Study Says Employee Training Increases a Company's ROI

There's little debate that companies should invest in their people by

offering training and other educational opportunities. But such

investments are usually swept under the rug as expenditures best kept

from the eyes of frugal shareholders. Now an effort is afoot to prod

companies to view employee training as an investment -- even to report

it in their financial statements alongside R&D and capital

expenditures. New evidence suggests that the money will come back in

enhanced shareholder value.

That's the conclusion of the American Society for Training and

Development (ASTD; based in Arlington, Va.), a professional association

of 70,000 corporate-learning specialists around the world. It routinely

collects detailed training data for its benchmarking service, and by

last fall had accumulated enough data from 575 US companies between

1996 and 1998 to show a link between training expenditures and total

stockholder return (TSR). The study, entitled "Profiting from Learning:

Do Firms' Investments in Education and Training Pay Off?" provides new

ammunition for anyone who needs to make the case for employee training

programs.

Why training pays

ASTD defines a company's TSR as the change in its stock price plus

dividends, calling it the best measure of a stockholder's actual

return. ASTD found that companies that spent $680 more per employee per

year than the average company increased their TSR by six percent the

following year. These top companies had a 37 percent TSR, while

companies investing below the average (ASTD doesn't give a figure for

this average in its report) had an average TSR of 20 percent, compared

to a 26 percent return of the Standard & Poor's 500 index. The top

quarter of the study group spent $1,595 per employee, while the bottom

quarter spent just $128. ASTD can't reveal the companies that

participated.

Skeptics might hunt for other causes for these figures. Perhaps

productivity-enhancing IT expenditures boost TSR, or perhaps some

industries simply have inherently higher returns. But the ASTD

applied "a more sophisticated statistical model" that employed

multivariate regression and still found a positive effect from

training. With employee education factored in, the model's ability to

predict TSR growth improves by 50 percent.

The study notes that training probably influences TSR indirectly by

positively affecting other "productivity indicators" that the market

recognizes. "We do know from our research that employee retention is

higher at companies that have significant training efforts," says Mark

Van Buren, ASTD's director of research and the study's coauthor. He

adds that "more of the firms that lead in terms of investment in

training are in the IT sector."

While it's too early to say which types of training are most effective,

the data is yielding some answers that ASTD may soon publish in a

report, Van Buren says. "The training content that matters most is IT

training," says Laurie Bassi, another study coauthor. Bassi is director

of research at Saba Software (based in San Francisco), a maker of

corporate-training software. This holds true for both major types of IT

training -- technical training for specialists and the basic computer-

skills training offered to all employees. Bassi adds that preliminary

indications show that so-called e-learning -- courses delivered over

the Internet or corporate networks -- may not be as effective as

classroom training and other traditional educational techniques.

However, Internet-delivered training is a lot more economical

SEC reports

Having established training's ROI, ASTD advocates that publicly traded

companies report training expenditures in the quarterly and annual

financial reports they file with the federal Securities and Exchange

Commission. This would accomplish two important things, the study says:

it would provide investors with new information that could improve

their portfolio performance, and it would give managers increased

confidence that they would be rewarded in the marketplace for putting

money into human capital.

A related advocacy effort is underway at the Brookings Institution

(based in Washington, D.C.), which will soon publish a report,

entitled "Unseen Wealth," detailing the conclusions of a task force

studying the importance of intangible assets in today's knowledge-based

economy. The report was cowritten by Steven Wallman, a former SEC

commissioner; Bassi is chairperson of a subgroup that worked on the

human-capital component.

Brookings and the ASTD want the SEC to require companies to report

human-capital investments such as training expenditures, but they say

that the wheels of bureaucracy have been slow to turn. "The SEC seems

unwilling to embrace change," Bassi says. "Realistically, the best we

can hope for is some companies will see it in their interest to report

things voluntarily." Says Van Buren: "We have had conversations with

the SEC. Their position is they have a pretty good system right now."

"The commission does not have anything on the table at the moment,"

admits SEC public affairs officer John Heine. He adds that the SEC

often takes its financial-disclosure cues from the Financial Accounting

Standards Board (FASB; based in Norwalk, Conn.), the group that

promulgates the familiar Generally Accepted Accounting Practices

(GAAP). Tim Lucas, FASB's director of research and technical

activities, says the profession is struggling with how to quantify

intangibles. "These are hard questions. For one thing, the definition

of training can be troublesome, " he says.

One company's top-level commitment

For all this to happen, companies need standard metrics for evaluating

their training efforts. ASTD provides several such tools at its Website

(see Resources), including the benchmark service that gathered the data

in the TSR study. Beware: it takes a lot of heavy lifting to fill out

the questionnaire. You must answer detailed questions in a 51-page

measurement kit, but your reward is a free report comparing your

company to others in ASTD's database, Van Buren says.

One company that scored high in the benchmarking service is Wisconsin

Public Service, (WPS; based in Green Bay, Wis.), which ASTD named a

training investment leader in its 2000 State of the Industry Report.

WPS maintains close partnerships with five nearby technical

colleges. "What we have done is create a kind of a branch campus at our

locations," says Frank Quisenberry, a WPS organizational-learning

consultant. Typically, the colleges provide professors who teach WPS

managers how to teach. The professors and the WPS staff also jointly

develop online learning systems, the focus of much of WPS's recent

efforts. While the company doesn't yet show training expenditures in

its annual report, the CEO is a training champion and touts the effort

publicly.

Quisenberry says the most effective types of training seem to be

computer-related or technical -- say, giving meter readers who would

otherwise fall victim to automation a chance to learn new skills within

the company. Retention is such a corporate value that Quisenberry seems

to have little patience with the old-school fear that employee training

will only pay off for your competitors. Says Quisenberry: "If you don't

do it, they're going to walk out the door faster."

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