Risk and Return

Risk and Return on Investment

Although there are a number of important benefits to investments in human resources, such investments contain an element of risk. Investing in human resources is inherently more risky than investing in physical capital because the employer does not own the resource. Employees are free to leave, although contractual arrangements may limit their mobility. In order for investments in human resources to be attractive, the returns must be great enough to overcome the risks. Further, for some investments, such as cash outlays to maintain no-layoff policies, the benefits are not easily quantified and there are meaningful costs. Decision makers have to be prepared to trade off current costs for long-term strategic benefits, such as a more flexible, committed workforce and related positive aspects of the organizational culture to which such policies contribute

"I need a training program on..." is a frequent reflexive mantra that issues forth when organizations experience significant change or seek improved performance.

"We have to adapt to new systems."

"Our sales must improve."

"Customer service is inadequate."

"We need greater productivity from our workers."

These statements and other similar ones often result in hasty decisions to train. Before long, curriculum committees form; training managers, instructional designers and subject-matter experts embroil themselves in discussions about media; instructors gear up for the delivery of a new training blitz.

It is all very exciting... and expensive. It is also vastly time and resource consuming. What makes it bearable, however, is the comforting thought that "we are doing the right thing for our people." We are investing in our most important asset. The activity and expense is contributing to the career development of our human resources. We are increasing our human capital assets. Best of all, we are building our organization´s competencies. We have certainly heard expressions such as: "The ability to learn more rapidly than our competition may be our only competitive advantage (de Geus of Shell Oil Company in Meignant, 1995, p.36).

Companies like Digital Equipment Corporation and Air Inter have invested as much as 19.5% of total salaries in training (Meignant, 1991, p.25). In the U. S., corporate training expenditures have risen from $50.6B in 1994 to $58.6B in 1996, an increase of over 21.5% in four years (Training, October, 1994 - October, 1997). With this type of enthusiasm, spending on training to produce improved human performance must be the right thing to do...or is it?

The purpose of this paper is twofold. First, it critically examines the role of training for improving the performance of people in ways that both they and their organizations value. It focuses on what the true worth of training is and can be for organizations. Secondly, it proposes a model for calculating return on investment (ROI) in training -- one which has been designed based on careful research and practical experience. In describing the (ROI) model, the paper presents a case study of its application within an operational context at a Bank (name withheld).

This text is divided into six major content sections: front-end analysis; wasted dollars on training; organizational factors that affect training ROI; human capital, the value of training and obstacles to calculating training ROI; a model for calculating ROI; a case study of the model´s application. A final section draws conclusions and offers recommendations for applying the model in other organizational contexts.