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Features

Published September 2008

Value Creation With Human Capital Investment

  

  Michael E. Echols, Ph.D.

Value is pretty straightforward when it comes to capital assets. When it comes to human capital, measuring value becomes more difficult. Still, it can be done in a way that makes sense for business leaders.

Most senior manager discussions about learning eventually boil down to cost. Why? What is it about cost that makes it the center of attention in training and learning decisions? It’s time to move beyond costs and introduce value into these management decisions.

The value journey begins with costs. The first reason cost is dominant is because training and learning expenditures are accounted for as an expense on the income statement. Senior managers care a lot about the income statement, that is, increasing the top line (revenue) while decreasing the costs that siphon away resources on the accounting passage from the top line to the bottom line (profits).

The second reason costs dominate is because we agree on how to measure costs. Our financial systems have rules on how to assign a hard number to costs. The accountants measure and manage costs with great enthusiasm.

Neither of these characteristics exists on the value side of the equation. The value created by training and learning expenditures is not recorded anywhere. One of the reasons there is no record is because there is no agreement within the learning community about how to measure value in the first place. The value conversation is being held hostage by the hardened sides that have polarized the ROI debate. It is time to move on.

Managing the value creation equation is important for several reasons. First of all, when we examine costs, we spend heavily on learning and development. ASTD estimated U.S. organizations spent $129.6 billion on employee learning and development in 2006.

We all have a stake in the value being created by these learning expenditures. In the 21st century, global economy intangible assets such as know-how are what create the majority of the value. This is a major shift from the 20th century, when investments in plant and equipment were the primary engine of value creation. The good news is that this shift puts learning leaders at the heart of the value creation process. The bad news is there is little agreement about how to measure the value side of the equation.

One symptom of this impasse can be seen on corporate balance sheets. In a February BusinessWeek article, Moody’s Investor Service reported a record $1.6 trillion in cash on the balance sheets of nonfinancial U.S. companies, $600 billion more than five years before. By itself, this data means little.

When the cash position is combined with what learning leaders say they want, a totally different picture emerges. A Bersin & Associates study documents that 72 percent of surveyed learning executives stated that measurement of business impact is most important. In the same survey, when it comes to measuring business impact, 82 percent of organizations would like to spend more on measurement and 31 percent would like to spend much more.