From Tech Transfer Newsletter, Fall 2004 » printer-friendly

The Value of Training

Knowledge is a vital organizational asset. This is the essential unstated assumption associated with almost all training discussions. While American corporations spend in excess of $50 billion annually on training (Galvin, 2002) and numerous authors espouse the virtue and necessity of training, few make an effect to actually show its value. This short paper highlights the fundamental premise for continued and even increased support for training: it is an investment in a valuable commodity that produces high returns.

Knowledge is valuable

Today, in the information age, organizations are routinely valued not on their physical but rather their intellectual capital. Edvinsson and Malone (1997) define intellectual capital as "the possession of the knowledge, applied experience, organizational technology, customer relationships and professional skills that provide [an organization] with a competitive edge in the market." Bassi and Van Buren (1999) point out that "intellectual capital is the only source of competitive advantage within a growing number of industries." For instance, the $296 billion market value of Microsoft in June 2004 far exceeds the value of its physical assets. To be sure, much of this value is based on speculation, but much is also based on Microsoft's intellectual capital-what it knows.

Training is one of the chief methods of maintaining and improving intellectual capital. Because of this, an organization's training can affect its value. Bassi and Van Buren (1999) found training as a percentage of payroll to be significantly correlated with the market-to-book value of publicly traded companies. Where the average US employer spent about 0.9 percent of payroll on education and training (Bassi, et al, 1996), training magazine's top 100 companies [in terms of training] averaged 4 percent with Pfizer ranking first at 14 percent.

Training is an investment

General accounting standards classify training as an expense. However, training is really an investment: an organization typically invests up-front to train its employees (in the form of enrollment fees, travel expenses and opportunity cost of the employee's time) and, in return, expects future returns (in the form of increased knowledge, skills and productivity). As with any other investment, if the returns outweigh the investment, training is a worthwhile endeavor.

Training is also an investment from the employee's perspective. Training increases skills and knowledge, which can lead to better pay or promotion. So who benefits most from the training investment: the employee with increased wages and/or promotion, or the employer with increased productivity? Loewenstein and Spletzer (1998) researched this question and concluded, "the effect of an hour of training on productivity growth is about five times as large as the effect on wage growth." Therefore, employers "reap almost all the returns to company training" (Bartel, 2000) This may be oversimplifying because employees generally view training as either a gift from the employer or at least a sign of commitment on the part of the employee, which is important to job satisfaction (Barrett and O'Connell, 2001).

In sum, both the employee and employer benefit from the training investment. The question now shifts to one of measurement: do the returns on training outweigh the investment?

Training Return on Investment (ROI)

When calculated using sound methodology, training has been shown to provide significant return on investment: on the order of 5 to 200 percent. The problem is that methods used to quantify training ROI can often be suspect or even outright self-promotion. Furthermore, it is often very difficult to quantify the effects of training. For instance, one effect of training can be increased job satisfaction, which is difficult if not impossible to quantify. Intuitively we know this is important in retaining good employees; however it will not show up on a ROI calculation.

In 2000, Bartel provided one of the best objective looks at the value of training to the employer. She looked at 10 large data set surveys and 16 individual case studies in an attempt to determine the employer's return on investment for employee training. She found the following:

• Methods using large data sets to compare many different organizations estimated training ROI from 7 to 50 percent.
• Individual case studies estimated training ROI from 100 to 5900 percent. Bartel believes the high ROIs in this category are based on faulty methodology. Her in-depth analysis of two well-constructed internal case studies revealed a 100 to 200 percent ROI.

Therefore, even the most conservative estimate puts training's ROI at 7 percent-an acceptable rate of return by most standards. Additionally, although it is not appropriate to generalize based on the results of two case studies, it can be said that based on Bartel's in-depth analysis of two well-constructed internal case studies, training's ROI can be much higher: approaching 100 to 200 percent.

Summary

Training is a valuable commodity that, if viewed as an investment rather than an expense, can produce high returns. While it is true that training costs money and uses valuable employee time and resources, studies tend to show training provides a positive return on investment-sometimes in the neighborhood of several hundred percent. Therefore, although training might seem like a luxury expense in tight financial times, it is, in fact, one of the most sure and sound investments available.

References

Barrett, A and O'Connell, PJ (April 2001).
Does Training Generally Work? The Returns to In-Company Training.
Industrial and Labor Relations Review, 54(3), pp 647-662.

Bartel, AP (July 2000).
Measuring the Employer's Return on Investments in Training: Evidence from the Literature.
Industrial Relations, 39(3), pp 502-524.

Bassi, LJ and Van Buren, ME (1999).
Valuing investments in intellectual capital.
International Journal of Technology Management, 18(5/6/7/8), pp 414-432.

Bassi, LJ; Gallagher, AL and Schroer, E (1996).
The ASTD Training Data Book.
American Society for Training and Development. Alexandria, VA.

Edvinsson, L and Malone, MS (1997).
Intellectual Capital: Realizing Your Company's True Value by Finding its Hidden Brainpower.
Harper Business. New York, NY.

Galvin, T (October 2002).
2001 Industry Report.
Training, 38(10), pp 40-75.

Loewenstein, MA and Spletzer, JR (November 1994).
Informal Training: A Review of Existing Data and Some New Evidence.
National Longitudinal Surveys Discussion Paper.
U.S. Department of Labor, Bureau of Labor Statistics.
Washington, D.C.
http://www.bls.gov/ore/pdf/nl940050.pdf.

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