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From Resource, June 2008
Learning Pays
What
is the value of employee training and development programs? Here is an
in-depth look at how such programs provide strategic value.
By Jennifer C. Rankin
These are very complex and competitive times for financial services companies.
Customers and shareholders are more demanding than ever. Agents and brokers must
have top-drawer products and back office support to deliver revenues.
Competition is intensifying as the industry both consolidates, through mergers
and acquisitions, and converges, with banks, brokerage houses, and insurers
entering each other’s business sectors. Operating costs are skyrocketing.
Globalization brings new competitors into the picture. The government has a
seemingly limitless supply of regulatory hurdles over which to jump.
In response to
these—and other—business pressures, insurance companies around the world are
trying to do more with fewer people, to control expenses, to encourage product
innovation and to craft winning business strategies. That means learning is more
important than ever.
Learning is one of an
organization’s most critical intangible assets. It’s not listed on balance
sheets, yet learning drives product innovation, responses to change and process
improvements.
In fact, IBM’s 2004
Global CEO Study found that 75 percent of CEOs believe that employee education
is critical for future enterprise success.
In 2005, IBM and the
American Society for Training & Development (ASTD) joined forces to probe
that finding in more detail, interviewing executives at 26 companies and
publishing the results in 2006 in the research report C-Level
Perceptions of the Strategic Value of Learning. They wanted answers
to three important questions. Does learning improve strategic value? Do chief
learning officers and line-of-business executives measure the strategic value of
learning in the same way? What is the learning function’s role in—and
accountability for—organizational growth, transformation and productivity?
Participating companies
came from 11 business sectors, including financial services, and ran the gamut
from American Express to Steelcase. Participants were the chief learning officer
and one senior business executive from each company. Each participant answered
six questions:
*
How does the learning function provide strategic value to your
organization?
*
How does the learning function’s strategic activity translate into
business results?
*
What is the learning investment process and your involvement in it?
* How do you know the learning function is maintaining ongoing alignment with
your strategic business needs?
*
How do you measure the learning function’s value contribution to your
organization?
*
How do you know the learning function is performing as efficiently as
possible?
Of course, the question
on everyone’s mind these days is the first question—that is, how does the
learning function provide strategic value to your organization?
The participants offered
four measures of value: strategic implementation, transformation, leadership
development and capability building.
Learning plays a vital
role in strategic implementation. Every year, say the survey participants,
companies identify a concise list of key strategies that are critical to taking
the business to the next level. These strategies almost always require
change—change in work flow, priority, approach or procedure. And when you make
changes, you must re-train staff.
The participants also
believe organizational transformation cannot occur without learning. In fact,
they say learning must occur during transformation, or organizations and
individuals find themselves well-prepared for last
year’s challenges.
Learning also is a key
component of leadership development. Despite popular opinion, the majority of
leaders are not born. They emerge after having learned enough through
experience, challenging assignments, and support from others to lead their
companies. Close to 90 percent of the companies represented in the survey
promoted from within to the CEO level. These CEOs gained their positions after
their companies invested heavily in their learning, development and growth.
Those investments paid off in shareholder gains, organizational advancement and
long-term success.
Finally, the participants
say market pressures make organizational—and individual—capability building
a business imperative. They believe learning helps them to develop the
capability to enter new markets or to adapt to rapid changes in their existing
markets.
The chief learning
officers and chief business officers of each participating company agree on
several points:
*
Learning provides strategic value and has a positive
effect on business outcomes.
*
It’s difficult to isolate and measure those outcomes.
* Stakeholder perceptions are a
key indicator of the value of learning programs.
*
The strategic value of learning is increased by strong governance
processes for planning, allocating and managing learning investments.
*
Learning programs must be integrated, proactive and responsive to
effectively meet business needs.
The chief learning
officers and chief business officers do differ on some key points, however. The
chief business officers were less concerned than the chief learning officers
with quantitative metrics that demonstrate learning’s value contribution to
business outcomes. The business heads are more interested in how to align
learning costs with the changing needs of the business and with the perceptions
of their employees and their bosses than they are with data from return on
investment (ROI) studies.
Measuring Results
The ASTD/IBM study is just
one of many to underscore the conventional wisdom that learning has strategic
value in today’s business climate.
This is not news in most
companies.
Neither is the idea that
you can quantify the value of learning.
What is
new is the idea that you can isolate the effects of learning programs
and convert that data to a monetary value—what one pundit has called the
‘Holy Grail’ of learning measurement.
In fact, return on
investment has become one of the most talked about concepts in the C-suite. The
topic appears on almost every human resources development (HRD) conference
agenda, articles on ROI appear regularly in HRD practitioner and research
journals, several books have been written on the topic, and consulting firms
have taken up the challenge. In addition, a professional organization has been
developed to exchange information on ROI.
Several issues are
driving the increased interest in ROI. According to Jack Phillips, a
thought leader in the field, pressure from clients and senior managers to show
the return on their training investment is probably the most influential driver.
He also says competitive economic pressures are causing intense scrutiny of all
expenditures, including all training and development costs. In addition, total quality management (TQM),
reengineering, and Six Sigma have created a renewed interest in measurement and
evaluation, including measuring the effectiveness of training. Finally, a
general trend toward support group accountability is causing some HR departments
to measure their contribution.
These
and other factors have created an unprecedented interest in the ROI process and
how to apply that process to the training function. Unfortunately, measuring the
ROI of training is not for the faint of heart. First, the process is confusing.
The models offered up by academics, consultants and researchers range from the
obvious to the mind-numbingly complex and they all define “return”
differently. Its statistical nature frightens even the most capable corporate
leaders. Applying ROI to employee development generates heated debate among
executives, some of whom believe it is a flawed and inappropriate concept,
others of whom believe it is the only answer to their accountability concerns.
To add fuel to the fire, some management experts are saying that our love affair
over the past decade with measurement and control is destroying employee
creativity and hampering corporate innovation, both of which are imperative for
survival in the decade ahead.
Unfortunately,
ROI can’t be ignored. As Phillips puts it, “To admit to clients and senior
managers that the impact of training or performance improvement cannot be
measured is to admit that training does not add value or that HRD should not be
subjected to accountability requirements.”
Another
reason ROI can’t be ignored is CEO concerns about the training function. Forty
percent of the CEOs who participated in a 2004 Accenture workforce survey were
either ambivalent or dissatisfied with their company’s training function.
These same executives also rated boosting workforce productivity and agility as
the most important training initiative, but only 17 percent of those were very
satisfied with their training function’s ability to deliver in that area. If
perception is reality, many training programs are not producing results that are
meeting the expectations of business executives.
Companies have always
known that knowledgeable employees add value. Nick Bontis, another intellectual
capital guru, likes to reference Tobin’s q, a ratio developed by Nobel
Prize-winning economist James Tobin that measures the relationship between a
company’s market value and its replacement value—that is, the cost of
replacing its assets.
Under this theory, if the
market value of a company is $25 billion and its book value is $15 billion, the
market is providing a $10 billion premium above and beyond its GAAP value.
Bontis argues that a significant portion of that $10 billion is the intangible
value of employee expertise.
What sorts of measures
can you employ to evaluate the effectiveness of employee training and
development? In 1975, researcher Donald Kirkpatrick developed the first four of
the five measures widely used today. In fact, they are popularly known as
Kirkpatrick’s Four. It’s Level Five—return on investment—that’s
generating so much interest and hand wringing today.
Before we discuss Level
Five, let’s take a closer look at Level Four—that is, the business impact of
learning programs.
Typical Level Four
measures include output, quality, costs, time, and customer satisfaction.
Effective training might result in lower turnaround time, improved employee
satisfaction, reduced employee turnover, higher job performance scores, improved
productivity, improved customer satisfaction, increased sales, and so on.
In
2004, for example, LOMA found a statistical link between professional
development and improved employee performance. We analyzed the employee records
of a financial services company with $20 billion in assets under management and
more than 5,500 full-time employees and found that employees who had earned the
FLMI designation were about 39 percent more likely than those with no LOMA
designations to receive an ‘above average’ rating during their performance
evaluations. We also found that employees who had earned one of our Association
designations were about 33 percent more likely to be rated ‘above average’
than those with no LOMA designations.
There
also seems to be a positive correlation between training and financial
performance.
In
a 2003 study, Towers Perrin found that high-performing companies are twice as
likely as lower performing companies to offer employee training programs on how
their business works. The consultant defined high-performing companies as those
having an average five-year total shareholder return above the corresponding Dow
Jones market sector for their industry.
In
the summer of 2007, Towers Perrin conducted another major research project to
study the effect of engaged employees on the corporate bottom line. One premise
was that a key to producing engaged employees is providing training and
development. For the project, Towers Perrin surveyed 90,000 employees in 18
countries to determine their level of engagement and gathered financial data on
their companies. It then performed a regression analysis to understand the
connection between the two, and found that firms with the highest percentage of
engaged employees had a 3.74 percent higher operating margin and a 2.06 percent
higher net profit margin than average.
And
a 2001 cross-analysis of training data collected by ASTD and financial data
collected by Standard & Poor’s found that companies that invest heavily in
training experience far higher gains in stock market valuation compared with
firms that spend the least on employee training.
Nevertheless, it’s hard
to give training all the credit for Level Four improvements. An employee could
simply be delighted with his new boss. A product could be selling because it
strikes a chord with the customer, regardless of the service he receives. A
stock could be taking off because your business sector is hot. Still, they are
very important measures, because high-performing employees deliver, low employee
turnover saves you lots of money, happy customers endorse your company, which
brings in new customers, and so on. And untrained employees are rarely
effective.
Next Level
The uncertain nature of
business impact measures, coupled with the intensifying business pressures we
touched on earlier, is fueling C-suite interest in ROI—that is, Level
Five—measurement. Some executives want to harden the traditional ‘soft’
and ‘semi-soft’ evidence of training effectiveness into a dollar amount.
Phillips is trying to
help them do just that. In his book Return
on Investment in Training and Performance Improvement Programs, he
takes readers through all the ins-and-outs of measurement and provides several
case studies. Among the topics he addresses are collecting data, isolating the
effects of training, and converting data to dollars.
Another thought leader is
the aforementioned Nick Bontis. He recently gathered data on 25 of the largest
insurance companies in the
U.S.
and found that every $1 spent on training and development per employee results
in an increase of $168 in revenue per employee.
Yet another thought
leader is Kaliym Islam, who published the book Developing
and Measuring Training the
Six Sigma Way
a year ago. Islam is the director of learning product development
for the Depository Trust & Clearing Corporation, the largest financial
services post-trade infrastructure in the world.
Islam believes you
can’t measure training program returns in a vacuum—that all stakeholders
must be involved in the process—and that true return on investment is a matter
of perspective. For example:
*A training manager would likely perceive a leadership program that receives
high evaluation scores from students as successful.
n*A
chief financial officer who paid $1 million to build this program when it could
have been purchased for $750,000 would have a different perspective.
*An
operations manager who missed a deadline because her employees were mandated to
attend this three-day training class would have yet another.
*Reporting
student evaluation results to the CFO or program costs to the operations manager
who missed her deadline would not be perceived as a return on their investment.
*Only
when all stakeholders perceive the program as being successful has a true return
on investment been achieved.
Islam
has developed a measurement model that combines traditional instructional system
design measures with the Six Sigma methodology. He believes this model will
enable you to: identify business requirements; develop evaluation criteria that
ensure there are predetermined, quantifiable and objective standards agreed to
by all project stakeholders; and provide a true measure of the effectiveness of
learning. He offers up an example from his own company and the book sheds much
light on the learning measurement topic.
Despite
all the buzz about learning ROI, it appears that very few companies are
measuring it. A 2003 Accenture survey of 200 executives in six countries found
that only 18 percent of them get either weekly or monthly evaluations of the
effectiveness of their training efforts and 14 percent never receive such
evaluations. Nevertheless, more than 40 percent of them also reported having
increased their training budget in the past year.
In
conclusion, there’s lots of information available on learning measurement. The
trick is wading through it all and trying to figure out what’s old news
wrapped in a new package and who’s developing leading-edge concepts.
As
you study ROI trends and issues for the training function, remember that
there’s a lot of middle ground between the ASTD/IBM executives who say
they’re not all that interested in performance metrics and the thought leaders
who, after all, have products and services to sell. It’s in the middle ground
that most of us find ourselves today. And it’s where we must begin to define
for ourselves what we mean by “return” and how we’re going to track
it.
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