Economics of Learning & Development

Before I hit the actual issue related to Learning & Development investment let me explain a bit about the actual systematic problem that the industry faces.

The issue is why L&D is treated as a cost or a budgetary item rather than investment?

Can this treatment be changed?

What will be the implications of such a change on the Learning industry?

I am trying to explain here the basis of financial thinking, please be patient to read the next section.

In today’s time most of the large businesses are owned by huge number of small (minority) investors directly or through institutional investors (MFs, Banks etc.). Therefore Management has a very important responsibility to rationalize its investment decisions and be able to come-up with objective answers to investment decision making (proactively in various investors meet and sometime they have to answer the queries of investors and media). Businesses need to see the quantified value additions to justify the capital allocation to any activity. Any area/activity where investment justification is not quantifiable – irrespective of actual value creation or its potential – suffers from inadequate capital allocation.

Reason is simple CEO/ CXOs are accountable to produce capital allocation rationale for the decision they take. And boards are ruthless in raising questions on any sensitive issue related to investment (use of capital). Any thing which is not explainable in numbers doesn’t fly through easily. It is subjected to lot of questioning. It is a risk which no C- level person wants to take or should take.

On this background note I want to address the issue of inadequate capital allocation in the area of “learning and development (L&D) – and it’s so true!

In my previous post I mentioned that in most cases allocation of funds in L&D are treated as cost (linked to budgetary allocations) rather than investment. Every body talks about it (L&D expense as investment), every body appreciates it but only a few take it seriously.

Measuring the learning impact is an art rather than science. Though there are some models to quantify the impact and arrive at ROI, CEOs find it risky to explain to their board- as it is not simple to explain in the small time windows available. Board members hate jargons and these models are normally full of it. We need to create simpler and more objective frameworks in the language that board understands and that CEOs will be comfortable talking.

As a learning professional therefore we should try to develop a financial analysis model (just like we have for any tangible investment like plant and machinery) to justify larger investments in L&D. The framework should be based on methodologies that C-Level and board understand such as NPV/IRR of L&D investment. It should be able to give results in the form of EPS growth and can be understood as a wealth creating activity in the interest of shareholders.

We live in a continuously evolving knowledge economy and investors will love to understand and praise those investments which can justify the value creation. We have witnessed an increasingly transparent trend in financial reporting. If we can set-up benchmark, the day is not far when showing L&D investment ratios in their financial reports will become a norm. As a few leading knowledge companies (or the layer of knowledge workers) set-up the right benchmarks by showing those numbers, others shall follow it to impress their investors. At that time task for the CEO will be very easy and board will have every thing in black and white template, a matrix they love. Can you imagine what growth can it trigger? It can be a paradigm shift that holds potential for unlocking billions of $ worth value that corporations can harness within their organization by putting optimum investment to L&D activities. You can imagine the virtuous effect of this phenomenon on L&D industry.

(Ankit Jain is Head – HR & Strategy at G-Cube)