Identifying costs and benefits


By its very nature, identifying costs and benefits their categorization and attaching monetary value estimates to them is part art and part science.

Potential benefits are particularly difficult to estimate because (a) they are likely to come some time in the future (while the costs are usually borne today) and (b) both the level of the benefits and the probability of receiving them are likely to be uncertain. That’s okay. The trick is to come up with plausible estimates, as well as confidence intervals (a range of expected values for each estimate).

Attaching a range to each estimate is important, as we will see. If your estimate of the ROI on a training initiative is 22%, plus or -3%, this would indicate a project with a very high probability of success. If your estimate is 22%, plus or -25%, this would imply that the project is much more risky.

Success at this stage hinges on the expert judgments—and careful analysis—of HR as well as line managers. There are a number of ways to generate these numbers. One effective method is first to develop a “straw man� of potential cost and benefit categories. Then, using colleagues, subject matter experts, focus groups, and archival data, gather feedback on the categories and ask for help in generating dollar-value estimates for each of the categories that you developed. It is important to recognize that some of these data may be available in full or part from your firm’s HR information system. The trick is to have carefully developed the cost categories before you begin to develop the cost estimates.

A simple example can illustrate why this is important. If you were to ask most senior HR professionals how much they invest in training per year on a per-employee basis, they could probably generate a number based on the corporate training budget. However, if the firm is very large, there is often a considerable amount of training that is done at the division-or business-unit levels, and these investments are generally not tracked by corporate HR. In addition, there is often quite a bit of “on-the-job� training that is not tracked by the corporate or divisional financial statements. So, in most firms, the corporate budget for training and development can understate the true spending on training, and often by a considerable margin. This is why it is important to have defined the question on ROI carefully like ‘Do we want to know the return on corporate investment in training or the firm wide investment in training? before starting to collect actual data on costs.

The costs involved whether for the firm or corporate are equally important to know the gains from the investment and also for rational budgeting.