Factoring Total Cost of Growth Into the Workforce Transformation Equation

In an increasingly services-driven economy, knowledge leads to growth. Employers and employees both strive for that growth, illustrating the importance for talent organizations to create cultures built upon a foundation of learning and development (L&D). Yet, we find that investment in L&D lags far behind appropriate levels, leading to skills gaps, challenges with retention, and lower levels of workforce engagement and productivity. According to our 2022 IT Skills and Salary Report, one-in-four IT decision-makers said a lack of investment in training is a primary reason behind departmental skills gaps. And, when there is some investment, it is often wasted in undirected spend that does not measure outcomes.

Consider for a moment a well-known industry term called the “Total Cost of Ownership (TCO).” It is the cost of acquiring and owning capital equipment, software, real estate, laboratories, etc., inclusive of maintenance and upgrades. TCO can vary widely, but it often ranges between 5-20% of the initial capital outlay or the yearly fee for licensed assets like software. Now, consider an employee’s fully loaded cost as the yearly license cost for the intellectual output of the employee. Software and SaaS license price increases are akin to employee compensation increases; investment in employee learning and growth is akin to yearly spend in maintenance and upgrades. Let us call this the “Total Cost of Growth (TCG).”

While TCO ensures that capital investments are in good working condition, TCG ensures that employees are in “good working condition.” This means that they remain competitive with technological, social, and regulatory changes around them. Just like lubrication in machines protects them against environmental atrophy, L&D protects employees against intellectual stagnation or decline as the environment changes around them.

The benefits of investing in TCG cannot be overstated. On average, the overall voluntary turnover rate across all industries was 32.7% last year. Gartner notes that the rate is likely to jump by another 20% by the end of 2022. It’s important to note that this can vary significantly depending on industry. A 90% employee retention rate / 10% employee turnover rate is generally considered “good.”

Loss of productivity, recruiting costs, and wage inflation with new hires cost companies big. SHRM reported that it can cost a company six to nine months of an employee’s salary to find a replacement. Employee replacement costs can be as high as 50 – 60%, with overall costs ranging anywhere from 90 – 200%. For an employee making $60,000 per year, that means it costs an average of $30,000 - $45,000 just to replace them, and $54,000 - $120,000 in overall losses to the company. And this isn’t even factoring in the intangible costs such as impact to culture, productivity, and momentum.

Even if a company spends 3% of total compensation on training and development, filling more roles internally—it pays off the cost of L&D and more. In general, companies do not spend anywhere close to 3% of employee compensation on L&D.

Many companies spend on L&D as if they are buying a “box of chocolates.” It is treated as an employee benefit, and “learning content by weight” is the philosophy adopted where investment is measured by how much content is bought rather than on quality, assessment, and curation. Such spend can be considered worse than not spending anything at all because there is no measurable ROI in terms of retention, internal mobility, and workforce development that maps back to strategic goals.

Companies that are effective with TCG investment are deliberate about employee development for strategic business needs. They assess critical skill needs aligned with company strategies and plan workforce transformation accordingly. They benchmark employee skills, build and maintain individual development plans, and provide individualized learning programs that make the employee ready for jobs and roles of the future. For companies that offer human intellectual property as product, such as consulting and services, this type of deliberate skilling goes directly toward business outcomes like time to billability or speed and flexibility of project staffing. For companies such as health services, financial services, hospitality, and transportation, this type of skilling relates directly to business outcomes like retention, internal mobility, customer satisfaction, data security, legal compliance, and employee health and safety.

Best-in-class companies often blend learning methods like videos, books, and live and virtual instructor-led training (ILT). They use learning platforms that engage the learner with recommendations, social cues, badges, goals, reminders, and gamification. They focus on developing the whole professional by offering a balance of technical skills (e.g., programming, data) with power skills (e.g., communication, agility).

How a company administers L&D budget is also critical to the success of any approach. It is true that functional leaders like Chief Technology/Information Officers, Chief Revenue Officers, or Chief Compliance Officers are more tuned to the strategic needs of their functions. Many CEOs often delegate L&D decisions to these major functional heads. This fully decentralized approach could be more impactful in the short term, but in the long term, may result in suboptimal allocation of funds, duplicative spend, fractured learning experiences, and poor outcomes. A decentralized, but synchronized, approach is key.

When the CEO is more involved in L&D, seeks valuable input from every function, then challenges the Chief Learning Officer to produce a combined plan that results in the best business case and the best employee experience—the overall investment is more efficient, and results are more impactful across the company. The modern, successful Chief Learning Officer must continuously engage with functional leaders and stay abreast of their needs and strategies.

Total Cost of Growth is a critical investment needed for all companies to sustain and grow – especially as today’s business environment changes from a technological, regulatory, macro-economic, and competitive standpoint. By investing in employees, you are building loyalty, career paths, and spending company capital in a more efficient manner, and as a result, making the company more productive, resilient, and skilled to face upcoming challenges. Falling behind and failing to invest in growth holistically is a guarantee for obsolescence.

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