I get it. I really do. There are topics you just want to avoid like the plague (too soon?). But like bad-tasting cough medicine, there are things that you need to know, especially for your professional growth, that make you better at what you do even though it may be intimidating and overwhelming to learn.
Sometimes learning is tough. But not learning something, especially when it’s challenging, is unacceptable. Learning is more than maintaining your subject expertise; it’s about pushing yourself out of your comfort zone. This is why you decided to read this article.
This is the second in a series of articles to provide a comprehensive understanding of fundamental business and financial concepts preoccupying decision-makers. Simply, I want you to get into their heads.
In this article, I’ll address how leaders evaluate profitability and cash flow expectations arising from long-term initiatives. People short-hand this as return on investment or ROI. But it’s more than the simplistic layperson calculation many recognize; it’s nothing close to the training ROI myth propagated by desperate believers.
A Dollar In My Day…
You probably heard your parents or grandparents ranting about how “Back in my day you could buy much more than you can today!” Guess what? Thank them for sharing with you your first lesson about the time value of money. Time value of money is the basis for evaluating the profitability and cash flow for a major investment or development of a significant initiative. It’s what drives “return on investment.” Don’t agree? Then you don’t respect what ROI is really about (and it has nothing to do with the training ROI myth).
Consider this: Say, I offered you a choice to either accept $75 dollars today or $100 one year from now, which would you accept? Many would wait for the $100 since it is more money…or is it? Personally, I’d take the $75 today and find a way to grow it to more than the $100 in the next 12 months—but that may just be me.
Another example you’ve probably heard is would you rather accept $1 million today or one cent that doubles every day for 30 days. Again, most would accept the $1 million. But what most don’t take into account is the time value of money (referred to as compounding). Choosing the doubling penny means the second day you have two cents, on day three it’s four cents, on day four it’s 8 cents, and so on. By day 18 the penny grows to $1,310. By day 28, it’s worth over a million dollars (more precisely $1,342,177). On day 30, it’s worth an astounding $5,368,709!
This time value principle is how stakeholders measure the return for significant investments. Leaders and financial professionals refer to this as discounted cash flow. Why? Well, it’s because the $5.37 million, from our penny example, is worth that at day 30, but it’s not worth that today. What it’s worth today requires “discounting” it at a reasonable rate of return. In our first example, immediately taking the $75 implies it will be worth $100 in twelve months, applying an appropriate return. But, how do your stakeholders decide on the rate of 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 Word Learning Practitioners Hate Most… Cost!”). Second, decision-makers never evaluate the ROI of a cost center. It’s not done no matter what any LD “thought leader” tells you. This doesn’t mean, however, they’re not evaluating your efforts. Evaluating the effectiveness of a learning effort (or any cost center contribution) is about how it delivers realizable value for the business objective it’s addressing or, more often than not, specific operational initiatives. The latter is what you must pay attention to when it comes to ROI.
Every operational initiative, especially major purchases or product releases, requires spending money. The adage about having to spend money to make money applies, and one of those costs is your learning/training effort. Naturally, many operational efforts extend over a period of time, usually years, and so will your training contribution and associated costs.
This is where the time value principle applies. Decision-makers will first evaluate potential long-term profitability. They do this by forecasting potential income (usually revenue) and accounting for current and future costs (both over the life of the effort), and one of the costs is training. The net amount (revenue minus costs) is then “discounted” at an acceptable rate of return (like in our previous examples) to today’s (present) value. This commonly applied ROI calculation is called a net present value, or NPV, analysis.
For example, say your organization wants to purchase new equipment that costs $5 million to increase production due to increasing demand for their products. They expect the equipment to last for 10 years and expect it to increase revenue by 5% per year. Immediate costs are the equipment and costs to make the equipment operational. There are other required ancillary (overhead and administrative) costs (like training) for the current period and over the 10-year life of the equipment.
Assuming the company applies a reasonable return, say 8%, stakeholders will then discount each year’s net value (revenue minus costs) for every year for 10 years using this rate. Your company will purchase the equipment, the summation of the total net value. If the NPV is greater than $0 it means the investment has a positive ROI exceeding the 8% return stakeholders expect. The stakeholder is implying that if the effort doesn’t provide a return exceeding 8%, it’ll be rejected. Essentially, they can earn 8% by not doing this major effort.
Why Is This Relevant To Me?
Your operational leaders expect to maximize the ROI for major investments and initiatives. But to do this successfully, they must do one of two things: either increase revenues or decrease costs. Since they don’t have control for forecasted revenues, they’ll focus on what they can actually control, which are costs.
They will assess every cost, asking questions like, “Can you reduce this cost?” “Do we really need this?” or “Is there a cheaper way to do this?” Chances are, you’ve heard these questions or some variation. Here’s the deal, it’s not personal, it’s just business. They’re asking the same questions to those responsible for other costs. These questions will come up more frequently when the NPV is close to, or less than, $0 NPV value. Finding areas to reduce cost helps them become more confident in accepting the major investment. Fundamentally, it’s about maximizing the return of their investment.
Have the courage to stand your ground if you believe you’re unable to further reduce training/learning costs without affecting the quality and effectiveness. It also helps if you can deliver the same learning impact through a variety of innovative methods, like more impactful eLearning elements (read: “The Double-Edged Sword That Is Learning Technologies“).
Your stakeholders will not ask you to prove an ROI for your learning efforts. They will ask, however, how the costs for your efforts affect the return on investment of their business objectives, especially major initiatives. It’s your responsibility to design and structure your learning support so stakeholders can maximize the ROI over the life of their business effort.
Be thoughtful of your learning process. Be impactful with your learning efforts in two ways: 1) by how well the learning contributes to improving performance (over time) and to manage change, and 2) by how it is structured and deployed within the budget allocated.
The second point is where practitioners, from instructional designers to learning managers, falter. But you shouldn’t. You have access to (and asked for) a variety of tools and technology to help focus your learning efforts and to make them more impactful. And when they come back with a cost reduction question, rather than taking offense, embrace the challenge. It’s an opportunity to innovate your learning interventions and, ultimately, build your credibility.
Please share your thoughts and feedback with us. We’d enjoy hearing about your efforts. And who knows, it may be the topic of our next eLearning Industry article. Also, please check out our LinkedIn Learning courses to learn more about developing your business credibility for your learning efforts. Please share your thoughts and remember #alwaysbelearning!
This article is Part 2 of a two-part series, read Part 1.