It’s an issue that resonates with most learning and HR professionals. How do we justify the investments we believe we need to make?
Written for TakeON! by Paul Stewart of ON-Brand Partners
Recently I got a call from a Head of L&D from a financial services company in a bit of panic.
“The executive team are reviewing our training budget, and they want to know what return on investment we can expect! How do I answer that?”.
It’s a question I’ve often been asked. With my background in economics and strategy, I’ve come from the land of numbers, equations and gap-analysis (some call it the ‘dark-side’). Arguably, I’m reasonably well placed to have a view on it.
I distinctly remember the first time this question arose. I was General Manager Strategy at a mid-sized, high-growth company. At one of our regular executive meetings, the Head of HR tabled a proposal for leadership development. She talked about its importance. Everyone nodded. After all, the idea of improving the leadership capability in a fast-growing business makes good sense.
However, as she was speaking, the CFO posed that question. “What will be the return on investment?”.
Damn! As good as she was, it was hard for her to provide a clear, concrete and convincing answer. Now, that didn’t mean the proposal was dismissed, but it wasn’t approved either. It was just ‘under consideration’. “Let’s come back to it”, the team agreed.
Next up was the CIO, who tabled a proposal to implement a new technology that would simplify some administrative processes. That meant fewer roles were needed. We could easily calculate the pay-back period (16 months) and long-term ROI (145%). Not surprisingly, that project got the immediate go ahead.
Here’s the issue… Measurement of ‘intangibles’ such as culture and soft-skills is more difficult than tangible measures of performance. With interventions to build capability and culture, the relationship with business performance is ‘complex’. That is, the payback is not immediate and it’s not direct.
As a result… It gets ignored. Some studies suggest that the majority of CFOs discount any ROI, because they can’t isolate it, and therefore measure it.
Of course there are exceptions. For example, when an intervention we delivered improved sales conversion from 12% to 21% , that was pretty easy to validate. But, most culture and capability interventions are not nearly as clear-cut.
With the consequence… That too many organisations consistently under invest in the intangible dimensions or organisations – culture and capability.
What’s the answer? First up we can present the research case. Based upon more than a decade of reading, researching and applying our approaches to organizational development, here’s the snap-shot of my perspective:
For organizations that invest well over the medium term, the ROI is very high. Sure the numbers vary from study to study (and I won’t list them here), but the overall pattern is clear. For major interventions we’ve been involved in, we’ve been able to establish an ROI in excess of 1000%.
The correlation and between investment and performance is unequivocal. But the problem is that the causation is indirect and not immediate. You need to accept that. Even so, there are plenty of measurements we can put in the place to help assess impacts over time.
The quality of the development strategy is critical. A lot of training achieves little. So we talk about what we are doing to ensure that ‘this’ approach will maximize the effectiveness. Recognise that the ‘system’ is key. The environment must be conducive and development must be embedded into the operating model.
The challenge is then to relate this back to your organisation.
I have a process that I work through with executive teams (or decision-makers). It enables them to form judgments between the tangibles and intangibles of organisational performance. At the end of it, (99 times out of a hundred) they conclude there is a gap. A gap between where the organisation is spending time and money, and where it should be in order to maximize performance (both in terms of employees and customers).
Of course, having concluded there is a gap, the immediate question that springs to mind for ‘left-brain’ executives is...
"But how big is the gap?” Which takes us back to the ‘complex’. It’s difficult to measure and futile in spending a lot of time to do so. In a practical sense the size of the gap does not matter!
If you conclude there is a gap (no matter how large), then simply rethink how you are investing at the margin. Just take ONE percent. One percent of time and money. But do it well! See what happens. You might just find that it pays off. Most do.
It's a mindset. Keep getting better. Put your time first. Effort before cost. Start the conversation.
VIDEO: Paul Stewart on how conversations lead to quick wins.
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