an ROI for your learning efforts. However, you will be wondering how the cost of your efforts affects the return on investment of your business goals, especially on large initiatives. It is your responsibility to design and structure your learning support in such a way that those involved can maximize the ROI over the life of their business.
Think about your learning process. Be impactful in your learning efforts in two ways: 1) by how learning helps improve performance (over time) and managing change, and 2) how it is structured and used within the allocated budget.
The second point is where practitioners, from instruction designers to learning managers, stall. But you shouldn’t. You will have access to a variety of tools and technologies (and those that are asked about) to focus and make your learning efforts more effective. And when they come back with a question about cutting costs, take the challenge instead of fretting. It’s an opportunity to renew your learning interventions and ultimately build your credibility.
Please share your thoughts and feedback with us. We look forward to hearing from your efforts. And who knows, maybe it will be the topic of our next article in the eLearning industry. Also, check out our LinkedIn Learning courses to learn more about how to build your business credibility for your learning endeavors. Please share your thoughts and remember #alwaysbeearning!
This article is part 2 of a two-part series, read part 1.