Human resource education and employee productivity improvements

¶ … ROI from Employee Education

The notion that employee education and training leads to higher levels of employee productivity is not a new concept in business management. However, for many businesses, the cost of employee education is still regarded as an optional business expense instead of an essential business investment. This prevailing attitude is primarily due to the fact that there appears to be no clear connection between employee education and the bottom line. It is the objective of this paper to demonstrate that there is a ROI from employee education, as it: increases the level of employee productivity; is of strategic importance to businesses building competitive advantages; improves employee morale and retention; and reduces the costs of recruitment.

KEY WORDS AND PHRASES: employee education; training and development; productivity; investment; ROI; competitive advantage; employee recruitment; employee retention; employee morale; life-long education; skills; knowledge; learning; human resource management; human resource development; intellectual capital.

Employee training has always been perceived as a necessary cost of business, especially in the area of management development and inducting new recruits into an organization's operations and culture. Unfortunately, however, employee education and training, in the broadest sense of the term, has yet to be accepted fully as there appears to be no direct connection between employee education and an organization's bottom line. The absence of proof that there is a ROI from ongoing employee education has led to a situation where many organizations demonstrate a tendency to slash training budgets in times of downturns (Smith, 1999-2004). It is the objective of this paper to demonstrate, through secondary research and discussion, that corporate investment in ongoing employee education does, in fact, fetch returns since it leads to: increases in the level of employee productivity; builds competitive advantages and is, therefore, of strategic importance; improves employee morale and retention; and reduces the costs of recruitment.

In fact, the strategic importance of employee education and training has assumed even higher significance in today's labor market, globally competitive business environment, and knowledge economy. Indeed, imperatives provided by environmental trends have always played a central role in the evolution of employee education and training. Since the historical development of employee education and training can serve to explain the roots of current organizational perceptions and practices, this paper will begin with a brief overview of the antecedents of employee training before going on to context the need for a change in organizational perspective.

Historical Evolution of Employee Education and Training

Employee training initially evolved as a craft training system that enforced quality standards and regulated the training of new workers through trade guilds. From the guild system, training evolved into factory schools with the advent of industrialization, which called for specific task education and specialized skills. The introduction of mass production methods, however, led to organizations adopting on-the-job training (OTJ) since the assembly line only required workers to endlessly perform mechanistically simple tasks. Such training systems paid little heed to individual employee motivation, an attitude that changed only post the findings of the now famous Hawthorne studies as well as the imperative provided by a consumer-driven society and increasing competition. The changed environment provided an impetus for development of business management leading to college courses on almost every aspect of management and the growth of human resource development as a respected field. Further, the recognition that employee motivation and morale were key to productivity led to businesses adopting human behavioral theories in training practices in order to bring about desired behavioral changes (Gordon, Morgan, & Ponticell, 1994, p. 2- 6).

The use of behavioral models of training continued till the early 1990's with businesses only feeling the need to retrain employees in new technical skills as technology became more complex and interactive. With a relatively stable business environment, employers did not feel the need to invest in broader employee education programs, instead using raises, promotions, and benefits as primary methods to motivate employees. Though the 1990s saw a paradigm shift in the training and development needs of employees with the advent of a globally competitive, knowledge economy, research evidence shows that, by and large, organizations continue to focus primarily on the training of new recruits and behavioral-based company training (Gordon et.al., 1994, p. 7-8). This is surprising given the historical evidence that environmental imperatives have always resulted in businesses changing their outlook and employment practices. Perhaps, one reason why businesses are not responding so quickly to the new environmental demands is the paradigm shift in employee education and training that the new economy calls for.

It is, therefore, important to assess the employee education and training needs that are necessitated by today's labor market and globally competitive, knowledge economy. Two such key factors are the centrality of information technology and a broad range of employee business skills to success. These central factors imply that organizations can no longer simply focus on developing the management skills of its stars or on training of its new recruits. Instead, firms need to look at life-long education and training of its employees if they are to build competitive advantages, successfully capitalize on business opportunities, implement new strategies, and achieve higher productivity levels.

Employee Education and Training: It's Role in Productivity and Building Competitive Advantages

The demand and supply of labor has always been an issue of concern to organizations, especially human resource professionals. The current knowledge economy, which requires the development of organizations into knowledge-intensive, learning firms, demands a highly literate and intelligent workforce that can adapt quickly to rapid changes. It is, therefore, a matter of concern that the National Institute of Literacy in the United States reported in 2001 that over one-third of job applicants lacked the necessary skills to perform the jobs they seek, and that many employees cannot use the available information sources to communicate ideas, read business documents, and solve work-related problems. Naturally, such illiteracy costs employers billions of dollars a year in lost orders and overall poor quality (Davis & Muir, 2002). Further, the centrality of information technology to business success has resulted in organizations rushing to invest in information technology as a way to improve overall efficiency and reduce costs. However, such investments often fail to achieve the desired objectives since the promised advantages will not materialize without highly competent people to both implement and utilize these innovative work systems (Swanson & Torraco, 1995). Thus, employee education and training to develop new competencies is essential to the productivity of such technology and indeed, the operations of the whole organization.

In addition, considering that the knowledge economy combined with a globally competitive environment calls for large amounts of new knowledge, personal thinking/application/problem-solving abilities, and high work-loads with extremely variable content, it is clear that employee training programs need to be far broader. In fact, organizations now need to look at employee education and training in a range of areas including basic literacy, business communication, computer skills, software knowledge, problem-solving abilities, critical thinking, and organizational skills. This multitude of workforce education needs has been identified by Gordon et.al (1994, p. 30) through their ongoing field-based research in this area. One clear inference that can be drawn from the preceding research evidence is that employers who invest in education and training programs, which address the needs of the new economy, will automatically reap the benefits in increased employee productivity levels besides saving billions of dollars that are currently lost through inappropriate or underutilized technology, misplaced orders, customer dissatisfaction, and overall poor quality.

The American Management Association, post a survey conducted of 352 HR executives who confirmed that investing in employees' education and future is more important than immediate compensation, has also reached the above conclusion. The importance of investing in employee education was also established in a study of more than 3,100 U.S. firms, conducted by the National Center on the Educational Quality of the Workforce. In fact, the findings of this particular study clearly establish that there is a ROI from employee education and training expenses: " ... On average, a 10% increase in workforce education level led to an 8.6% gain in total productivity ... A 10% increase in the value of equipment increased productivity just 3.4%." (Smith, 1999-2004).

In spite of such clear research evidence, that establishes a connection between employee education and training and an organization's productivity, it is surprising that most organizations seem to institute Organizational Career Development programs primarily due to a desire to promote from within (23%) and a shortage of promotable talent (14%). A mere 2% cited a desire to improve worker productivity. Further, in developing their systems, almost 75% targeted fast-track management candidates while over half targeted management trainees. These findings were established by a study sponsored by the American Society for Training and Development on Organizational Career Development among a sample of 1,000 U.S Corporations, 96 federal agencies, and between 500-1000 European, Australian, and Singaporean companies; 26% of who responded to the questionnaire and structured telephone interviews (Gutteridge, Leibowitz, & Shore, 1993). It is obvious from the findings of such research studies that organizations are still mired in the age-old practice of focusing only on development of the star achievers and new recruits instead of focusing on the broader employee education and training needs of the workforce, as a whole.

Yet, today's business environment increasingly calls for an organization's ability to use employee expertise, at all levels, as a factor in the very shaping of business strategy. Implicit in this is the need for HRD to not just support the business objectives of organizations but play a pivotal role in the shaping of business strategy since organizational success increasingly depends on an organization's ability to apply state-of-the-art expertise to new, emerging business opportunities. This is contrary to current practices where formal consideration is given to employee expertise and training implications of a given strategy only after constraints emerge during implementation (Swanson & Torraco, 1995).

The centrality of employee expertise to business success is particularly evident in high technology industries such as information technology and communications where technical innovations are continuous and the life of knowledge is measured in months (Swanson & Torraco, 1995). However, employee knowledge and expertise is not confined to high technology industries alone. For today's competitive, global economy calls for continuous innovation, value addition, and rapid adaptation to changing conditions. Thus, only "high performance work organizations can succeed in virtually all industries. Such firms are the ones who take the approach of relying upon the ingenuity, creativity, and problem-solving abilities of their workers to constantly develop the necessary competitive edges in terms of product quality and innovation, price and cost leadership, and customer service. A good example here is the work practices in FedEx, a company that has been known to rely on their delivery truck drivers to use their knowledge of customers and routes to identify bottlenecks; act as sales representatives by informing customers of new services; and work as a team through training and installing communication equipment in trucks (Kling, 1995). Naturally, no high performance firm can achieve this without investing in the ongoing education and training of its workforce, and changes in the organizational structure and culture. The latter is particularly important since employee education and training programs need to necessarily be accompanied by employee motivation through practices such as organizational career development, which could necessitate changes in organizational structure and culture.

The truism that investing in employee education and training pays off in terms of building competitive advantages and higher productivity levels has, in fact, been realized by several leading-edge corporations such as Motorola, Texas Instruments, Xerox, Disney, Home Depot, Ford, and Dupont; several of who have created extensive internal systems for providing education and learning, including business literacy (Swanson & Torraco, 1995). Besides such anecdotal evidence, there is a wide body of research that conclusively proves that there is a ROI from ongoing employee education and training. One such study is a cross-industry survey of work practices and firm performance of 855 publicly held firms conducted in 1992. This study, which created two indexes, "employee skills and organizational structures" and "employee motivation," demonstrated that each of these indexes was significantly correlated with higher sales per worker when considered separately. Taken together, a one-standard deviation increase in both indexes was associated with a 16% increase in productivity. Further, these indexes were also positively related to financial performance measures such as gross rate of return on assets and the ratio of stock market value to total assets. In another study, it was found that 108 firms that had successfully introduced innovations in training, quality management, and organizational structures outperformed a matched control group over the six years subsequent to the introduction of such practices. These innovative, learning organizations achieved a cumulative excess increase in stock price of over 20% (Kling, 1995).

Employee Education and Training Improves Employee Morale and Retention

"Employee loyalty to the organization rests on many other motivational factors besides money: self-fulfillment, improved self-esteem, and a need for personal affiliation. If a company's business culture places an emphasis on life-long employee learning, more individuals will see themselves as highly-appreciated members of the organization. This feeling of "being vested" is a powerful inducement to stay." (Gordon et.al., 1994, p. 137) The preceding observation is not new and has long been acknowledged by behavioral theory. But perhaps employee motivation has assumed higher significance in the light of an environment characterized by rapid changes and employee insecurity caused by the fear of job obsolescence. Indeed, the current environment has led to training, education, and degree completion programs becoming one of the most desired employee benefits sought. This is also because a Gen. X and Gen. Y workforce views training and development as critical, valuing the opportunity to advance and make more money (Smith, 1999-2004).

While the fact that improved employee morale leads to higher motivation and productivity is self-evident, it is important to note that the absence of employee education and opportunities to advance or gain wider experience can result in employees migrating to companies that are known to offer such benefits. Despite these known facts, "a research company reports that 54% of businesses do nothing to create a high-retention culture or reduce high employee turnover." This, in spite of the fact that the costs associated with high turnover include lost customers, business, damaged morale, besides the costs of hiring and training new recruits (Smith, 1999).