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05/23/2012

The Impact of Funding Cutbacks on Training in an Organizations


The Impact of Funding Cutbacks on Training in an Organizations

 

Introduction

            Many organizations invest lot of time and money in order to develop their people. People can be “brought to a desired standard of efficiency, condition or behavior by instruction and practice” (Hackett, 2003, 1). Thus, many organizations implement training courses and coaching in order to improve the skills, knowledge and capabilities of their work force, which in return, they expect increase in productivity and profitability (Jenkins, 2002).

            However, just like other aspects of business, HRM and training are also affected by global financial crisis or recession. Global financial crisis influenced how organizations from different industries implement and manage strategies and actions inside the organization. Now, organizations are not just focusing on the quality of outcome or finished product but also focus on using limited amount or quantity of resources – all organizations are focusing on saving costs in all of operations and activities inside their organization, from managing their human resource up to marketing.

            As a result, there is an ongoing debate regarding the impact of funding cutbacks on training inside an organization. There are notions that it will greatly affect the overall quality of service or product to be offered by the organization, thus affect productivity and profitability. On the other hand, there are notions that training budgets are commonly cut first and budgeted last because of the lack of evidence which connect it with positive return on investment (ROI).

            This paper will analyze the different impact of funding cutbacks on training inside the organization. It will focus on different perspectives and theories regarding the subject. 

Economic Impact of Global Financial Crisis on Training Budgets 

            The UK Chartered Institute for Personnel Development (CIPD) released its report about Learning and Development Survey in April 2009. The result of the survey showed that the global financial crisis had affected different organizations. Generally, 46% of the survey respondents stated that the economic position of their organization had worsened in the past year. In addition, some 32% of the respondents stated that the funds and budgets available for their learning and development had decreased within a year. In private (33%) and public (34%), it had reported a significant decreased in training funding (CIPD, 2009).

            In addition, the result of the study also showed that large organizations have been affected by cuts in training funds. Table 1 shows that in organizations with more than 5,000 employees, 44% of the respondents stated that training budgets had been reduced within a year. This is followed by 251 – 1000 and 1,001 – 5,000 employees (32%) and 250 or fewer (26%). Furthermore, the study also showed that a market discrepancy in the amount of money spent per employee on training inside organizations of different sizes. A total of €457 was spent on training per employee in organizations with 250 or fewer employees, while a total of €137 was spent on training per employee in organizations with more than 5,000 employees, aside from that, they also receive less training time, compare with the smaller organizations (CIPD, 2009). 

 

Table  SEQ Table \* ARABIC 1 Company Size and Training Budgets

Organization Size

% Employers Cutting Training Funds in Previous Year

Money Spent Per Employee

(GBP)

250 or fewer employees

26

GBP 417

251–1,000 employees

32

GBP 260

1,001–5,000 employees

32

GBP 184

5,000 or more employees

44

GBP 125

Note: GBP 1 = €1.09 as at 21 October 2009

Source: (CIPD, 2009)

Cost Cutting in Training

            Training budgets are common cut first and budgeted last, particularly during down periods because of the lack of evidence of a ROI. Traditionally, training is considered as an expense rather than as an investment. The difference between the two terms is huge because, expense is just an expense which cost money, thus not necessarily offer a return of value, on the other hand, investment helps to return profit or sales. In addition, there were also notion that training reduce motivation, and it offer results in the long-term, which is important because during down times, it is important to have short-term profit (Gordon, 2009).

            As a result, organizations become desperate in implementing strategies and actions which will help in order to lessen the expense of the organization, at the same time improve the production in order to increase profit.  However, there are different studies which show that training is a significant cost-cutting tool during down times. According to Parry (1997, 155) “training doesn’t cost – it pays!, it is an investment, not an expense”. It is important to take note that the costs of training are known and expressed in dollars, but its benefits and advantages are commonly soft, subjective and difficult to quantify and convert to dollars (Parry, 1997, 156).

            It is important to consider that the current increasingly sink or swim of the global business, only those organizations who makes the most of their vital assets can remain competitive. Thus, it is important to remind every business that the capabilities and skills of the employees are considered as the most important asset of an organization, therefore, it is mainly important to focus on the  content development and improvement of the skills, capabilities and knowledge of the human resource (Learning to Improve Performance, 2006).

            It is not because decision makers do not value and understand the significance of keeping their employees updated with the most applicable and current knowledge of the business in all of its aspects. But when times are difficult and economies must be made, it is much easier to give reason for cutting something that may seem advantageous, but seems not that necessary, than something which is obviously connected directly towards the financial performance of the company (How top companies survived recession by refusing to cut back on educating staff, 2004).

            This is how bad decisions – choice to cut funds or budgets for training – can be done and made. The fact is that, it is exactly when times are difficult and hard and business are sailing in rough seas that those organizations need to maintain their employees and polish and update their skills. To do the opposite is like throwing the lifeboats in order to save on weight (How top companies survived recession by refusing to cut back on educating staff, 2004). The next part of the paper will present the different risks or disadvantages that organizations can face in the future by cutting cost in training funds.

Risks in Cutting Cost or Budget on Training

            One function of HRM that is considered as both a source of vitality within the organization and a part of the measurement puzzle is training. While, by instinct, the need of an organization and commonly even considered as deliberately measurable, is loaded with different issues regarding its contribution towards the value of organization and effectiveness of employee. Exclusively, the capability to confirm if a given training programme helps with the performance of the organization and capability of the employee determine if a programme must continue to receive funding. However, the path from training to the performance of the organization is not always direct, and employees do not always leave training with the skills that they can already use or apply in their work, thus they commonly experience learning curve. Thus, practitioners must always focus on continuous way of living with the possible tools to reduce resource or look for the connection between training and the outcome of the performance. Past studies showed that training is connected to satisfaction, trust and commitment (Owens, 2006).

Employee Motivation, Satisfaction and Performance Risks

            Motivation, satisfaction and performance are important aspects in human resource. These factors help employees to work at their best, thus help to improve productivity inside the organization. Motivation pertains on the set of reasons which drives someone to do something. Within this, it is important to focus on different factors which include self-efficacy or self-perceive ability (Bandura 1986); and the achievement motivation, which pertains on the desired to overcome different risks and challenges and to perform based on standards (Steers and Spencers, 1977) (Bartell, 2001).

            Training enables employees to gain new knowledge and acquire new skills, and improve their entire capability, thus it help in order to improve their self-efficacy. Self-efficacy is connected to self-esteem or the evaluation of one’s self about the influences, rather than the perceived abilities (Brocker, 1988 cited in Bartell, 2001). Therefore, training enables employees to be more confident and motivated to work, because they have trust about their selves. With the help of training, employees feel that the company value about their capabilities and skills, thus, they are likely to stay and be highly engaged.

            The study of Gallup Organization showed that employee disengagement costs small and large companies as much as $300 billion yearly. Therefore, training can also help in order to reduce costs related to HR issues. It is also important to take note that the engagement and motivation of the employee helps to maintain high productivity. Thus, when resources are scarce, during tough times, the willingness of the employees to go extra mile is very significant (Training Folks, n.d.).

Employee Retention or Turnover Risk

            Employee turnover is considered as one of the most vital expenses connected with HRM. This is because of the costs to be spent within recruitment and selection as well as non-productive time when a new hired employee is climbing the learning curve. There are different studies which showed the good impact of good and consistent employee development and its influence in building and retaining the most valuable talent inside the organization. The study of Dr. Emma Parry of Cranfield School of Management in surveying 1,189 companies in Great Britain, it had showed that more than 50% of the companies and their training staffs reported that training their employees made them more likely to stay. The study also showed that more than ¾ of the respondents reported that it is more useful to their bottom line to train their current employees than recruiting new employees (Training Folks, n.d.).

            It is studied that turnover is connected to job satisfaction and organizational commitment. Job satisfaction pertains on “the extent that an employee favors or disfavors a job, expressed emotionally and/or cognitively” (Brief, 1998). In general, training helps in order for employees to gain new skills or abilities and/or update their current (McConnell, 2003). As have mentioned, it help in order for them to gain self-esteem and confidence, which motivates them to work because of their trust for their capabilities and skills. Therefore, with the employee being knowledgeable and skilled, they will be satisfied with their works and performance. Thus, this thinking will lead to organizational commitment or relative strength of an employee’s identification with and involvement in the organization (Porter and Steer 1974 cited in Bartell, 2001).

            It connection, job satisfaction is said to improve job performance, therefore by focusing on intermediary, such as job satisfaction, as means in order to improve is not a new strategy. It if can be shown that the training programme of an organization can help to increase job satisfaction, then a bridge from training and improve performance can be established (Wright et al., 2002).

Customer Retention Risk 

            During tough times, having huge number of satisfied and loyal customers will be helpful in order to success. This has been showed in different cases, such as the case of Harley Davidson during its downfall. With the help of loyal customers, the company managed to improve its position in the market.

            As have discussed training help to improve the performance, productivity and overall behavior of the employees. It is important to consider that these factors are directly connected towards the satisfaction and retention of customers, particularly in the service sector, where in employees directly connect and communicate with the customers.

            According to Murphy and Murphy in Leading on Edge of Chaos, it can cost 5 times greater to acquire a new customer than retaining a current customer, thus it means 2% increase in customer retention can have the same impact on profitability as 10% cost cutting effort. In addition, a 5% reduction in customer loss can increase profit by 25% to 125% depending on the industry. Therefore, if the employees do not have updated skills and knowledge, their lack of competence and indifference can frequently result in frustration and deep dissatisfaction of the customers, which can greatly affect their buying behavior and choice in the future, driving them off towards the competitors (Training Folks, n.d.).

            The study of American Society of Quality showed that the major cause of customer defection was the perception of indifference on the part of employees of the company in offering service or product (68%). Those employees who do not have knowledge about their products and services are less likely to know and provide the needs and issues of the customers. Thus, the said deficit in the knowledge and skills of the employee communicates indifference towards the valued customers of the company, and can be translated into missed sales opportunities and dissatisfaction of the customer (Training Folks, n.d.).

Conclusion

            Training is an integral part of an organization. It is a tool which enables organization to maintain and continue learning and development. This is particularly important in the current complicated and ever-changing business industry, due to the influence of fast changing technology and globalization.

            It is understandable for many organizations to give up training in order to obtain lessen expenses and costs in the entire operation, at the same time, acquire additional money for other important aspects and investments to improve profitability. However, as have mentioned and tackled in this paper, training is not an expense, but an investment, which offers huge advantage and benefits to the entire organization. However, unlike other possible investments, training’s outcome and benefits cannot be expressed and measured with dollars and other statistical methodology. Its result is more subjective and tangible, but very important towards the performance and competitiveness of an organization.

            First, it helps in order to maintain the skills and knowledge of the employees updated in order to meet the different challenges in the environment. This will given them more self-esteem and confidence, because they are aware of their strengths, therefore, will drive them to work at their best. Training programmes show that the organization values their employees, thus it can help to create a strong bond or connection between the employees and the company, which will be very helpful during tough times, particularly in the current global economic crisis. Commitment and loyalty of the employees can help to lessen and prevent high turnover rate, which is one of the biggest sources of expenses in an organization. Above all, training can help in order to maintain competitive and efficient employees which is important in customer relationship, particularly in the service industry. When customers are satisfied with the services and products being offered by an organization, then they are more likely to be loyal. As have tackled, loyal customers can be very helpful during the tough times, because the company can expect continuous sales and profit.

            With all these, it show that training enable to lessen and prevent additional costs. Costs related to selection and hiring of new employees, at the same time, costs involved in marketing or advertisement. Therefore, cutting funds or cost for training is not a very good strategy. However, it is important to focus on how to implement an effective training programmes.

 

References 

Bartell, S. M. (2001). ‘Training’s new role in learning organizations’. Innovations in Education and Teaching International. Taylor and Francis Ltd. 

Brief, A. P. (1998). Attitudes in and around organizations. Thousand Oaks, CA: Sage. 

CIPD (2009). Learning and development. Retrieved on 5th October, 2010, from  Chartered Institute for Personnel Development website. 

Gordon, E. (2009). Winning the global talent showdown: How businesses and communities can partner to rebuild the jobs pipeline. Berrett-Koehler Publishers.

Hackett, P. (2003). Training practice. CIPD Publshing. 

‘How top companies survived recession by refusing to cut back on educating staff’. Development and Learning in Organizations. Vol. 18, no. 4, 18 – 21.

Jenkins, D. (2002). Planning training and development super series. Elsevier. 

‘Learning to improve performance’ (2006). Development and Learnings in Organizations. 20(2), 24 – 27. 

Owen, P. (2006). ‘One more reason not to cut your training budget: The relationship between training and organizational outcome’. Public Personnel Management. 35(2), 163+. 

McConnell, J. (2003). How to identify your organization’s training needs: A practical guide to need analysis. AMACOM Division American Management Association.

Parry, S. (1997). Evaluating the impact of training: A collection of tools and techniques. American Society for Training and Development.

Training Folks. The perils of cutting your company’s training budget. Retrieved 5th October, 2010, from Training Folks website. 

Wright, T. A., Cropanzano, R., Denney, P. J. and Moline, G. L. (2002). ‘When a happy worker is productive worker: A preliminary examination of three models’. Canadian Journal of Behavioral Science. 34, 146 – 150.

 

 

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