Do you feel your training budget is always at risk of being slashed? You do? Well, so do most of your L&D colleagues. Teresa Russell and Craig Donaldson talk to some CFOs who explain how L&D budgets in their organisations are approved and why they are not the subjects of cutbacks at the first sign of declining profits
Do you feel your training budget is always at risk of being slashed? You do? Well, so do most of your L&D colleagues. Teresa Russell and Craig Donaldson talk to some CFOs who explain how L&D budgets in their organisations are approved and why they are not the subjects of cutbacks at the first sign of declining profits
Last month, the American Bankers Association released the results of a major benchmarking study involving the chief learning officers of some of America’s leading banks. It concludes “those institutions that demonstrate the greatest commitment to human capital enjoy the greatest financial returns”.
The strongest evidence supporting the relationship between people investment and a company’s financial performance was observed for the variable measuring total training and development expenditures per employee. This variable saw a positive relationship with respect to return on assets, return on equity, net income per employee, total assets per employee and total stock market return over the recent 12 months (for publicly traded institutions).
Does this mean that in order to get L&D budgets passed by the CFO, L&D practitioners have to hone their finance skills and learn ‘accounting speak’? According to three Australian CFOs, you don’t have to become an accountant, but you do have to work with your finance colleagues to prepare a reasonable business case.
Blundstone Australia
Blundstone – Australia’s largest footwear manufacturer – is a family owned, Tasmanian-based manufacturer and distributor that employs 550 people on three sites. Andrew Ross, Blundstone’s CFO, explains that L&D is one of the biggest line items in the company’s annual budget. Although the HR/OHS manager has total control over the spending of the L&D budget worth “hundreds of thousands of dollars”, it is up to line managers (considered to be in the best position to judge training needs) to propose and justify training expenditure. All projects that are more than $5,000 have to be authorised by the board and Blundstone’s CEO, but Ross says: “It’s fairly hard to get a training proposal knocked back.”
Training proposals are viewed in terms of a value add. There is no specific format for presentation, just a requirement that the training be justified in terms of the value it will add to the business or the individual. “Our employees get a higher hourly rate if they have more skills, so there is a financial incentive for them to improve their technical expertise,” says Ross. This applies to both factory and office staff. “Multiskilling also reduces OHS issues for the company, because staff are less likely to be engaged in single activities that can lead to RSI,” he adds. Other benefits are more job variety and backup support to cover staff absences. Blundstone now self-insures for workers compensation, so training its factory workers is all about risk minimisation. Ross directly attributes net savings of 50 per cent on workers compensation costs to the factory’s skills training programs.
Ross says L&D at Blundstone has a high profile because it improves morale and makes the workforce more flexible. “It is sometimes hard to draw a direct link between training programs and the bottom line, but you can measure it more clearly in a factory environment when you get fewer rejects and quality issues,” he says.
The value that some training adds to a business may not ever be expressed in dollar terms, but that doesn’t mean it can’t be justified to the gatekeepers of the cash. Ross is currently studying for his DBA (doctor of business administration) and presented his own study costs in terms of succession planning. “The CEO position may become vacant in a few years. I wanted to be able to throw my hat into the ring when that happens, so I needed to get broader business experience,” he says. The CEO and the board agreed to contribute to his study costs because it would fulfil their succession planning needs. The same logic was applied to the provision of leadership training for its factory supervisors, in the hope that an heir apparent to the factory manager may emerge.
Does all this positive talk about L&D mean that the training budget doesn’t get slashed at Blundstone? Well, yes and no … “If the training budget is not being spent, I will freeze unspent or unallocated money, when required. But we never cut back or cancel approved programs,” asserts Ross. “Cutbacks in one year never affect next year’s L&D budget.”
Anglican Retirement Villages
Anglican Retirement Villages (ARV) is one of Australia’s leading providers of aged care, owning and managing 22 aged care facilities. Two major projects are also under construction. Its properties are located within the Anglican Diocese of Sydney, from Dapto in the south, to Penrith in the west and Turramurra in the north. ARV claims to be an employer of choice in the aged care industry, attributing this to its commitment to its employees through policies, training opportunities and career development.
According to ARV’s business controls manager, Stefan Procajlo, learning and development has a very high corporate focus for two reasons. “We are governed by federal government accreditation which requires, among other things, that we have appropriately trained staff, but L&D is also very much about minimising risk,” he says. If the Department of Health and Aging did a spot audit and identified residents at risk, ARV’s government funding could be suspended and new resident intake prevented.
Procajlo offers the following example to demonstrate the relationship between training and risk minimisation. “If we get an outbreak of gastro in one of our nursing homes, the cost of controlling the outbreak is far greater than savings realised by not providing infection control training. Residents may have to be placed in isolation, or the whole facility temporarily closed. Also, our insurance premiums, which are already a few million dollars, can blow out.” Procajlo says that experience has shown them that they can bring their insurance premiums down through effective training and competency assessments.
Susan Alexander, ARV’s L&D manager, works with finance in building the business case for relevant initiatives. There are two types of L&D spending that occur in ARV and each is viewed differently by the CFO. Alexander prepares her recurrent budget based on a training needs analysis. Training initiatives usually have OHS data, as well as each general manager’s approval to support them. Cost savings are considered more than any financial ratios. Procajlo points out that a lot of benefits are not quantifiable up front, such as reducing premiums, reducing staff turnover and increasing productivity.
The second type of L&D spending requires capex authority for individual programs that are expected to generate revenue. A recent example is the Aged Care TV channel. In late 2002, ARV signed a joint venture agreement with a production company to develop and broadcast programs for staff of aged care facilities. Subjects as diverse as palliative care, infection control, dementia and fire awareness have been produced. ARV broadcasts these programs to all its facilities (at times suitable for its shift workers) and follows up with onsite assessments. Procajlo said that the business case had to be justified in terms of ROI, but that ROI hurdle rates in aged care are lower than industries that are purely profit driven.
ABN AMRO
ABN AMRO is a leading international bank and provides wholesale and investment banking products and services across more than 60 countries and territories. It employs more than 100,000 people worldwide, with about 675 people in offices in Sydney, Melbourne, Auckland and Wellington.
The bank employs a different budgeting process to most organisations, in that each business unit is relatively autonomous from a spend perspective. Each business unit is run on a global line, whereby they go through a process with global counterparts to reach an agreement as to their annual budget. While the bank’s finance departments provide reports in and around spend, it’s largely the call of individual HR departments as to L&D initiatives which are made available to all business units.
Peter Douglas, CFO for ABN AMRO, A&NZ says that the foundation for a good business case is establishing whether there is a market which will consume a particular L&D initiative within an organisation. Establishing this will assist L&D advocates in identifying the benefits for a business case, he says.
ROI is another element of any business case, but CFOs have to appreciate that “there is always going to be a warm and fuzzy element”, Douglas says. “We can develop assumptions about the value of benefits, but we need to make sure that those who are making the decisions are informed as to the assumptions and appreciate that there is a degree of looseness around them. It is an art as opposed to a science.”
Douglas believes most CFOs appreciate this, however they may fall down in communicating this to other key stakeholders in a business. “They may be thinking that if they do X, then HR will deliver Y. Much as the numbers might be in black and white, we need to colour in the shades of grey around them and make sure that people are familiar with these assumptions.”
There are often hidden or ongoing costs which are sometimes not factored into business cases for particular L&D initiatives, and Douglas says finance can play an important role in assisting HR to cost L&D initiatives. For example, projects which require a significant infrastructure or technology cash spend up front often require an additional spend stretching out three to five years beyond that.
Stakeholders expect the parameters to be set out for their decision making regarding L&D business cases, and Douglas says it can be useful for HR to provide options around different scenarios to help them arrive at a decision. “If stakeholders don’t agree with particular elements then this gives them other avenues to pursue.”
The bottom line, however, is that HR needs a robust process to assist businesses in identifying and addressing skills gaps. “Invariably the business knows its product, service, people and skills. “Business will look to HR to help them understand what their L&D needs are. If they can pinpoint those skills gaps and identify the solutions to remedy them, then HR will be in a much better place to support the needs of the business.”
Take home messages for L&D managers
• Work with your CFO or finance department to help build a business case in terms that are important to your organisation.
• Provide statistical backup where you can, but don’t get bogged down in financial terms. Your CFO doesn’t expect you to be a financial whiz – just an L&D whiz.
• Measure and report training outcomes where appropriate.
• The best way to protect your L&D budget is to link L&D to organisational goals.
