How much should you spend on employee training? (As much as you need to!)

In my day to day consultations with clients I get some strange questions which often reveal some underlying incompetencies in a company’s strategic and decision-making ability. One of the classics was ‘We need to know how much we should spend on employee training. Can you provide us with industry benchmark data which could be used to allocate an appropriate portion of the company budget for employee training’.

The response I would have liked, but didn’t give was ‘ You should spend about as much as it costs to retrench the person who wants to know the answer!’. But the reality is its actually not uncommon for companies to have expenditure targets for traning and other such employee management strategies.

I could only assume that the question had come from an someone in the finance department or maybe from a Human Resource Manager looking for a way to justify employee training expenditure. Whatever the motive, this sort of question reveals a sadly common ignorance.

I’ve never been a great advocate of using industry benchmarks for anything, let alone employee management strategy. Why should a company be remotely concerned with what competitors are spending. The aim for most businesses is simply to have the largest profit margin at the price which meets your sales/revenue targets (this could be the market price if your just a competitor or the price which meets your growth targets if you have a differentiated product or market niche). What it costs others is of no concern either in the contest of continuous improvement strategy – you just want to consistently achieve better quality, efficiency, market penetration etc.

OK I’m being a bit harsh, but industry benchmarks are often more distracting than useful, other than a few key indicators such as market product price or shareholder dividend measures. Imagine the average expenditure on employee training in your industry is 2% of budget. Does this mean you are going to feel guilty or clever if you only spend 1.5%.? Are you going to overspend at 2.5%? Are you going to send people to training courses they don’t need to achieve the industry rate. More so, in most cases this type of data is not available, and if it is, it probably would reveal a high variance across individual company expenditures.

The answer, is simply as the title suggests. You spend as much on employee training as you need to achieve your performance goals. Training expenditure falls right from the business strategy. For example, you develop your targets for revenue, costs and profit etc. From those you determine your sales targets and/or customer retention and supporting product or service strategies. Following, you determine your capital and employee expenditure targets. Given these, you must determine the adequacy of your employee skills and recruit and train.  Many companies define their skill needs within job position competencies against which employee skills can be assessed.  This level of detail can be useful but again the competencies must reflect the business’ strategic needs if they are to add value, which in turn requires regular review and adjustment.  Whatever the sophistication of the process, it is evolutionary and iterative and requires discipline as your internal and external organisational environments transform.

So for example, lets say you need to improve your customer retention by improving service standards. You have diagnosed a deficiency in product expertise and improved the service framework with new systems and processes. You must train the relevant staff so you allocate trainging expenditure, then sit back and watch the relevant KPI’s – they’ll tell you whether you need more training or not (given the systems and processes are correct in the first place (which is an issue for another time). How much training do you need? As much as it takes to develop the competency of employees on the new system.

The idea that training budgets emerge from business strategy is simple but takes time and effort in planning, measuring and managing continuous improvement. Obviously the amount you spend will differ depending on your business strategy. But the purpose of the expenditure should be transparent and justified and the benefits accountable. Managers across the organisation should be able to say ‘I spent this much to achieve this objective, for this reason and this how close I got’.

As far as industry benchmarks go you’ll probably be setting it, not following it. But who cares anyway?

Adventures in Making a Business Profitable – Part 1: Restructuring

About 10 years ago I had just caught my first real management job at the ‘rather big company’ (the first step on my path towards the big company some years later). Anyway, I had ended up in the ‘rather big company’ (about five thousand employees) through a twist of fate or two. I was going pretty much nowhere in my then current job and received call out of the blue, from someone whom I’d had prior business dealings, asking was I interested in a position at the rather big company managing one of its service products. The rather big company had a shaky brand and a poor reputation around the industry and lived in the shadow of a rumored potential takeover or worse. Even so, it was rather big and the position was in charge of about 150 staff, with a high level of decision making and infra-structure independence. It was the best chance I was going to get cutting my teeth at some general management, so throwing caution to the wind, I saw this as my break and took the job.

 

Of course, when I got there the business was a mess – poor profits, high staff turnover, dysfunctional systems and an impoverished culture of overworked deflated employees. I was under pressure to increase profits, cut costs (staff was the major budget component), build market share, improve customer retention – ‘and you’ve got six months to get the runs on the board’. Things were not quite as rosy as they had been portrayed in the recruitment interviews but I still had the youthful zeal and ambition to be confident in the great unknown.

 

 

I remember taking a walk one lunchtime, to a bookshop hunting for inspiration, and picking up an autobiography of Albert J Dunlap (Mean Business) and Ricardo Semmler’s Maverick. In fact I couldn’t have picked two more disparate management agitators yet it turned out that both would have a strong influence on my approach to turning the business into a success.

 

 

Dunlap’s book is about his somewhat contentious but generally effective approach to restoring Scott Paper to profitability. His ideas are actually based on an in depth, common-sense understanding of how businesses must operate which tends to be lost as companies grow and personal self-interest and corporate politics drown logical decision-making. It describes how he got rid of duplication, shut down unprofitable and non-core businesses and leached self-interested, unproductive managers. He implemented strategic plans and made mangers justify them and be accountable for them with performance pay. He understood that shareholders are the foundation of a business’ viability and made hard often unpopular decisions generally to correct prior management errors and failures. He dealt, autocratically with  mature companies which had lost their way implementing disciple and accountability through lean pyramid structures.  It was post the conglomerate splurges of the 80’s and 90’s where companies were bought up businesses in unrelated industries on the belief that they would get more consistent more revenues from the varying business cycles.  Of course what actually happened was that executives were trying to run  businesses in industries without the necessary expertise, and making a mess of it.  The revolt during the late 90’s was about going back to core business with better planning and more discipline over budgets, quality and service, maybe buying up or controlling (through market dominance or contract) the supply chain and strategies, product innovation and strategies to exert market dominance over competitors (as the law allowed).

Although Dunlap had less success at Sunbeam sometime later, if you extract the principles from the gung ho there is a lot of food for thought, and in fact much of his style is de rigeur management practice today, in your average mature, pyramid autocratic company.

 

It certainly taught me the need to ensure all parts of your company were contributing value to the bottom line, and inspired me to see the errors and imperfections in my little business and do the necessary restructuring, process re-design and elimination of non value-adding functions. I too was in a mature company with a pyramid management hierarchy and a history of poorly planned autocratic management decisions.  One simple example sticks in my mind. When I arrived at the business we had a customer telephone unit of some dozen very able employees who dealt too effectively with a never ending wave of complaints so effectively, that they never reached those employee responsible for them. Disbanding the unit I made the responsible employees accountable (they had do solve their own mistakes) with error reduction targets linked to their salary (amongst other factors). We reduced complaints to a trickle after finally solving the procedural errors that caused them. Common sense you might say but its amazing how much business is bereft of common sense. Hopefully you don’t see that much stupidity these days.

 

What Dunlap didn’t teach me was that restructuring a business, particularly when you must farewell some of the employees, is a torrid exercise, and so it should be. Its an emotionally draining process and creates a massive disturbance in the lives of those who leave and those who remain in the company. No matter how much you can justify it as essential for the survival of the company, it leaves a bad taste in your mouth. (If you have ever done it, and you enjoyed it, I suggest you’re in the wrong business.) Some years later I was to experience the other side of a number of restructures and retrenchment so I can verify the harsh reality from all angles.

 

 

The sad thing is that the need to restructure is more often than not a result of poor management (eg. the sub-prime crisis). It is less than usual that a business environment changes that dramatically to require significant adjustment and restructure. The exceptions are things like technology developments which change processes, the beginning or end of a product cycle particularly due to changing government policy (ie industry regulation, protection or subsidy policies etc) . In my experience, most business environments involve evolutionary rather than radical unforeseeable changes. In an evolutionary environment if your any good, you should be controlling the companies path by environmental analysis, carefully reviewed strategy and measurement systems which enable you to adapt and changing the business progressively. In this environment, you may have to move people around, but you can use your natural attrition rate, promotion and job experience as a means to have a more positive impact on employee culture and performance.

 

 

Anyway, were reduced by about employee numbers by about 30 per cent after restructuring the business. The process was physically and emotionally exhausting, not just the planning and development, but you have to be very confident that you have got it right as the results don’t come for some time after. This was a complex product and new processes required training employees, constantly adjusting and refining computer systems and work practices. Problems come at the speed of sound with barely enough time to solve them. It takes a while for customers to develop trust that your service is really going to improve and they want to see evidence pretty much from day one.

 

 

We had added a fair chunk to the bottom-line but the proof was in the performance over the next 6 months and beyond. My biggest challenge was still to come – to inspire the remaining staff to perform efficiently and productively. It was this task that fate had favoured me in selecting the Ricardo Semmler book.

 

 

Still to this day I find Semmler’s Maverick an extraordinary, inspirational account about employee participation, egalitarian management and employee engagement. He was faced with a similar predicament to Dunlap and took a completely different approach. I’ll write about this shortly.

 

(See Part 2 of the series)

The New Global Economy is Emerging

Economic growth is the foundation for growing living standards. Since the second world war, the US has been the principle driver of global productivity growth. Its wealth and capacity has enabled it to grow fairly consistently and be a source of finance to stimulate production in other western countries. As a strong proponent of free trade, it has stimulated economic growth in western industrial nations (eg. European Union, Japan and the Asian tigers) over the past 30 or so years.

On this basis, with the US heading for recession, a deflating dollar against many major currencies, growing unemployment and the risk of oil driven inflation, many commentators have been suggesting that this could cause a slowdown in western industrial economic growth. Many are assuming that the US will recover and reclaim its space as the motor behind the global economy. But the structure of the global economy is changing. The US has caught the flue, Japan and the EU might get a dose as well, yet the new emerging economic powers just seem to have a slight sniffle. The the new global economic order is upon us and it might just change the balance of global wealth and economic power.

Over the past 10 or so years, the free market has overtaken Marxist economics in all but a few of the old communist states, and has been followed by the formation of massive new cooperative economic regions designed to stimulate enterprise and growth. The emerging Asian nations are a strong trading bloc. Many of the old USSR states have formed the Confederate of Independent States. Outside of this you have oil rich and influential Middle Eastern nations and the less developed African sector (also oil rich in some cases). Most of Western Europe and the UK are progressively increasing their economic affiliation through the EU, progressively joined by the old communist Eastern bloc countries. Outside of this you have the industrial countries such as resource rich Australia and South Africa, and those most closely tied (financially and trade based) to the US – the Asian Tigers (post WW II developed, Japan, Singapore, Korea etc) South America and Canada.

The European Union, China and India are each significantly greater populations than the US while the Confederation of Independent States (old USSR states) is pretty much the same size. Economically, all bar the EU are starting behind the eight ball, lacking not just the US culture of entrepreneurship, innovation and production efficiency but in many cases, the institutions and regulatory regimes that support business and finance in modern western economies (not to mention as well, political uncertainty and cultural upheaval). But many have other advantages, in addition to large internal demand for goods and services, they have large populations of young workers (excepting China), relatively low labor costs, improving education and an increasing thirst for wealth. In some regions, the absence of property rights also provides the opportunity to produce goods without the cost of innovation and development.

With the US economy almost in recession following six years of unsustainable credit driven growth (expected GDP Growth of 0.9% in 2008 and 0.7% in 2009 (European Commission Economic Report Spring 2008) ). By comparison expected growth for emerging Asia, excluding Japan, is around 7% over this and the next years. China’s expect growth is around 10% (revised down from 11+%) reflecting the massive growth in infrastructure and (less profitable) production investment and its rising domestic consumption.

Emerging Asia contributes around 34 per cent of world export trade of which 40 per cent is trade within its sector, of which involves the production of goods for export to industrial countries (IMF) . Internal consumption, infra-structure development and communal trade are likely to protect China and the region to an extent from the western slowdown, although the effect of US recession on exports and strengthening US financial links is uncertain. Emerging Asia’s other main player, India has a growth rate of around 8% propelled by a large generation Y population, increasing education and low labor costs.

The Confederation of Independent States (the old USSR also has a collective strategy to increase trade and finance. These are a really interesting group whose future growth rate is somewhat uncertain. However, growth rates are increasing – Russia was around 8% in 2007 with Gross Domestic Production (GDP) equal to about 16% of the EU. Although inflation is high, growth is expected to remain strong over the next couple of years.

Meanwhile, the European Union continues to focus on collective economic and financial sustainability (expected GDP growth 2.0% and 1.8%). The Union strategy is to reduce costs, increase competition and increase self sufficiency through coordinated economic policy – harmonizing product standards, labor market flexibility and reducing trade bureaucracy and anti-competitive practice. With a population of almost half a billion it is the largest single international market, bigger than the US and Japan combined. It has the capacity to become increasingly self-sufficient and globally influential, subject to the extent of harmony it can achieve in the future and labor costs rising in emerging countries.

As China, India and th CIS grow over the next decade its likely they will continue to contribute more and more to global wealth. As their standard of living increases, predictably so will their labor costs. Business culture will no doubt change in places like the CIS and China. For example as private wealth increases people and companies will want to protect their assets and property rights. Market and regulatory structures will mature, innovation and entrepreneurship will gradually replace dependence on the central guidance. Most significantly, their wealth will enable them to contribute more and more to foreign investment and in turn their level of influence over the global economy.

The first big question is how long this will take. Changes to a countries fundamental social and economic structures often take generations to evolve, and is quicker in countries with higher education levels. It may take some time but the trains are accelerating.

The second question is. as it happens, what will it look like? It will be a great irony, but for the US – who has fought so hard for the free economy – it may involve a somewhat diminished role in a future world dominated by the billion plus populations of Chinese and Indian free market entrepreneurs and the various other regional communal trade sectors.

I have a hunch that the next 40 years will take the global economy on a journey vastly different from the last 40 years.