There are many factors to consider when calculating the total cost of training. It is not enough to determine the development costs; one must also determine the delivery costs to arrive at an accurate result. Most of us already know that. However, when calculating the total cost of training, we sometimes forget to include the cost of lost opportunity.
For example, let’s assume that we are bringing 40 sales reps together for a one-day workshop. We need to pay for food and lodging, transportation, and facilities rental.
It appears that our total cost for the workshop is $43,000.00. But what about the cost of lost opportunity? How does that affect the total cost for the workshop?
What is lost opportunity?
For the purposes of this article, I define lost opportunity as the value of reduced productivity, or time lost, due to an individual’s absence from the job. Any time an individual is not performing the tasks of their job, the organization incurs the cost of lost opportunity. This applies to time an individual spends in training.
- When a sales representative is in a training session, the sales rep is not selling. That represents a lost opportunity.
- When we utilize managers or other field employees to conduct a training session, the organization also incurs the cost of the manager or field employee not performing their regular job, another lost opportunity.
Calculating the cost
The cost of lost opportunity can have a significant impact on your organization. It may even guide your decision-making process when comparing alternative training delivery options.
There are a number of methods available to calculate lost opportunity cost. Two popular methods, described below, are the labor cost method and the value contribution method.
Compare the two methods. If these methods do not match your situation, you may need to do a little research—you may need to get creative.
Remember, your goal is to quantify the value. You may want to consider working with your finance organization to help you accurately calculate the cost.
The labor cost method
In situations where temporary personnel substitute for employees attending training, you can calculate the lost-opportunity cost using daily salary information. This method also applies to situations where you may have employees work part of an extra shift to cover the time for another employee to attend training.
For this method, you need to know the...
- Number of temporary personnel hired to replace or fill-in for employees attending training
- Daily salary of the temporary replacement personnel
- Length of the class (in days)
After determining this information, you can calculate the lost-opportunity cost using the formula:
Number of temporary personnel x Daily salary x Length of class = Lost opportunity
When determining the length of the class, be sure to include any travel time required for the employees to attend the training. For example, if employees spend one day traveling to class, three days attending class, and one day returning, the total length of the class is five days. Do not forget to include the cost of any temporary workers who replace employees working as instructors.
We need to pull 16 individuals from a clean-room assembly line to train them on new work instructions.
Number of temporary personnel = 16
Daily salary = $96.00 (based on an 8-hour shift at $12.00 per hour)
Length of class = 2 days
16 x $96 x 2 = $3,072.00
The formula used above assumes the temporary personnel operate at the same efficiency as the regular employees. To account for possible inefficiencies introduced by the temporary personnel, you may want to include an inefficiency factor. Convert the factor to a decimal value for use in the formula.
To do so, start with the employee’s productivity level (100 percent) and combine it with the inefficiency level. In other words, to include a 20 percent reduction in efficiency, use 1.2 as the inefficiency factor (100 percent + 20 percent = 120 percent, or 1.2).
To include a 50 percent reduction, use 1.5 as the inefficiency factor (100 percent + 50 percent = 150 percent, or 1.5). When the inefficiency factor is included in the calculation the formula becomes:
Number of temporary personnel x Daily salary x Length of class x Inefficiency factor = Lost opportunity
In the example below, we account for the inefficiency of the temporary employees. The temporary employees will only be 50 percent as efficient as the regular employees, so our cost of Lost Opportunity is:
16 x $96 x 2 x 1.5 = $4,608.00
The value contribution method
Another method to calculate the cost of lost opportunity is to use the amount of money each employee contributes to the organization’s gross revenue. To calculate the cost using this method, you need to know the…
- Gross revenue earned per employee
- Number of annual productive days
- Number of employees in training
- Length of the class (in days)
After determining the information listed above, you can calculate the lost-opportunity cost using the following formula:
(Gross revenue per employee/annual productive days) x Trainees x Length of class = Lost opportunity
To calculate gross revenue per employee, you can divide annual net sales by the total number of full-time employees.
Annual net sales/total number of full-time employees = Gross revenue per employee
Annual productive days are the number of days you expect an employee to work. To determine the number of annual productive days, you need to know the number of…
- Vacation days
- Sick-leave days
After determining this information, you can calculate the number of annual productive days using this formula:
261 – (Holidays + Vacation days + Sick leave days) = Annual productive days
You may wonder where the value 261 originates. There are 365 days in a year (we are going to ignore the ¼ days and leap year). Subtracting 104 days to account for the 52 weekends in a year leaves you with 261 potential workdays. Backing out the holidays, vacation days, and sick days, leaves you with the number of annual productive days.
Let’s go back to the example provided at the beginning of this article. We are bringing 40 sales reps in to participate in a one-day workshop.
- Gross revenue per employee = $250,000.00 (based on annual net sales of $50 million/200 full-time employees)
- Number of participants = 43 (40 sales reps, two sales managers, and one meeting facilitator)
- Annual productive days = 236 (based on an 10 paid holidays and 15 days of PTO)
- Length of sales meeting = 2 days (based on a one-day meeting and one day of travel)
Our cost of lost opportunity is…
($250,000/236) x 43 x 2 = $91,110.70
Keep in mind that, in this example, we assume that all employees contribute equally to gross revenue. You can modify the formulas to account for different levels of contribution.
When we include lost-opportunity cost, the total cost for the workshop is significantly higher than $43,000.00.
Is this accurate? It may not be exact, but it provides a good picture of what it is really costing to remove 43 people from their normal job activities.
Note: Instead of using gross revenue you can also calculate the value contribution method using profit per employee…
Gross profit/total number of full-time employees = Profit per employee
and insert it into the formula below.
(Profit per employee/annual productive days) x Length of class = Lost opportunity
You can modify any of these formulas to account for different levels of employee contribution to gross revenue or gross profit. Work with your finance person to help you identify how.
Although often overlooked, lost-opportunity cost is an important factor to consider when calculating the total cost of training. Two methods for calculating the cost of lost opportunity are the labor-cost method and the value-contribution method.
Your finance organization may be an excellent resource to help you with this type of calculation.