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The Perils of Cutting Your Company’s Training Budget

Most of us have heard the old saying about the importance of advertising:

The Perils of Cutting Your Company’s Training Budget Effective corporate training starts with identifying what you intend to achieve. What is the outcome or the desired result this training will bring about? And how will you know it when you see it? Think in terms of key performance indicators that accurately measure the results of the training.

“When times are good, you should advertise. When times are bad, you must advertise.”

If one examines the history of business cycles during times of recession and recovery, the lessons learned time and time again teach us that the same quote could be equally applied to employee training and development – just substitute the words “train and develop your employees” for “advertise.”

The current economic climate is just about as devastatingly negative as any of us have seen in our lifetimes (provided we did not live through the Great Depression of the 1930’s.) Given the seemingly daily flow of bad economic news, it’s quite natural that some level of panic and a scarcity mindset can begin to pervade the boardroom atmosphere.

Cutting the Training and Development Budget: The Perils

Often, employee training and development budgets are among the first areas cut when times are tight. Developmental training which is more strategic in nature is especially vulnerable because the return on investment is often not immediately obvious. Even though it can be tempting to cut training and development, it may be wise to consider the following risks before swinging the training budget axe.

Customer retention risk

In the book, Leading on the Edge of Chaos, authors Emmett C. Murphy and Mark A. Murphy outline research indicating that it can cost as much as 5 times more to acquire a new customer versus retaining a current customer. To translate, this means that a 2% increase in customer retention can have the same effect on profitability as a 10% cost cutting effort. Further, a 5% reduction in customer loss can increase profit by 25 – 125% depending on your industry.

When your employees are not up-to-date with the right skills and knowledge, their lack of competency and indifference can often result in frustration and deep dissatisfaction on the part of your customers and quickly lure them to your competition.

Research by the American Society of Quality reported that the number one cause of customer defection (68%) was the perception of indifference on the part of employees of the company providing services or products. Employees who fall behind in terms of their knowledge of your products and services are less likely to recognize and acknowledge customer needs and issues. This shortfall in employee knowledge and skills communicates indifference to your valued customers and can translate into missed sales opportunities and customer dissatisfaction.

Employee retention risk – cost of turnover

Employee turnover is one of the most significant expenses associated with human resource management. Not only are there the high costs associated with recruitment and selection, but the non-productive time when a new employee is climbing the learning curve has a considerable financial impact as well.

It is well documented that one effect of good, consistent employee development is that it helps to build and retain your most valuable talent. An October, 2008 study conducted by Dr. Emma Parry of the Cranfield School of Management in Great Britain surveyed 1189 companies. Over half reported that training their staff made them more likely to stay. In the same study, over three quarters of the companies reported that it was more beneficial to their bottom line to train their existing staff rather than recruiting new employees.

In today’s climate, some employers make the mistake of assuming that employees will stay because their choices for alternatives are limited or non-existent. In the short term this may be true, however global economic recovery will happen eventually. It always does. When the economy bounces back and opportunities become plentiful again, employees who felt slighted, undervalued and trapped will be more likely to move on. Employees who felt that the company valued them enough to invest in their development are much more likely to stay and continue to grow with your company.

Employee motivation risk

Closely related to employee retention is the issue of employee motivation. For the same reasons that your employees will remain with you when they feel valued, they will more likely stay highly engaged and motivated. It has been estimated by The Gallup Organization that employee disengagement costs US companies as much as $300 Billion annually. Employee engagement and motivation obviously translates into higher productivity. And when resources are scarce, the willingness on the part of your employees to “go the extra mile” is particularly important.

Legal and regulatory risk

With a new administration in Washington, a whole host of new or revised employment regulations and laws are (or are about to) take effect. Legislation such as the Lily Ledbetter Fair Pay Act and the potential for passage of the Employee Free Choice Act can have a significant impact on companies – especially if ignored. If supervisors and managers lack awareness of the implications and requirements of new legislation, the potential for costly fines and litigation can increase dramatically. In addition, depending on your industry, there are most likely new regulations or changes to existing regulations that your managers and employees need to be aware of on a continuing basis.

Company reputation risk

When all is said and done and the economy recovers, there is no doubt that you will want your company reputation to be one of excellence – both from a customer service perspective and an employer of choice perspective. Companies that build and preserve truly great reputations will be the ones poised to pick up market share, new business and top talent. Companies that panicked or became paralyzed during the recession may unfortunately pay a greater price than they ever anticipated when recovery occurs.

Smart ways to make the most of your training budget

With all this said, it is important to keep in mind that it is certainly not being suggested that money simply be “thrown” at training and employee development. On the contrary, there are several smart approaches that can be taken to get the most out of your training dollars. Here are a few tips that were adapted from a May, 2009 MBTI blog entry by Mike Shur and Breanne Potter:

  • Reduce your training travel budget. Use technology to the fullest. Can the training be conducted through web-based training or a webinar? Are you making the most of collaborative distance learning tools and techniques? Doing so can save a significant amount of time and cost.
  • Conduct training in shifts. Instead of pulling whole teams away from work for long periods of time, schedule learning so that it has the least impact on time away from the job. Utilize on-the-job coaching where appropriate. Consider “lunch and learn” sessions on a variety of topics.
  • Consider asking participants to brown bag their lunch and snacks for all-day sessions instead of catering lunches and snacks.
  • Create online knowledge sharing environments such as a company wiki. Consider establishing communities of practice for both informal meetings and online knowledge sharing.

During times of recession, avoid the future potential pitfalls associated with wholesale slashing of your training budgets. Tough times call for resourcefulness and innovation – not panic and retreat. Paying attention to employee development and ensuring that your employees’ skills and competencies stay at the highest performance levels will not only help your company weather the storm now, but will help position it to soar above the competition in better economic times.

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