In this post I am further extending my thoughts (read previous post for reference – Economics of Learning & Development) to make a case for treating L&D as an investment activity rather than an expense.
Let us draw an analogy with manufacturing set-up. Investment on upgradation of Plant & Machinery is undisputedly considered an investment activity as its investment rationale is quantifiable in terms of increased output, increased revenue, increased free cash flow and increased PAT.
Similarly, we may like to believe that investment in upgradation of human skills/competences result into increased output therefore increased revenue, increased free cash flow, increased profitability and therefore increase in shareholders’ value.
L&D as investment activity seems to resonate with respect to two other important criteria- “Investment Quantum” and “Investment Horizon”. Most medium-to-large organisations tend to spend between 2%-15% of the compensation on L&D (for various roles). This is a significant number and can be treated as an investment rather than maintenance activity. For the second criteria- the outcome of L&D (as a composite intervention at individual employee level and organisation level) certainly extends beyond a year-we should not ignore the fact that L&D is an employee motivation tool as well, which increases retention.
Another key variable from organisation’s valuation perspective is Price-Earning (P/E) ratio. P/E ratio represents the collective demand of a stock which is fundamentally linked to stability and future growth in earnings of a company. By upgrading and maintaining (read increased retention) the “talent machinery”, L&D sustains the organisation’s future business performance. So, L&D does both- Stability & Growth– and can be fitted into stock analysts’ framework as well. Companies’ may showcase the linkage of higher “Retention” and expected growth in earnings to L&D. Those organisations that can show a positive co-relation can enjoy a higher valuation thanks to L&D focus and investment. So L&D can be projected as a shareholder friendly investment given the quantitative framework exists.
Now, we need to develop a framework and a financial model which captures the L&D activities and generate results in the form of traditional financial ratios.
Certainly it is possible to develop such a framework, but it holds a significant challenge for now. Organisations will need an integrated system in place to capture individual employee data on training, performance and business results in line with the requirement of the proposed financial model.
Fortunately, framework for correlating “Performance” with “Business Outcome” is already in place in the form of KRA based appraisal system, which intrinsically connects individual employee’s performance with Business Outcomes. But, KRA system also includes certain important but non-revenue business outcomes from employees such as leadership development, institutionalisation, R&D etc. Therefore the proposed framework should be able to translate these “non-revenue Business Outcomes” in terms of notional revenue for accomplishing a fair analysis.
So, as of now many organisations either capture or can capture the required data (without much difficulty) on “L&D”, “Performance” and “Business Outcomes”, all we need is a holistic framework which captures required data and feed into the proposed financial model which talks the language of business analysts. Once financial analysis framework of L&D is evolved (with fair amount of objectivity) to include traditional financial variables such as NPV, IRR, EPS, CEOs task become easier in treating L&D expenditure as capital investment.
I am sure that all of us intuitively know that significant value is created through L&D but how much? Is it one zero more or less!
When we as learning professionals are so clear about the value of L&D why can’t we convey this to investment community?
Look out this space for thought-growth.
(Ankit Jain is Head – HR & Strategy at G-Cube)