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Return on Training Investment
Return on Training Investment: Valuing Human Capital
Pamela G. Sharpe
George Mason University
Abstract
The advent of the global economy brought new challenges and opportunities to enter markets which before had been unavailable. Innovation, competitive advantage, retention, quality, and customer service are at the forefront of every Chief executive officer’s (CEO) agenda. Companies must make decisions faster and with accuracy. A knowledgeable workforce is the life force of any organization. Chief learning officers are being tasked with aligning investments in workforce development to business goals. Organizations with strong retention, reeducation, and leadership development programs are fierce competitors in this digital age. Top companies are not waiting to see what their competitors are doing; top companies are the innovators in the field. “Best Practice,” “Workplace Leaders,” “High Performance Organizations,” and “Excellence in Practice” are all titles the top companies have earned. What separates them from others is the value they place on human capital. What are organizations doing to retain valued employees? How do the leading companies measure human capital value to stay ahead of the competition? This paper attempts to examine the correlation between human capital value and return on investment (ROI).
Return on Investment: Valuing Human Capital
“Everything happens in an organization because people make it happen. Nothing happens until people do something.” Jac Fitz-Enz
Competing in a global economy requires organizations to compete with companies who are leaders in knowledge and service. In the past, employees and customers were centrally located, whereas today the Internet connects customers and enables organizations in forming global multi-billion dollar organizations. The Internet gives employers, employees, and their customers twenty-four hour access, with only a click of a button. Likewise, global companies operate twenty-four hours a day, and must be efficient, knowledgeable, and capable of rapid change. In order to stay competitive companies are jockeying to hire, train, and retain the brightest and the best employees.
The combination of executives’ growing appetite for effective learning, their skepticism about the business value of the training their people actually receive, and their relentless drive to reduce fixed costs has thrust Training and Development (T&D) into the corporate spotlight. This constitutes an enormous opportunity, as well as a significant challenge, to everyone in Training and Development (Van Adelsberg and Trolley, 1999). Training departments must be equipped to deliver just-in-time training, be able to design and redesign training to meet the organizations’ business goals, and training departments must demonstrate to top executives that the training it provides adds value. Training is no longer just a function within the organization; training has become a main component in organizational success.
Rapid growth of the global economy has brought new challenges, increased budgets, and created a need for accountability across all departments. Training managers are being forced to manage training like a business, shifting their thinking from a trainer-focused paradigm to a new business management paradigm. Training managers must align programs closer with organizational and business goals. Training is no longer assumed to work. Executives are requesting quantitative measurements from training managers of the success of its programs. Training managers must prove the value of training by showing a positive return on investment. Danielson and Wiggenhorn (2003) suggest that “today’s progressive corporations have moved from treating learning as an obligatory cost to regarding it as a weapon in the battle for competitive advantage.”
Until recently, training departments were the darlings of every organization. Armed with increasingly large budgets, these entities, many working autonomously, within their organizations were the elite of the elite. While other business units scrambled to measure their return on investment, training continued to assess their success using Kirkpatrick’s level one and level two evaluations to measure students’ reaction and learning, but business measurements were not conducted, and training managers failed to earn a seat at the strategic table. For years, training managers convinced top executives that training could not be measured (Philips, 2004). Smile sheets, which evaluated everything from number of bodies in each class, and whether the students enjoyed the class, to the training environment were used, but a true measure of return on investment was not conducted. Top executives are now demanding return on investment calculations from departments and functions where they were not previously required. In a global economy, executives are asking for real measurements and training managers must step up to the table. Without facts and statistical data about the benefits of training, training does not have the “ammunition to defend itself against budget cuts and assaults on its value” (ASTD, 1998).
The Internet pushed global organizations into the knowledge age. In order to stay competitive companies sought out new technologies, with each new technology requiring new training. “The prevailing thesis on Wall Street is that knowledge workers will require more education and more training than ever before. As a result, corporate training budgets will increase substantially, which will mean more money flowing into the coffers of companies that sell training (Stamp, 1997 as cited in van Adelsberg and Trolley 1999).” As companies began to grow, training budgets grew. It is estimated that the corporate training market in the United States is over 100 billion dollars per year. However, in a 2004 research report on High Performing Organizations, Accenture found that “only 17% of executives surveyed report that they are very satisfied with the performance of their training organizations (Accenture, 2004).”
What are the qualities of a high performance learning organizations? According to the Accenture study, the high performance organization’s number one proficiency is aligning learning initiatives to the organization’s business goals. Number two is measurement of the overall business impact of the learning function, (Accenture, 2004). Accountability is the key. When the strategy of learning organization’s are aligned with organizational goals and measures, the impact of its training and development programs contributes to organizational strength and competitiveness. Additional competencies of high performing organizations are: including others as partners in training, focusing on competency development, integration of learning with other human performance systems, blended learning, and leadership development. These organizations have a huge investment in human capital. The value of which can be determined in the success of the company.
In a 2004 Global CEO Study, IBM found that 60% of CEOs surveyed feel that the major barrier to change are limited internal skills, capabilities and leadership to manage the transition from a cost cutting to revenue growth. Seventy-five percent of CEOs believe employee education will become a critical success factor in realizing the growth agenda. It is clear that executives see learning as a key factor in growth, productivity, competitiveness, and sustainability of global companies. As territories and markets grow, it will become imperative that training provides the missing link that will foster innovations, sustainability, and growth. Bontis and Fitz-Enz (2003) state “human capital is the profit lever of the knowledge economy.”
Without a stable and committed workforce, organizations cannot be competitive. When CEOs are asked, what keeps you up at night?, the answers most received are (IBM, 2004):
· staying competitive,
· deficiencies in workforce skills and capabilities,
· reeducation, retention,
· shortage of managerial leadership,
· being innovative,
· keeping cost down.
When asked, what are the most important internal and external barriers to change? CEO’s believe that education or often reeducation and the lack of qualified candidates are the people issues that will have the greatest impact upon their businesses over the next three years. CEO’s believe that a shortage in managerial leadership is a major barrier to change in their organizations. One CEO states, “We are not doing enough to develop and upgrade our skills and capabilities.” Another states, “Due to heightened competition, we have found it difficult to retain key staff (IBM, 2004).” It is clear human capital has a high value in the success of global organizations. What is human capital? “A company’s human capital is the collective sum of the attributes, life experience, knowledge, inventiveness, energy and enthusiasm that its people choose to invest in their work (Weatherly, 2003).”
How organizations value and manage this asset is debatable. Jac Fitz-Enz (2002) believes that human capital is measured according to the value add created by the people. Only then can you find out the human capital return on investment. Value add is determined by taking total revenue, minus expenses divided by total full-time equivalents (TR – E/TFE = TVA) value add. Human capital return on investment is determined by taking total revenue, minus expenses, this equals adjusted profit. Take the adjusted profit and divide by expenses for payroll and benefits this equals human capital return on investment (TR – E = Pr/P&B=ratio). This ratio is the amount of profit the company receives for every dollar spent on employees (Fitz-Enz, 2002).
While human capital ROI analyses are significant in that they legitimize the need to invest in human capital, they yield little actionable information for decision-makers who make investments in human capital. In other words, these valuation approaches are outcome focused rather than decision-making focused. They are aimed at justifying human capital investment in aggregate, rather than informing human capital investment decisions specifically (O’Driscoll, 2006).
Companies that are looking for ways to maintain sustainable competitive advantage in a service and knowledge driven economy, must have training organizations who measure the impact of the training. Executives are scrutinizing training budgets and training managers are being called upon to deliver the best possible training and prove its return on investment. Before ROI, training departments focused on Kirkpatrick’s four levels. In 1959, Donald Kirkpatrick developed a four-level evaluation valuation taxonomy that focuses on defining the outcomes of a given training program. The four levels are:
Level 1. Reaction – immediate reaction to the intervention, did you like the training?
Level 2. Learning – what the participants learned, did you understand the information and score well on the test?
Level 3. Behavior – how the participant applied their learning on the job, did the training help you do your job better and increase performance?
Level 4. Business results – what positive effect the applied behavior had on output, quality, consumer satisfaction, etc., did the company or department increase profits, customer satisfaction, etc., because of the training?
While Kirkpatrick’s taxonomy has been used for many years and is simplistic in design many studies have shown that most training organizations have been ineffective in conducting evaluation. In addition, many training departments do not measure past level two. Brinkerhoff (1987) contends that evaluation in business and industry programs is geared more towards the bottom line while the four-step model developed by Kirkpatrick focuses instead on training outcomes.
Jack Phillips later added to the Kirkpatrick model by developing another level return on investment (Level 5). What is return on investment and how is it calculated? The ROI Institutes TM (2006) definition of Return on Investment is a comprehensive measurement and evaluation process that collects six types of measures:
· Reaction, satisfaction, and Planned Action,
· Learning,
· Application and Implementation,
· Business Impact,
· Return on Investment,
· Intangible Measures.
The ROI Institute TM (2006) states, that the return on investment process provides a systematic approach to evaluation and planning, data collection, data analysis, and reporting. If implemented successfully, the measures and data collected can provide valuable information to executives as to the success of their investments in training. The return on investment calculation is as follows: ROI = (Net programs Benefits/Program Costs) x 100%
These valuation approaches confirm that there is a business benefit to investing in people, but they say little about how much to invest and where to invest. These three approaches, the human capital value, Kirkpatrick, and return on investment approach each have their shortcomings.
The human capital approach does not provide executives with enough information to improve decision making in regards to training investment. Its focus is the return on investment without any consideration for the training needs. This approach is still new and not widely used.
The Kirkpatrick approach falls short in that it is:
· summative in nature,
· focuses on the defining the outcomes of a given program on trainee reaction, learning and behavior (levels 1-3) and on organization results (level 4),
· does not take into account the formative aspects of evaluation required to assist in decision-making regarding learning and human capital investment,
· does not provide any guidance as to how to monitor progress through the analysis, design, development, and delivery stages of intervention creation to drive the alignment, effectiveness, and efficiency of learning.
The return on investment approach falls short due to its summative nature justification is based on past programs investments, it does not adequately capture the benefits of the intervention over time, and it does not provide guidance on future investments (O’Driscoll, 2006).
In a recent meeting with forty training executives, I learned that several best practice-training organizations do not develop training without the assistance from the heads of the department and their staff. It is becoming a standard practice at Fortune 100 and 500 companies for company leaders to conduct training classes. Retaining employees and knowledge sharing is one of the drivers for these new programs. Organizations are developing a culture where everyone shares knowledge and human capital is valued. It is estimated that for every employee who leaves an organization, it costs six months in salary and benefits to find a replacement. If the employee is professional, manager, or executive, the cost can be one to three years of annual salary (Fitz-Enz, 2002).
Conclusion
Alone the approaches to will not provide enough data for executive to make effective decisions about workforce development, retention. Chief executive officers and chief learning officers must insist that the learning function be holistic. An organization’s human capital is its ultimate investment. Once the organizational strategy is known, the training organization is able to identify and develop successful programs. By collaborating with leadership within the entire organization, training can develop a positive culture where growth, knowledge sharing, mentorship, coaching and succession planning, lead to company-wide success.