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The Human Capital Return On Investment

A paper from Global Learning Alliance and Knowledge Advisors

Part 6 - Estimation, Isolation, and Adjustment

We've discussed the works of Dr. Jack Phillips and his ROI process as an analytical tool to measure the ROI on human capital. However, just as Dr. Phillips leveraged Dr. Kirkpatrick's learning measurement model so to can the work of Phillips be leveraged to systematically measure and collect ROI data that is non analytical.

Phillips guiding principles include elements of what he refers to as estimation, isolation and adjustment. These are the cornerstones to monetizing a benefit (the numerator in our ROI equation) and linking it to training.

Estimation is a process commonly used in business today. Sales people will estimate their future sales, accounting people will estimate the cost of a warranty or claim that is expected in the future. So to can training personnel ask that participants estimate the job performance impact that a training program will have on their job. Participant estimation, as it is commonly referred, is not estimating the performance solely related to training but asks participants to estimate job performance changes in general, including among other factors, training.

For example, if one attends sales training, one might estimate an increase in job performance but that increase could be related to other factors such as a competitor going out of business that increases sales performance more so than training. So, estimates of performance change need to take into account many factors, not just training. Those factors include process changes, people changes, marketplace changes, technology changes and of course training.

When estimating the increase, the participant should think carefully about all the factors mentioned. They may want to review historic data and forecast data to reasonably factor into their overall performance change.

Logically, the training department is keenly interested in the effect training had on the performance improvement. So, the next step is to isolate the estimated increase in performance to just training. In this part of the process, the participant should estimate the how much the training has or will influence job performance, relative to the other factors and assign a value to it. So if the sales person felt that training was the strongest factor that caused change or will be the driving force behind future change it would receive a higher value than not.

Finally, because participant estimation and isolation is participant driven one must adjust any resulting ROI calculation for the estimate. Again, in other facets of business this is commonly done. Using analysis suc h as most likely, optimistic and pessimistic adjusts estimates for bias by the estimator and flaws in assumptions. You'll often see sales forecasts reported in this manner.

In training, adjustment is made for two reasons: first is conservatism. Conservatism is a guiding principle of Phillips. It is also critical to state one is conservative in assumptions to build integrity into your ROI model. Second, is for bias. Self-reported bias by participants is typically inflated. In fact, studies done by organizations like the Tennessee Valley Authority (TVA) and separate studies by KnowledgeAdvisors suggest that respondents tend to over estimate by a factor of 35%. To this end, when computing an ROI calculation one might reduce the inputs by a factor of 35% or a similar confidence rate as the adjustment factor for conservatism and bias.

Taken together, the principles of estimation, isolation and adjustment form a powerful model in tabulating a systematic, replicable, and comparable ROI model for human capital.

The result of the process is a monetized benefit factor, that when multiplied by the salary (i.e. the human capital) yields a monetized benefit from training. The model is easily adaptable, leveraging automation and technology, to drill deep into a specific business result such as the ROI on sales, quality, productivity, cycletime, customer satisfaction, or employee retention.

Part 5 < Back to Top > Part 7   

© 2004 Global Learning Alliance and Knowledge Advisors. Reproduced with permission. Any opinions or views contained in this article are solely those of the author and do not necessarily represent those of Training Reference.

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