The Importance of Companies Having a Learning and Development Budget
When it comes to trimming a company's fat, the learning and development (L&D) budget is often first to go. Seen as a luxury, it's always been under tremendous strain. But, with rising labour costs and rampant inflation, it's now an indulgence too many companies can ill-afford.
That's a severe mistake. Cutting your business's learning and development budget leads to inefficiencies as your company's future managers, innovators, and thought-leaders lag behind other companies that chose to invest.
While you're likely to see a short bump in your company's finances by reducing the learning budget, it's a false economy. Long term, it can mean a slow downward slide; indeed, with a tightening labour market, a company that invests in their staff is investing in their future.
Too few companies understand this logic. More than one-third of global L&D professionals expected to see a budget increase in 2020. It mirrors the trend of the past decade or more. Between 2011 and 2019, L&D budgets saw year-on-year increases on average – rising to $1,308 per employee in the US in 2019.
It's not always enough – with many L&D budgets already stretched to breaking point.
Below we're exploring what learning and development is and why companies who invest in their L&D budget do better than those who don't.
Let's get started.
What is Learning and Development?
Learning is often used synonymously with training; there's quite a difference. In fact, most guides to learning and development cite training budgets as meaning the same thing. In the broadest sense, that's true – both teach skills to employees.
Learning and development go far beyond this basic remit, however.
Think about a training course – you go along to learn a specific skill or task. You spend a few hours or days acquiring new skills, only to forget them in the days after. It's got a major ROI problem.
Learning is different. While it can begin in a workshop or seminar, it continues long after – using resources, discussions, and more to build on a foundation. We've all heard the phrase 'learning is lifelong'; when an employee has a talent or capability, nurturing that talent takes more than a single day; it requires a steady stream of investment: the ROI can be remarkable (see below).
With learning and development, you can align your company's goals and performance with that of your employees. You'll need to identify skill gaps in your company, investing in employees from a broad range of backgrounds as you bridge those gaps.
Why is Learning and Development So Important?
You'll save on hiring new people
Few metrics are as daunting to HR managers and company execs as the cost of onboarding new staff. Employers often assume they'll need to hire professionals or risk falling behind to overcome their skills gap. Not so.
By acknowledging the talent and potential of your existing team members, you can save on hiring costs by increasing your L&D budget.
After all, hiring new people for your organisation is more than just the salary – which can already be substantial. You'll need to recruit, train, conduct background checks, and wait as they integrate into your business. Collectively, it can take up to six months or more for companies to break even on a new hire.
In 2020-2021 companies spent over $92 billion on hiring compared to $92.3 billion in training expenditures for a much greater pool of people. Suppose a small fraction of the former was spent on the latter. In that case, businesses could save themselves the time and energy attracting new clients and instead reskill the talent already present. It's a no-brainer.
You'll hold on to your people
We've all heard of the "Great Resignation". Following the Covid-19 pandemic, significant swathes of employees re-evaluated their careers, leaving their jobs in record numbers. What's less reported is the labour shortage is expected to last for the next few decades. As Baby Boomers retire and fewer workers exist to fill the gap, competing for the best people will become the norm, not the exception.
Combined, these two trends mean there's been a tremendous loss in institutional knowledge
But as companies scratch their heads about how to recruit the best talent, there's an obvious solution staring us all in the face: invest and retain.
You can see your retention rate soar by increasing your learning and development budget. You'll also have a more talented, productive, and efficient workforce. Seen from this perspective, you're learning and development budget is revenue-generating. With the average recruiting fees at $20,283 for a head-hunter, or $4,000 when handled internally, it's vastly more than the average spent on employee training: a meagre $1,308.
Your people will be loyal
The inverse of your retention rate is your people's loyalty. When you invest, you motivate. You tell a person that they're a valuable asset to your business and that you believe in their progression. It's a powerful message.
Creating a culture of learning isn't hard. Employees crave work that is engaging and meaningful. Concepts like "job crafting" mean people can take their roles and sculpt them to their skills, abilities, and talents. Some will be more willing to take the plunge than others.
Nevertheless, the feeling of career progression is a major morale boost. When surveyed, a staggering 93% of employees said they would remain at a company if it invested in their careers.
Should we be surprised? "What learning and development do you offer?" is often a top question asked by candidates in a job interview. Millennials, in particular, value opportunities to grow and learn more than either Gen Xers or Baby Boomers.
While a culture of hopping between workplaces has become the norm, people aren't always keen to jump ship. As the labour market tightens, investing in employees and developing a learning culture will be pivotal. But it's not just about investing in the so-called "hard skills". Concepts like leadership, communication, collaboration, and time management can also pay dividends to employee development and company productivity.
Nor does learning have to be a distraction from an employee's role. Integrating learning into everyday life – be it microlearning, lunchtime seminars, daily lessons, and more – can become a passive upskilling process.
You'll skyrocket your profits
Let's be honest: better trained employees are more productive employees. When you invest in your people, profits rise – it's that simple.
We've already considered the significant cost of hiring and onboarding new employees: each one a hit to the company's bottom line. And we've praised the benefits of employee motivation and loyalty.
Does employee learning actually lead to greater success?
In short – yes!
In a 2016 study, a leading Indian IT services company was analysed to see how its initiative to invest significantly in employee development paid off. The company was battling against stiff competition from US firms. The investment worked; as the paper concluded:
"…leveraging the general technological skills in combination with the business-domain skills enabled the focal firm to earn superior returns."
By narrowing its capability gap, it could expand its global reach. The genius behind the move was that the company acknowledged that to survive, they had to invest – just like purchasing new machinery, investing in employees results in a greater profit.
The American Society for Training and Development (ASTD), for example, collected information from over 2,500 firms. They found businesses offering comprehensive training saw:
218% higher income per employee than those with less extensive training
24% higher profit margins than those who spend less on training
6% higher shareholder return if the training expenditure per employee increased by $680
You'll see an uptick in productivity and quality
Profits don't appear out of thin air; they result from increased employee productivity. For firms prioritising customer service, it's best to see employees how customers do: experts in their fields. Customers, be they businesses or consumers, expect your employee to be able to answer their questions and meet their demands. Even more, they expect impeccable communication skills – or at least value such skills when they're clearly present.
According to IBM, companies using learning technology see a 16% increase in customer satisfaction.
Such productivity and quality gains aren't restricted to customer service. For instance, teams receiving 40 hours of training per member compared to 30 hours of training or less met their project objectives three times as often.
Even increasing team skills by as little as 1/3 can lead to a 90% increase in meeting project objectives. Moreover, when teams are well-trained, it's linked to $70,000 in annual savings and a 10% increase in productivity.
Little wonder "75-80% of managers believe effective training is critical to project success and meeting project deadlines."
It's hard to disagree.
Of course, the reverse is also true. Untrained employees hamper business growth and lead to significant project delays. Perhaps most concerning is that ignorance of compliance and risk mitigation can put the business at risk. Better employee training not only reduces cost it also minimises the risk of lawsuits for failing to comply with industry standards.
You'll create an inclusive and welcoming environment
Developing an inclusive and diverse company culture doesn't happen overnight. To ensure every member of your team feels valued means investing in broader topics within learning and development. While skills and on-the-job knowledge are vital to the health of your company and the engagement of your team, helping staff overcome cultural and structural challenges is of equal importance.
Whether it be personal branding, building confidence, overcoming imposter syndrome, or the art of negotiation, such skills can transform the lives of your employees – turning doubt into confidence.
When you can draw knowledge and experience from all your employees, when everyone feels part of the team, and when all employees have a voice, you create a dynamic, engaged, and success-driven environment.
It's not all talk.
According to McKinsey & Company, increasing ethnic and racial diversity improves profitability by 35% across UK and US companies. Often that can mean being conscious of the talents and perspectives already at your disposal.
Final Thoughts
No longer can we think of learning and development as a rounding error in the budget. It's strange we ever did. Companies would never treat their hardware, software, manufacturing facilities, and other investments as a way to trim their budgets. Yet, where people are concerned, learning and development became secondary.
Investing in employees is one of the best revenue-generating activities – soon, it won't be a choice. As fewer young people enter the workforce compared to those leaving, training your existing team members will be the key to company growth.
It's time to value our employees and support their learning – the results are clear: greater profits, better retention, improved productivity, and an overall more inclusive and vibrant work environment. What's not to like?
References:
https://www.investopedia.com/financial-edge/0711/the-cost-of-hiring-a-new-employee.aspx
https://www.thebalancecareers.com/how-much-does-it-cost-to-hire-a-new-employee-4589165
https://www.peoplekeep.com/blog/Employee-Retention-The-Real-Cost-of-Losing-an-Employee
https://www.topechelon.com/blog/typical-placement-recruitment-fees-average/
https://www.statista.com/statistics/738519/workplace-training-spending-per-employee/
https://trainingmag.com/right-sizing-the-learning-and-development-budget/
https://www.linkedin.com/pulse/learning-development-budget-julie-gordon/
https://www.gallup.com/workplace/236438/millennials-jobs-development-opportunities.aspx
https://positivepsychology.com/job-satisfaction-theory/
https://appinventiv.com/blog/the-impact-of-employee-training-and-development/
https://corp.kaltura.com/blog/learning-and-development-importance/
https://www.ibm.com/blogs/ibm-training/the-roi-of-training-within-your-organization/#_edn1
https://feminineriles.com/feature/amazing-stats/economic-benefits-of-diversity-facts/