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How to measure the financial return of training

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After a three year research project and a qualitative analysis in 12 companies, ValueCreation has developed a methodology for calculating the financial return on investment in training. The research was conducted without any public funding. 

It is an effective management tool that enables an organization to know if its training efforts are or are not profitable. It can also identify where and where not learnings have been produced, as well as their usefulness and profit from them.

Research has shown how some companies with well-structured training plans were losing up to half a million euro without knowing it, while other companies that had leveraged their training efforts had good returns of five times the initial investment.

 It is also possible to identify hidden value drivers, such as the existence of informal training, potential for improvement, hidden internal knowledge, and so on. As well as hidden costs of training: rotations, poorly designed planning, poor performance, etc.

 All this has also following  added value

1. Reduce training costs without reducing learning
2. Identify potential improvements and generate savings
3. To achieve a corporate culture based on continuous improvement

How it works
The philosophy behind this concept is that economic performance and  costs are effects of actual activities. Activities, in which training and related same issues (interactions, learning, etc.) have a direct impact on the variables of turnover, productivity and savings (efficiency). 

 
ValueCreation’s approach has been to use analytical accounting methods, HR and organizational tools as well as ethnographic and social science approaches. In this way we have integrated both organizational and financial approaches and have developed a simple and applicable tool via the qualitative work, action research and participant observation.

Regarding cost accounting, we chose an Activity Based Costing approach, more specifically so called value Based Management (VBM). VBM was designed to identify those elements that produce value in business processes as well as those that produce costs. Value drivers are those activities that generate revenue, productivity and savings. Cost drivers are expenses and investments.

Three examples
We have three examples of actual cases we have worked on. The first is a power company, the second a shared services center and the third an open innovation center or living lab.

Electricity company
A power utility faced a severe problem of rotation of middle managers. The organization requested a training program to that turned engineers into skilled managers.

While identifying value drivers, it soon was clear that the learning methodology made a difference. It was built on cross-functional teams, a procedure that seemed to increase the interest, the knowledge exchange and learning. The trainees had to make heavy use of informal networks to solve problems and, moreover, were “forced” to research, write and reflect, what at the end of the day was more effective than teaching.

The identified value drivers focused on the strategic skills trainees had acquired: the new ability to work in teams and communicate, as well as the ability to develop a non-hierarchical leadership, but a rather collaborative leadership style.

The effects of these skills quickly proved useful, as they were applied to six improvement projects. It must be said that in some cases those projects were about affairs that had been stacked for two years with no apparent solution. For instance, the adaptation of the procurement process to a new legal framework. Besides of being able to activate a large amount of savings by dissolving the organizational barriers, other groups significantly reduced the number of accidents, productivity gains were achieved significant energy efficiency targets reached. Much of these effects were estimated by the departments of Purchase, Human Resources and Marketing. 

 

The balance of the investment is easily calculated: the project cost was about  67,000 euros while the training and project hours for the new middle managers had a cost of 210,000 euros. In this way, we obtain a final positive result of 553,000 euros.

Shared Services
If anyone thinks that the cost drivers are simply the cost of trainers and training measures as well as staff hours in training, you’ll see in the next example how in reality there are many hidden costs in training that are not taken into account.

The following case examines the policies and practices of a shared services center in which 200 people deliver accounting services to 17 countries. In order to compete with the Czech Republic and India, possible locations of low cost accounting services, the Spanish shared services center adopted a policy of recruiting qualified staff, but cheap: that is, new graduates with little experience. As a result, there is a high rate of employee rotation to better paying companies. So it is necessary to invest heavily in training newcomers. In addition, lack of experience of staff involved the design of an intensive and extensive training in accounting and ERP systems. Furthermore, in order to maintain flat hierarchies and to minimize management positions, the company established co-ordinators, that were de facto middle managers, but primus inter pares in salary.

It was also noted that there was a lot of informal training among the staff that had never documented or taking into account, while on the contrary, the company expended resources in a complex documentation system of low usability and less use (although necessary for legal reasons ). There were several savings and improvement initiatives with significant economic effects, especially in the tax area. Failing to establish a cross training in these matters, potential savings were never realized. Finally, the process of developing the training plan was carried out by the typical middle management consultation system, unrelated to the company’s strategy.

Thus, we find a list of cost inductors more complex than the mere costs to training suppliers and hours:

 
The cost drivers show how the company has actual losses and opportunity costs of more than one million euro. As value drivers, accounting and ERP trainings produced quantifiable productivity gains (along with other drivers) of 660.000 euro. This means, that the organization is losing with its training process half a millioneuro per year.

Living lab
This is an open innovation project which aims to integrate older people into the so called knowledge through learning new technologies. Being a living laboratory, there are no rules, but the group itself develops its dynamics and is the one that defines the most effective practices.

One of the first effects that was observed was that ICT training is useless if not linked to projects with meaning. It was also found that:
 
• Meaningful activities lead to unexpected: history of the city, health, etc..
• Working with meanings we observe important effects on self-esteem and presumably health
• The ability to innovate is more related to those unexpected learnings than with technology: they produced a project for independent living and another one to enhance employment and occupation for people over 55 years

 
It will be noticed that while there was a positive economic return, it is by the fact that successful innovation was able to attract public funding. Yet there are a number of unmeasured factors, such as the impact of changing habits of the elderly group for instance in the number of visits to their doctors or the amount of new economic or productive-like activities that the project produced. That is, the impacts of training often exceed the economic objectives and have social, medical, educational, political, etc. consequences.

How to get it started?
Although some may think the contrary, measure the financial return of training  does not require a large infrastructure. However it is important to integrate it into a strategic process of training design. If measurement is done ex post once the process is in progress, it can also be undertaken.

What is needed? Strategic approach, working with action research methodology, involving key players and train them in VBM. If at first some coaching may be needed, soon the process will become one more HR activity.

Autor: Carlos Bezos Daleske

Siento curiosidad por todo lo relacionado con personas y organizaciones, especialmente en salud. Me gusta trabajar con personas y con su capacidad de innovación y co-creación. www.iexp.es I feel very curious about everything related to people and organizations, especially in healthcare. I enjoy working with people and their ability to innovate and co-create. www.iexp.es

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