Beating The Downturn - Six Sigma & Return On Investment

One of the hot topics at the moment is return on investment. In these days of credit crunching, low interest rates and falling stock markets everyone is considering how best to obtain a return on investment (ROI).

So why is return on investment so important, and why more so now? When times are easier, people are happier to take a risk and invest in something even when the return is not clear. When times are hard, attitudes to risk are different, people are less prepared to invest when the risk and return is not clear.

In the training world, the question has always existed, and many people have struggled with answering the question “will I see a return on my training investment?” In recent months, there have been a number of initiatives urging people not to cut back on training because doing so will hamper them in the longer term, “when things get better again”. However it would be wrong to train people just because times are difficult! In good or bad times; the question is the same, “will I see a return on my training investment?”

So how do we measure ROI on training? The reason why this is a difficult question to answer is that often people do not think through what they want to achieve with the training, and what this might be worth. For example, when sending someone on a leadership development programme what outcomes are expected, what will be achieved after the training that could not be achieved before? Once it has been established what outcomes are required, the value this will add to the organisation needs to be worked out.

For Lean Six Sigma, the issues are the same, what will be different and what value will be created by these differences? Where things are a little easier with Lean Six Sigma is the information available already from studies done on Lean Six Sigma projects can be used as a starting point. Mikel Harry did a study on over 3,000 six sigma projects carried out across a variety of different organisations, and worked out that the average value to the organisation per project was $180,000, or over £100,000.

Let us assume that we select and train a black belt and this takes 4 months. In year 1 we incur total costs of 12 months employment of £50K, and training costs of £10k (including travel, accommodation and software). If our black belt completes 1 project by month 6, and this project saves £100,000 per annum, then in the first year we will save £50K, equivalent to the costs incurred. If a further project is completed at 9 months with the same savings, then we will see a further saving of £25K, giving a total saving in year 1 of £75K. So for an investment of £50K, we have returned £75K, a 50% ROI.

Of course these calculations are based on average project values, and this is where the risk has to be considered. 2.5% of projects studied achieved did not generate any savings, so there is a 1 in 40 chance (based on past performance) that a project will not generate a return. 25% studied achieved a saving of less than £60,000, which would mean that there was only a break even in year 1, so there is a 1 in 4 chance that there would be a break even in year 1 and no immediate return. On the other hand the upper quartile for project benefits is £160 and so there is a 1 in 4 chance that the ROI for the first year will be £100,000.

Of course, this is historical data, and should only be considered as a starting point. When we are talking with clients about potential programmes of work we always ask them what they want to achieve and why. We also ask them why they have not achieved it before and what’s stopped them? There are generally two reasons: lack of resource, or lack of skills. If the answer is lack of resource then they need resource first. If the answer is lack of skills then training will help them achieve what they want to achieve. Generally, it’s a combination of the two.

So the questions that need answering are:

1. What do you want to achieve?
2. What is that worth to the organisation?
3. Do you have the resource to do this?
4. Do you have the skills to do this?
5. What will the resource cost?
6. What will the training cost?
7. Is there a return on the investment in resources and training

Recently we worked with a large secure printing company that was experiencing high scrap rates, and customer dissatisfaction because of these rates. We asked them the questions above with the following answers:

1. We want to reduce scrap rates from 5% to below 1%

2. This should be worth over £400K to us each year

3. We do have some resource which we can dedicate to this, but will need some additional expert resource.

4. We do not have the skills; we have been trying to solve this for over 12 months with no success.

5. The resource allocated (a team) cost £70,000

6. The package of training and support cost £30,000.

7. Assuming the project savings start at 6 months, there is a potential saving of £200K in year 1, and thus a ROI of 2:1 in year 1.

Having completed the project and achieved more than the required savings, the organisation was of course delighted with their investment performance! And remember that this is just year one. The team are now solving other problems, and so the return continues even though the training costs are completed.

So when considering ROI for your planned Black Belt training, first try and answer the questions above. Invest wisely and you will achieve a return!