Competent business leaders recognize the importance of maximizing organizational resources — especially the value of their workforce.
Making the most of available talent is essential to meet market expectations and sustain a competitive advantage, particularly in today’s uncertain economic climate. But people are the most costly and challenging resource for leaders to manage. So why are training and development programs (T+D) often at the top of the “sacrificial lamb” list when it’s time to cut costs? That’s when T+D should be in a position to add value and shine.
Where’s the disconnect? It starts long before budget cutbacks.
Too often, those involved with administrative functions (where T+D resides) fail to grasp management’s expectations. This is either because they don’t view their domain as a core business function, or they’re unable to demonstrate a tangible connection with business objectives. In either case, this is where T+D can communicate its relevance, and fundamentally change business leaders’ perception.
What should learning practitioners do? First let’s look at T+D from senior management’s point of view.
Create a Compelling Case For Learning
Start by recognizing that business leaders think of T+D solely as a cost center. This is not a bad thing. Your CEO/CFO views every internal business activity as either a cost, profit or investment center. T+D is a cost center because it contributes to achieving business results only indirectly. It is not expected to make a direct profit or increase the organization’s financial value. (This is why business leaders don’t accept T+D ROI calculations.)
Given these realities, how can you help leaders rethink T+D’s contribution to the company? Focus on these steps:
- Stop attempting to show positive financial outcomes for training initiatives.
- Work with leaders to identify their forecasted business scenarios.
- Align your budgeted “training” dollars with specific performance objectives.
Let’s address each of these elements in more depth.
Demonstrating Training Value: The Drill-Down
1) Stop Trying to Calculate Training ROI
Leaders are taught to treat internal business activities as one or more of the “financial centers” we’ve mentioned. Primary business activities are typically treated as profit-centers, because their goal is to align with the organization’s purpose and generate a return from allocated financial resources.
Cost centers (such as T+D), are never expected to generate a positive financial result from allocated funds. Instead, T+D (like HR) is expected to contribute to achieving well-defined performance objectives.
A true return on investment (ROI) calculation is based on a tangible capital allocation that contributes to long-term profitability. Contrary to the claims of training ROI proponents, these rumeles are defined by formal accounting guidelines (such as US GAAP, IFRS, ASPE), and are therefore non-negotiable. Unless operational expenses are part of a capital investment, they aren’t measured through ROI — especially for an activity like T+D, which is treated as a cost center. Training ROI measurent makes sense only when long-term capital investments are involved, such as equipment (e.g. laptops/tablets or training classrooms) or technology (e.g. a new LMS platform, learning portal or elearning content).
2) Define Forecasted Expectations
It’s important for business executives to prepare for various possible future outcomes. Forecasting is a core leadership responsibility. This is important to understand, if you want to change senior management’s perception of T+D as a static, reactive business activity.
Don’t confuse forecasting with budgeting. Forecasting is about outlining a variety of possible circumstances an organization may or may not face — typically worst, best, and realistic scenarios. Forward-thinking leaders develop business models that allow them to manipulate elements within their control, while considering external elements not within their control (such as competitive factors or changing economic conditions).
T&D can contribute to the forecasting process by working closely with business leaders to:
- Assess employee knowledge/competencies required for each scenario (forecasted skills assessment).
- Develop financial requirements for training initiatives that map to each scenario.
- Prepare the T+D department for unexpected outcomes, so the team can quickly adapt to meet shifting organizational needs.
3) Align Training “Dollars” with Performance Objectives
Every business activity is allocated funds based upon a pre-defined budget. The budget is designed to cover operations, as well as deliverables that contribute to business performance objectives. (For T+D, that means development and delivery of training initiatives.)
How can you be sure your T+D spend is considered a strategic investment?
- Treat every training dollar as a budget allocation that is aligned with specific performance objectives.
- Review the T+D budget alongside your organization’s performance objectives. In other words, analyze your performance framework (e.g. Balanced Scorecard).
- Align T+D with the performance needs of core business units (profit centers).
Training Value: The Business Leader’s Bottom Line
Clearly, these suggestions are easier said than done. But it’s essential to capitalize on some of these points. Why? Because T+D professionals are continually challenged to “sell” the benefits of an intangible need (training outcomes) to decision-makers who expect tangible results (business and financial impact).
This doesn’t mean business leaders don’t recognize the relevance of T+D. However, they’re ultimately responsible for allocating scarce resources in ways that ensure accountability and drive business momentum. This is a major reason why T+D budgets must demonstrate tangible returns — especially when learning initiatives are linked with line-of-business performance needs. Profit centers are financially accountable for training outcomes, because they’re essentially “paying” for T+D programs through their budgets.
Keep in mind that, although leaders are focused on financial results, they do not measure T+D’s performance the same way they assess the value of a profit center. They recognize that training is a “cost of doing business.”
C-level executives would rather measure training in terms of its effectiveness, rather than its ability to cover costs and generate a profit. Effectiveness is about how a cost center expense contributes to improved performance. When T+D connects programs to improved performance, then business leaders will value T+D as partner in achieving business objectives.
About The Authors: Thanks to our guest contributors, Ajay M. Pangarkar CTDP, CPA, CMA, and Teresa Kirkwood CTDP, founders of CentralKnowledge and LearningSource AMS. They are employee performance management experts, award-wining learning assessment development specialists, and three-time authors who most recently published The Trainer’s Balanced Scorecard: A Complete Resource for Linking Learning to Organizational Strategy. To read more of their insights on learning strategies for today’s business environment, follow their Workforce Revolution blog. Also, you can connect with Ajay on Twitter, on LinkedIn, or by email.