Determining return on investment, determining costs, measuring human capital

1. Determining Return on Investment, Determining Costs,
Measuring Human Capital
Presented by:
Mirwais Rahimzoi
Pooja Deswal

2. Return on investment
 Return on investment (ROI) is a measure of the monetary
benefits obtained by an organization over a specified time period
in return for a given investment in a training programme.
 ROI is the extent to which the benefits (outputs) of training
exceed the costs (inputs).

3. Why we calculate ROI?
 To justify the training budget.
 To determine the effectiveness of training.
 To evaluate the training method used and the use of time for
trainer and employee.
 To determine if there was a change in time, cost, or behavior.
 To provide evidence to management/stakeholders.

4. Conti..
 To build trust and respect for ourselves and the trainers.
 To gain credibility with executives.
 To identify areas for improvement.

5. Conti..

7. Benefits of ROI of Training
 Measure contribution
 Set priorities
 Focus on results
 Alter management perception

8. Models
 Benefit-Cost Ratio (BCR) – This is a basic definition of ROI. This is a
quantification of the relation between the benefits of a program and its
costs.
 When BCR is greater than one, the benefits outweigh the costs and the
program is considered a success.
 When BCR is less than one, then the costs exceed the benefits and
indicate that improvements or changes probably need to be made to
justify the continuation of the program.

9. Conti..
 Another useful and often used definition/formula expresses the
ROI as the percentage return on the costs incurred.
 If result greater than 100 percent means that the program has a
net benefit after accounting for the costs involved in running it.
 If result less than 100 percent means the program had a net
cost. This means that the program did not recoup its cost after
accounting for the benefit.

11. Determining Costs
 When conducting training, it’s important to know how much it is going to cost.
 when carrying out an evaluation it’s important to consider all training costs,
including indirect costs.
 Accurate cost information can give you an idea of how much you spend in
comparison to other similar organizations, and to stimulate discussion on how
much you should be spending on training.
 The cost of training will depend on the type of training you offer. Consider the
benefits of different training options, rather than just choosing the least
expensive.

12. key costs are
 Planning costs
 This covers any work selecting the training programme, such as
a training needs assessment. This will include any staff time
spent on conducting an assessment or external consultant fees.
 Programme development and design costs
 This includes any time spent researching or designing the
programme, the purchase of the training programme, or the use
of consultants.

13. Conti..
 Delivery costs
 Any external instructor or facilitator costs would be included here.
 However, if an employee ran the training, their travel costs and subsistence.
 Also include the cost of training facilities and refreshments.
 Evaluation costs
 This would cover the fees of any external evaluators or the time internal staff
spent evaluating the training. Include the cost of any evaluation materials,
analysis or data collection tools, and the distribution of any reports.

14. Direct & Indirect Costs
 Direct Costs
 Training provider's fee
 The cost of training materials and Course materials
 Travel and accommodation costs for participants
 Indirect Costs
 Participants' wages, including all on-costs (e.g. tax, superannuation and
workers' compensation)

15. Conti…
 The cost of temporarily replacing staff, or the cost of productivity
loss while they are being trained.
 The cost of management time spent setting up the required
training.
 Any administrative costs and utilities related to the training
activity.

16. Measuring Human Capital
 Human capital is a term popularized by Gary Becker, an economist
from the University of Chicago, and Jacob Mincer that refers to the
stock of knowledge habits, social and personality attributes, including
creativity, embodied in the ability to perform labor so as to produce
economic value.
 Alternatively, human capital is a collection of traits – all the knowledge,
talents, skills, abilities, experience, intelligence, training, judgment, and
wisdom possessed individually and collectively by individuals in a
population.

17. Conti..
 The skills, knowledge, and experience possessed by an
individual or population, viewed in terms of their value or cost to
an organization or country.
 The knowledge, skills, competencies and other attributes
embodied in individuals or groups of individuals acquired during
their life and used to produce goods, services or ideas in market
circumstances.

18. Factors that determine human capital
 Skills and qualifications
 Education levels
 Work experience
 Social skills – communication
 Intelligence
 Emotional intelligence
 Judgement
 Personality
 Habits and personality traits
 Creativity- Ability to innovate new working practices/products.

19. Why to measure Human Capital?
 To determine human capital’s ROI
 Human capital is an asset that you invest in, and expect to get a return on.
Once you calculate what your return is on your human capital investment,
you will be able to judge the efficiency and effectiveness of your human
capital.
 To identify gaps in human capital
 When you measure what you have, you will be able to see what you don’t
have. The gap becomes even clearer when you consider your
organization’s overall objectives.

20. Conti…
 To bridge the gap in your human capital
 The overall objective is identifying what you have, what you are
lacking, and then determining how to bridge the gap between the
two in order to achieve your organization’s goals.

21. How to measure human capital?
 Unlike other assets and resources, human capital is an intangible one, just
like intellectual property or patents are. Intangible assets are no less
valuable than tangible ones, it’s just that their value cannot be discerned by
touch.
 There is no straightforward way of measuring human capital. Not only
because it is intangible, but also because they are many variables that
affect it.
 One measure, however, that is relatively more straightforward is measuring
your human capital’s return on investment (ROI).

22. Measuring human capital’s ROI

23. Conti..
 While there isn’t any concrete measurements for human capital, here are a
couple of other ways that can help.
 Skills Inventory
 A skills inventory is a recording of the skills, capabilities, qualifications,
trainings, and certifications of employees.
 The skills inventory may also includeemployees’ preferences, career goals,
and other developmental information. The purpose of the skills inventory is
for an organization to have a database of its resources for more effective
HR management.

24. Conti…
 While the main purpose of a skills inventory might not be measuring human
capital, having a database of the information can certainly help to Sort,
arrange, and compare employees’ skills with what is required for their
positions, and then identify the gap and determine how to bridge it.
 Personality
 An individual’s natural reflexes, tendencies, attitudes, and innate traits are
what differentiate a good employee from a great one. Use psychometric
testing to measure human capital’s “other attributes”, identify the gap.