Training budgets are one of the first to go in a down economy. I first pointed this out in Finding Strategic Learning Funds, but there’s ample evidence to be gathered. When the money isn’t there, organizations start casting about for any program they deem expendable. But the unfortunate truth is that training is the best possible investment a company could make during a down economy. The evidence shows, it’s the one place where cuts don’t make sense.
Steve Muench, PhD, asserts that “Training is one of the chief methods of maintaining and improving intellection capital. Because of this, an organization’s training can affect its value.” (Tech Transfer Newsletter, 2004). In fact, the market-to-book value of companies significantly correlates with training as a percentage of payroll according to Bassi and Van Buren (1999). Furthermore, numerous studies have found that the organizational benefits of training are extensive. According to one, by Loewenstein and Spletzer (1998), “the effect of an hour of training on productivity growth is about five times as large as the effect on wage growth.” Research by Bartel (2000) also finds that employers, not employees, ”reap almost all the returns to company training,” going on to conclude that return on investment generally ranges from 100 to 200 percent ROI.
So, the evidence is out there — yet, why are companies cutting back when they should be investing?
One possible reason is a lack of good communication regarding the value of training itself. This is particularly true in small and mid-sized companies. The large ones seem to have it figured out: They do the analysis and understand how important “sharpening the saw” is. When asked if Amgen had made any cuts to training given the economy, CEO Kevin Sharer said, “We haven’t cut back on that at all. Developing people is the future of the company.” (Fortune, 2009).
But smaller organizations don’t have the maturity to understand the importance of training.
Training is investing in the future. Unfortunately, it’s not enough to simply ask the powers-that-be whether they want to make that investment or whether they’d rather remain stagnant while the competition passes them by. In a numbers-driven world, it comes down to dollars and cents more often than not. This means getting out the trusty spreadsheet and doing some math to show its value.
It’s not hard. The key is keeping your eye on the “line of sight” from training to profitability. More than anything, this means making sure that training is directly applicable to the bottom line. Training must become a resource, just like any other cost-oriented tool or expense. There’s no problem buying new software if it leads to profitability. There’s no problem hiring new staff when it means more revenue down the road. So, make the case for training: Demonstrate the return on investment (ROI) that a training purchase will generate, in terms of revenue to the business.
ROI analysis can easily be applied to training expenditures. It’s the same process as any other expense: Does the investment make sense and is it necessary to meet the organizational goals? Sometimes it’s an easy analysis to make. For example, if your company is currently losing money because of a poor process or incorrect practice, compare the current loss to the cost of correcting the problem (that is, the training that will fix the situation). Is the cost of training less than the ongoing loss (keep in mind that the loss is cumulative, continuing to accrue every year until it’s fixed)?
More complicated ROI analysis needs to focus on the financial value of your organization’s goals, and break that value down along the “line of sight” to the training investment. For example, let’s say your product launch is valued at $1 million, but half of that valuation is on the assumption you deliver a specific, key feature. That means your direct key performance indicator (KPI) for that feature is $500,000. Let’s further say that your team can only deliver two-thirds of the desired functionality without training. This means that the training program’s relevance to the KPI is about $166,000. Will the training itself cost less than $166,000? If so, you’ve got a business case to do the training. (You can round out the case with your ROI figure: If the training costs $20,000 then your ROI would be about 830%, which is a pretty darned incredible return on investment!)
If you’d like a more scientific, in-depth study of ROI methods, take a look at my article Should Training be an Integral Part of a Project Budget to Increase Project Profitability?, featured on the leading PM site My Project Management Expert.com. There’s a lot more research and some discussion of current ROI methods, as well as a couple of good examples.