Training & ROI
DC - When did you begin looking at the relationship between investments in training and corporate performance?
LB - I got started in this line of work when I created ASTD’S benchmarking service. We created a definition of what constitutes spending on training and education, something that had never been standardized before. We gathered a lot of information from various organizations on their training functions. Over the years we generated a large database, one which ultimately had about 3,000 organizations in it from around the world. About 600 of those organizations were U.S.-based publicly traded organizations and we began to see that there was a relationship between spending on education and training and subsequent stock prices.
DC - I notice you use the word "subsequent," which implies investments in training are predictive of performance, not just correlated with performance.
LB - Precisely, and that is very important from an investment point of view. The Holy Grail of investment research is to find something that actually predicts stock prices. In 1999 when I left ASTD we knew there was a relationship but we hadn’t come to understand the relationship well enough for it to be investment-grade information. I've continued to work on that issue and have pushed the analysis to the point where we have moved beyond researching the topic to actually running an investment fund based on our findings.
DC - Shouldn't the stock market punish companies that under invest in training?
LB - In the short run, the stock market actually does just the opposite; it punishes firms that do invest, although it rewards these firms in the long run. The reason for that is that accounting systems treat spending on training as a “hidden” cost. A firm that invests in training looks as if it has high costs. The analyst on Wall Street has no information to show that some of those “costs” are actually investments that will bear, with some risk, a benefit in the future. All the analyst sees is two seemingly comparable firms, one with higher costs and therefore lower earnings than the other. The firm with the lower earnings gets its stock price dinged in the short run.
A firm that is making an investment in training is actually making the investment despite the pressures of the financial market. Ultimately though, the benefits from training will show up and the firm will be rewarded.
DC - Wall Street may not recognize the difference between an investment in training and a cost, but companies should. Why do you think companies are under investing in training?
LB - The behavior of publicly traded firms is very much driven by short-term stock prices. Executives are very heavily compensated based on the share price. They react to what the financial analyst on Wall Street thinks.
DC - What specific aspects of training are you measuring?
LB - The most powerful predictor we have found is simply the level of spending per employee. We’ve studied a lot of variables such as the number of hours of training, staff-to- training ratios, and the type of training, but what we have consistently found is that spending per employee is the best predictor. That isn't to say those other things aren’t important but many of them are very difficult to measure. Despite our best efforts we still have noisy data. We think this spending-per-employee variable is less noisy than the others because we have spent a lot of time getting it as close to right as we can.
DC - Is it as simple as firms in the top quartile of spending doing better than those in the second quartile, who in turn do better than those in the third?
LB - What we find is that firms in the top of the distribution do better than firms at the bottom of the distribution. We are really looking at the top 5 to 10 per cent of firms, and quite frankly we don’t have a statistical capability to make distinctions among the great masses in between. That is a measurement problem – firms have a lot of difficulty knowing what they are spending and hence reporting it to us accurately. So once again we have a noisy variable and that’s why we are unable to make distinctions between the 40th and the 50th percentile. What we can do is make distinctions between the top and the bottom.
Another side to this is that those firms that are making extraordinary investments, the top 5 to 10 per cent of the distribution, are probably qualitatively different from the others. You are not spending that much money if you are not giving a lot of thought to it.
We know the overall amount of money spent on training matters but things beyond money matter too, and we are working very hard at getting measures for those things beyond money. You could have a brilliant training program but without the necessary enablers it won't give the return it should.
DC - What are these enablers?
LB - One of the discoveries—which will come as no surprise to HR managers but we've systematically documented it—is that a big reason why training dollars are not well spent is because managers are not really supporting the training. Managers put up all kinds of barriers that prevent employees from using what they've learned.
HR managers ought to systematically and quantitatively look at the enablers and document how supportive or non-supportive the environment is. When there are sufficient training dollars, but not the kind of training impact that is desired, the lack of support is often the culprit that can be quantified.
You do this by looking at managers across the organization and, using a standard methodology, figuring out who supports learning and who does not. Everyone will say they support learning but they may be putting up barriers to their people either acquiring new knowledge or applying that knowledge. If you are in an organization where the CEO is one of those managers creating barriers to learning then you have a problem. However, if you are in an organization where the CEO is a supporter of the learning environment and you can systematically identify those managers that aren’t, then you can get some CEO clout behind you in creating change. However, it's critical you have a credible way of determining who is and who is not supporting learning.
DC - Are there other enablers that HR managers should be looking at?
LB - A lot of enablers are obvious. Do people know where to go to get training? Do they know what is available? Do employees have any incentive to learn things?
DC - I can imagine the chief learning officer having three or four metrics around these enablers and in a rigorous way determining if he has all of his ducks aligned. He could do this for each unit to be sure their training investment is not being squandered.
LB - If you do this the right way your method actually becomes diagnostic as opposed to merely descriptive.
DC - What are the best companies doing in terms of training, measures and diagnostics?
LB - Well the very best, of which there are few, have the data systems in place to make the link between individual learning and the organization's results. These companies are getting fairly sophisticated about creating the data structure that is necessary to produce insight that allows them to make rational allocations of resources. For example, in a bank you can look at variations in training metrics between the branches and relate that to financial outcomes. Swedebank does some very impressive work in this way.
Another good example is Accenture, which is able to look at relationships between things like investment in training, employee satisfaction, retention and the revenue the employee generates.
DC - Are there cases of companies spending too much money on training?
LB - Now that we have large databases we can actually ask that question statistically: is there a diminishing marginal return, and if so, at what point does it occur? We see no evidence in our database of a diminishing marginal return. We know one must exist but if we are correct in believing that the market causes firms to under invest, it may well be that we do not observe firms ever getting to that point of diminishing marginal returns.
DC - Do you have any closing advice for HR professionals?
LB - We need to find methods for measuring, accounting for, and reporting on people as something other than just a cost. Firms will tend towards under investment in people until we solve this problem. This has major implications not only for organizations but also for the individuals in them and society at large. That's why I think it's a worthy problem to work on.
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