Return on investment in training: Research readings

THIS BOOK PRESENTS the results of five research projects funded by the National Research and Evaluation Committee during the period 1999-2000. Four of these projects examined the returns to enterprises of their investments in training using a variety of methodologies including case studies and surveys. The intention behind the projects was to not only examine the validity of claims made for positive returns to training expenditure but also to develop ways in which enterprises might be able to measure these returns for themselves. The fifth project was part of a suite of work that investigated the development of training and learning cultures in Australian enterprises. This project examines some of the non-financial returns that enterprises can gain from their training investments.

The first chapter by Mike Long of the Australian Council for Educational Research reviews the international literature on the economic returns to training from both the point of view of the employee and the employer. The principal return for the individual is increased wages. The results of studies of wage effects vary considerably, but many have found that the average wage increase is in the order of 7-10 per cent for workers who receive employer-sponsored training. The size of the effect depends on a number of factors, including the mix of general and specific skills, the content of the training and the duration of the training. For employers, the returns to training are in the form of increased productivity. The size of the return depends on a variety of assumptions that economists make about the costs of training and the depreciation of the returns over time. As Long points out, the skills depreciate over time, anywhere from 4-12 per cent per year. The higher the depreciation of the skills the lower the total benefits from training and thus the lower the returns. This has significant implications for industries that are experiencing a high rate of change in which skills become obsolete very quickly.

Janelle Moy from the University of Technology, Sydney also reviews the literature on returns to investments in training. Her review, however, examines the nature of the concept of returns to training investments. She questions the adoption of the purely financial approach implied by the notion of return on investment (ROI) and instead advocates a much broader approach based on the notion of a return of training investment (ROTI). She surveys the available studies on ROTI and on evaluation of training in general. At the end of the chapter, Moy discusses alternative approaches to assessing returns on training investments, including the balanced scorecard and the concept, popular in Sweden, of human asset accounting.

Richard Blandy and his colleagues take an economy-wide approach to assessing the returns to training investments by firms. They replicate the work of three major overseas studies in Australia. These studies were the 1982 Employment Opportunity Pilot Project survey of employer training in the United States, the study by the Centre for Economic Performance (LSE) of the impact on firm profitability of the quality of employer training undertaken in the mid 1990s and the matched plants comparison work of the National Institute of Economic and Social Research. The results of this work were that Australian firms provide extensive training for new employees but only gain productivity increases from initial employee training about two-thirds those of United States firms. This is mainly because of the lower initial wages paid in the United States compared to Australian firms. The surveys were also supplemented by case studies of Australian firms. Together, the evidence that Blandy and his colleagues amass suggests strongly that the profitability of firms is directly related to the quantity and quality of their training.

One of the most interesting studies in the group was carried out by Chris Doucouliagos and Pasquale Sgro of Deakin University. Building on earlier work that they undertook for the Victorian Office of Training and Further Education, Doucouliagos and Sgro carried out in-depth investigations of the returns to training investments in eight firms. Focussing on particular training programs in each of the firms studied, they calculated both the cost-benefit ratios for training and the final returns on training investments experienced by the firms. The results show that the returns to training can be very high indeed, with some firms experiencing returns of up to 5000 per cent on their expenditures over time. They also point out that returns to training can come in many forms. Amongst the firms that they studied, Doucouliagos and Sgro show that returns come not only in the form of productivity increases, as assumed in the economics literature, but also in terms of lower employee turnover and reduced recruitment costs or lower WorkCover premiums for a decrease in work-related accidents.

Leo Maglen and Sonnie Hopkins at Melbourne University report on their study of 30 firms in the manufacturing, retail and hospitality sectors. The case studies used extant firm-level data to make some estimates of returns on training investments but also examined the relationship of training to other factors in the firms, particularly to business strategy and to other human resource policies. They found that in many cases, although not all, training investments had led to positive returns for firms, but a critical finding for Maglen and Hopkins was the relationship of training to other human resource policies. Testing the notion of the 'bundling' of human resource practices to achieve greater effects for firms, Maglen and Hopkins show that training is a critical element in these bundles and that the returns to training cannot be fully realised unless training supports other initiatives in the firm.

Finally, freelance consultant Jane Figgis examines what makes firms value training. This project involved two stages. In the first stage, a number of case studies were carried out on how and why firms use training. In the second stage, another group of firms was given the results from the first stage and asked to comment on what they might learn from the studies. Figgis shows that the organisational culture of firms is a critical factor in the promotion of training. There is no such thing as a 'training culture' per se, but some aspects of organisational culture are more supportive of training and learning than others. Figgis shows that these positive aspects of culture place significant emphasis on communication in firms, including people talking about what they have learned and according others genuine respect.