CLOs must have a process in place to optimize the value of their learning investments to reap their full benefit. By finding ways to improve impact, learning leaders can ensure consistent increases in earnings for their organizations.
by Site Staff
March 27, 2006
A constant struggle every learning organization faces is optimizing value for the investment. Optimizing is decision-making based on the past for the future. There must be a process to optimizing value, and it must be built into the fabric of the learning organization to ensure it functions as designed.
If a process exists not only to quantify value on prior investments, but also to forecast future value, the benefits include:
- Aligning business results with business objectives.
- Significantly reducing wasted learning expenses.
- Substantially increasing productivity.
- Simplifying the process of tracking actual business results.
- Cost-effectively measuring ROI.
- Linking learning investments and bottom-line impact.
Without a system and processes in place to optimize value, most organizations do not reap the full benefit of their learning and development investments. More importantly, by systematically finding ways to improve impact, organizations can significantly increase earnings.
Value optimization enables organizations to redirect wasted or poor-performing L&D investments into higher-impact programs, which will significantly impact the bottom line. For example, the award-winning Defense Acquisition University (DAU) implemented a data-driven approach to analyze value. Over the course of three years, DAU was able to increase output, effectiveness and business impact significantly without any increase in funding.
Human Capital Contribution Model
A systematic process to valuing learning investments is referred to as the human capital contribution model. This model is composed of five core components: business needs analysis, performance analysis, business result analysis, ROI analysis and profit impact analysis.
Business needs analysis is the up-front planning process used to understand the driving business factors prompting the creation of a learning and development program:
- Why is this important? The key to a successful learning intervention that maximizes impact on the business begins with a formal analysis of business needs.
- What’s the process? To ensure the right L&D investment is designed, developed and delivered, a needs assessment should be conducted to understand the business objectives. Once identified, a knowledge and skill assessment should be conducted to examine the gap between the current state and desired state.
- What are the tools? The primary tools are needs assessments, knowledge and skills assessments, pre- and post-tests, and competency assessments. Using learning analytics technologies to collect, store, process and report these results greatly facilitates the process.
- What are the results? Better-designed learning programs and more clearly defined and measurable business objectives that can be linked to post-learning business results.
When CNA Insurance was designing a new learning program, a 40-question scenario-based skill assessment was used. The skill assessment helped in the development and delivery of the training to make it more targeted to the end user.
Performance analysis is a systematic approach to redirecting poorly performing investments into programs that drive on-the-job productivity:
- Why is this important? Research has shown that nearly half of all training is wasted. For a typical Fortune 500 company, that is more than $50 million per year. More importantly, a typical Fortune 500 company could drive another $10 million in earnings if productivity were improved by 1 percent.
- What’s the process? To ensure waste is eliminated and productivity continually improved, a systematic review of key indicators is needed to pinpoint the root cause of poor-performing investments. Performance analysis focuses on where the investment occurs (Which programs? Which courses? Which vendors? What customers or lines of business?). It also analyzes key attributes of activity and performance data including attendance rates, learning effectiveness, job impact and value indicators.
- What are the tools? Data sources for this analysis include LMS (learning management system) data and evaluation data. Using learning analytics technologies to collect, store, calculate and report these results greatly facilitates the process.
- What are the results? Better information for decision-making. Future allocations of L&D resources to more value-added programs, courses, vendors and clients will significantly impact the bottom line.
When Nextel Communications Inc. was conducting sales training, it hired a third party to assist in delivery. Within the first days of the rollout, the company was able to review the third-party instructors’ results quickly. The results illustrated that certain instructors were performing poorly. The results helped to eliminate waste and improve quality.
Business result analysis is a systematic approach to connecting L&D investments to a balanced set of actual results:
- Why is this important? By systematically analyzing the link between learning and business results, one can identify areas for improvement and help drive better results. In addition, by analyzing business results, validation for ongoing investments can be made.
- What’s the process? The human capital contribution model is based on a balanced approach and being as closely aligned to financial statements as possible. After all, senior management performance is almost always based on financial results. The recommended balanced set of business results most closely aligned with financial statements are revenue, profitability and productivity. This approach applies to both the public and private sector and is recommended for all major learning initiatives including corporate universities, leadership programs and business unit programs. When appropriate, it also is recommended that additional business results be tracked, such as quality, cycle time, employee loyalty, customer loyalty and risk mitigation.
- What are the tools? Data sources for this analysis include ERP (enterprise resource planning) data, financial and cost accounting data, customer satisfaction data, error rate data, CRM (customer relationship management) data and HRIS (human resource information systems) data. Learning analytics technologies provide L&D managers with templates and wizards to analyze the key business results, but are flexible to provide for customized business results analysis and then display the analysis on interpretive and graphical scorecards and dashboards.
- What are the results? A thorough and timely understanding of organizational impact. L&D become advisers for improved performance.
For example, PeopleSoft Inc. (prior to the Oracle merger) needed to tie the investment in training to a core set of business results. The company used both evaluation data, where business results were linked to training both at the conclusion of training and months later, and also an automated template to link actual business results with training. The outcome was a quantification of results that showed an improvement of 20 percent in productivity with the training.
ROI analysis is a process-based approach to determining the financial return on L&D investments given cost considerations:
- Why is this important? Because investments should provide more positive financial value back to the organization than the resources consumed in the original investment. It is also a commonly used financial analysis to validate investment decisions.
- What’s the process? To ensure L&D management focus on benefit versus cost, leveraging methodologies from experts such as Jack J. Phillips’ ROI Process helps provide a framework. The collection, storage, processing and reporting of data to create a monetary cost and benefit from training are inputs to the ROI process. Then the benefit must be isolated to training and adjusted for bias and conservatism.
- What are the tools? Data sources for this analysis include ERP data, financial and cost accounting data, customer satisfaction data, error rate data, CRM data and HRIS data. Leverage analytics technologies to wrap automation, templates and wizards around the ROI process. This will make the administrative burden of ROI feasible and practical when there are limited resources to apply to ROI analysis.
- What are the results? A reliable ROI expressed as a benefit-to-cost ratio when compared by learning delivery, program, vendor, client or line of business will help the CLO make better decisions from a dual dimensional perspective (benefit and cost). It also will validate the investment (or invalidate it in the case of a negative ROI).
For example, New Horizons Computer Learning Centers Inc. was assisting a client in technology training. Management was very interested in the financial ROI. The key focus was on estimating the change in performance before versus after the training and isolating it to training and then adjusting it for confidence and conservatism. The cost of the training was also conservative by design. The outcome was an ROI that was positive and produced future economic value as seen through a 3.43 payback period.
Profit impact analysis is a data-driven planning and reporting process that helps optimize the impact of L&D investments and connects learning to financial statements:
- Why is this important? Because L&D expense is part of the calculation, these profit measures are arguably the most meaningful ways to analyze past and future impact of learning on earnings.
- What’s the process? If learning intervention is effective, it will ultimately impact profit in a positive way. The financial goal of a corporate university is to increase the profit contribution of its people. That profit contribution can best be measured by taking revenue less labor costs and L&D expense, which is called the human capital contribution profit. A corporate university will be most successful when the human capital contribution profit is growing faster then the revenue, which is measured by calculating the human capital contribution margin (human capital contribution profit divided by revenue).
- What are the tools? Data sources for this analysis include financial and accounting systems. Learning analytics technologies can provide templates to guide a manager through the inputs and structured analysis to trend and track the actual to projected results.
- What are the results? This analysis will create a sensitivity analysis tool that can help plan investments better and optimize L&D impact. It also enables learning professionals to discuss financial impact with business executives.
For example, when KnowledgeAdvisors Inc. reviewed the profit impact from a major investment in a new technology platform and analyzed the training effect on the investment, it took a financial approach to analyze this important learning and development investment. Projections were made for the second and third years after the training as management set out to prove that although the training investment would be significant, it would pay off in the form of future earnings that directly impact the bottom line. The second-year projection using a profit impact analysis approach was a 6 percent improvement in profit margin. This was because the new technology platform was projected to be brought online quicker and managed more effectively as a result of the training (the human capital contribution effect) and ultimately help accelerate future sales by 5 percent. The third year was projected to increase profitability by 3 percent with a 3 percent increase in revenue due to the training investment.
Conclusion
In today’s world of limited money, time and personnel, we face accountability for all that we do. If we are to be the fiduciary of millions of dollars for learning and development, management should expect nothing less than:
- A reasonable analysis of the business needs that drive the investment.
- Optimization of the performance of the investment so as to lower the risk of wasted training.
- The linkage of the investment to key business results.
- A reasonable ROI calculation based on the isolated and adjusted benefit from training.
- The projected impact on future earnings.
Learning and development organizations should leverage the best practices of other lines of business and derive reasonable ways to optimize value. Business is not about precision and perfection—it’s about how to provide reasonable information in a timely manner to make better decisions. Keeping this in mind will go a long way toward demonstrating accountability while illustrating how the investments will generate the most for the stakeholders.
Jeffrey Berk is the vice president of products and strategy for KnowledgeAdvisors, a learning analytics technology company. Jeff is an adjunct professor at Loyola University and Northwestern’s Kellogg School. He can be reached at jberk@clomedia.com.