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Return on investment in staff training Return on investment in staff training
28.03.2017
Source: BIA

Is investment in staff training justified?


We do claim that training and development are a priority in human resource management, however surveys show that often we are unaware of our aim and sometimes we tend to apply spontaneous measures for reaching unclear goals. When we analyze the expenditure of the operational programme “Human resource development”, it seems that Bulgaria is one of the most “trained” countries in Europe. But then why do we have the lowest labour productivity? Why does the workforce have the lowest levels of key skills according to INSEAD survey? Has anyone tried to measure the effect of the implemented programmes and trainings which are externally funded? Another example – according to a survey conducted by BIA among large and medium-sized enterprises (2015), employers in Bulgaria invest about 20% of their total cost for employees. In Europe, however, such investment is above 30%. Among the respondents only 27% use reliable instruments for assessing the results of the training, and 85% do not measure the return of the investment in the training. Moreover, only 33% of the respondents use modern systems and approaches for determining the needs of training.

 

 

According to the theory of capital, investment in workforce’s knowledge and skills is felicitous when the return exceeds the expenses. Naturally, investing in development of knowledge and skills brings value, since it leads to higher levels of effectiveness and productivity in employees. According to employers, however, there are some risks when:

 

  • The organization does not need a particular training
  • The training is carried through ineffectively
  • The participants in the training are not motivated and engaged enough with applying the new knowledge in their everyday work
  • The risk of turnover increases – well trained employees have more opportunities for finding a better job
  • Employers provide employees with a certain know-how, which is intellectual property owned by the organization; thus, if employees quit and start work with them, it can become available to rivals

 

Employers and investors think in numbers. Thus, human resource specialists have to be able to apply specific instruments, so they can prove that investing money in a certain training will return the corresponding added value – financial or non-financial benefits, which exceed the expenditure. And in order to minimize the risks in training, different legal approaches must be sought.

 There is another issue to be discussed. Two types of human capital in the organization are being recognized in the scientific literature:

 

  • General human capital – transferrable knowledge, skills and qualifications, which are highly valued by all employers
  • Specific human capital – knowledge and skills, which correspond to the organization’s specifics and are highly valued by a certain employer/organization

 

By investing in development of general human capital, employers “provide service” to their employees – thus, their deficits are compensated and some “benefits” are brought to them. So there is the question – Who has to pay for this training? On the other hand, specific human capital increases productivity within the current organization, and does not increase the employee’s market value with other employers. Development of specific knowledge and skills enhances employees’ motivation for staying within the company, since they are tuned to the workplace and are better rewarded.

 

 

How to assess the need of training in an organization?

 

Assessing the need of training is a process of systematic research, collection and analysis of information, which allows the organization to compare its current work performance with their desired one. Thus, the need of training can be seen as a difference between desired and actual level of work performance, and this difference is conditioned by three deficits in employees’ competencies (knowledge, skills, attitudes and behavior). The process of assessing the need of training covers 3 levels of researching and analyzing information:

 

  • Needs on an organization level
  • Needs on process/job position level
  • Specific individual needs

 

Generally speaking, there are 2 types of approaches for assessing the needs of training:

 

  • Strategic – needs of training are defined in advance in the long term, based on the strategy and the business objectives
  • Reactive – needs of training are defined as a reaction to certain problems

 

The optimal approach in assessing the training needs must combine both types.

 

 

How to measure effectiveness and return of investment?

 

There are 2 types of popular mutually complementary approaches for assessing effectiveness and return of investment in training:

 

  • Analyzing expenses and benefits using ROI system

 

This approach was introduced in 1992 by prof. Jack Phillips. It includes comparing expenses, made for training, and income and benefits by the training. Effectiveness and efficiency can be measured using the following formulas:

 

                                                                       Benefits from the training

BCR (Benefits/Cost Ratio)              =          ----------------------------------------

                                                                             Expenses for the training 

 

                                                                             Net gain                                                                                                             

ROI (Return on Investments %)    =          ------------------  х   100 

                                                                             Expenses

 

Expenses for training include: rent for rooms and equipment, remuneration for educators, expenses for training materials, remuneration for participants during the training; travel expenses, etc. Reaching the goals and registering behavioral changes in employees represent the benefits. And this results in better indexes for economic efficiency and profitability. Training’s benefits should be defined by 2 types of indexes: directly measurable ones in the short term and indirect ones creating value in the long term.

 The main obstacle in measuring the return on investment in training is associated with the question “How can we isolate the training effect from other factors, which affect the final results of the company’s activity?”. Here are approaches for resolving this issue:

- Experimental and control groups

- Applying methods of prediction

- Having the participants assessing the effects and benefits from the training

- Having the line managers assessing thr changes in the employees’ job performance

- 360-degree feedback on the job performance of the trainees

- Having experts assessing the factors

 

 

  • Kirkpatrick/Phillips’s model

 

The effect of training can be measured by 4-levels scale which includes:

- Reaction – the degree to which participants are satisfied with the content and quality of the training

- Learning – what is learnt and acquired

- Behavior – what changes in the behavior occur

- Results – what are the final results in the trainee’s activity

 

Lord Calvin (William Thomson) made one statement, which is popular in academia: “When you can measure what you are speaking about and express it in numbers you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind.“ So, this applies in management as well. You cannot manage without information, you cannot make decisions without assessing the alternatives and measuring their effects and consequences.

 

 

T. Tomov




Confederation of the Independent Trade Unions in Bulgaria BULGARIAN INDUSTRIAL ASSOCIATION Confederation of Labour „Podkrepa”