the blog of dan pontefract | Budgeting for Learning 2.0: It’s Not That Hard
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Budgeting for Learning 2.0: It’s Not That Hard

I find it remarkably sad that ‘training’ departments within organizations continue to pump out bricks and mortar classes as their sole approach to learning instead of shifting to a formal, informal and social mix. As I’ve repeatedly stated, formal classroom sessions are important, but they don’t have to be the only thing offered to the employee base, and they don’t have to exhaust the entire budget.

Perhaps it’s because they (the ‘training’ departments) aren’t looking at it from a budgeting perspective.

Here’s a hypothetical situation for you. Imagine if there was a company in a service industry with the following details:

  • Company Payroll (7500 FTE):        $675,000,000
  • Learning Staff Payroll (50 FTE):    $5,000,000
  • Non-payroll Learning budget:      $5,000,000
  • Total Learning budget:    $10,000,000
  • Staff ILT Learning Days (10 days per FTE): 75,000 days
  • % Learning Investment on Payroll:            1.48%
  • Opportunity Costs of ILT Days:    $28,125,000
  • % Learning Investment + Opp Costs on Payroll:   5.65%
  • TOTAL Learning Costs:    $38,125,000

This is a very typical situation for organizations today where (thanks to ASTD) benchmarking learning investment as a percentage of payroll is the norm, and anything between 1% and 2.5% is considered acceptable.

I also believe that any full-time learning related headcount should be attributed to the overall budget number.

What usually doesn’t get reported, however, is the amount of time, in terms of opportunity costs, we add to the mix when the staff are away ‘learning’ in a classroom. In the situation above, I estimate the traditional 2 weeks of training (or 10 class days) as a standard for every employee in the company. After factoring in the opportunity cost of being away you should then begin to gauge what it really is costing the company in terms of a percentage of payroll, in this hypothetical case, 5.65%.

But what’s really interesting, in my estimation, is how many organizations devote roughly 90% of their real budget to formal learning, leaving 10% for the non-formal pieces. (obviously in contradiction of many studies that suggest we, as corporate citizens, learn 80% of the time in non-formal settings)

If this were the case, then we’d see a breakdown as follows for our hypothetical situation:

  • Learning Costs Breakdown (with opp costs)
    • Formal                  $34,312,500        90%
    • Informal               $2,668,750           7%
    • Social                     $1,143,750           3%
  • Learning Costs Breakdown (without opp costs)
    • Formal                  $9,000,000           90%
    • Informal               $700,000              7%
    • Social                     $300,000              3%

That is, we’re spending over $34m on formal learning, if factoring in headcount to develop/deliver/coordinate, travel, opportunity costs and outsourced contractors, training firms, etc.

That’s a fair bit of money for what amounts to marginal return.

Alright, so what if we shifted things such that 60% of the budget were devoted to formal events, and 40% to non-formal scenarios such as informal and social learning? And, what if we reduced the ILT capacity to 5 days per year versus 10? And, if we are making such bold claims, wouldn’t we naturally be reducing both the amount of T&E expense required for such a prediction … and … the amount of full-time people required to deliver formal training internally?

Well, in our hypothetical example, here is what could happen:

  • Learning Staff Payroll (40 FTE):    $4,000,000
  • Non-payroll Learning budget:      $5,000,000
  • Total Learning budget:    $9,000,000
  • Company Payroll (7490 FTE):        $675,000,000
  • Staff ILT Learning Days (5 days per FTE):  37,500 days
  • % Learning Investment on Payroll:            1.33%
  • Opp Costs of ILT Days:     $14,000,000
  • % Learning Investment + Opp Costs on Payroll:   3.41%
  • TOTAL Learning Costs:    $23,000,000

We’ve reduced the staff by 20% and taken out $1m because we’re not formally teaching as much anymore. In fact, we’re not teaching as much by roughly 50% because we’ve shifted our model from 90% formal to 60% formal and 40% non-formal, thereby freeing up the internal staff to focus on informal and social learning versus always developing and delivering formal training. (see Roles in the New Training Org)

Secondly, we haven’t reduced the non-payroll learning budget, but we’ve been able to shift T&E dollars towards infrastructure needs of social learning … and … our vendors are now part of the equation, so when we pay them for service, we pay them for formal, informal and social learning service not just ‘bums in seats’.

With the shift, we can see the following breakdown:

  • Learning Costs Breakdown (with opp costs)
    • Formal                  $13,800,000        60%
    • Informal               $4,600,000           20%
    • Social                     $4,600,000           20%
  • Learning Costs Breakdown (without opp costs)
    • Formal                  $5,400,000           60%
    • Informal               $1,800,000           20%
    • Social                     $1,800,000           20%

What have we done? We’ve reduced the overall costs of ‘training’, including opportunity costs, by roughly 40% and we’ve shifted the learning model from a 90% formal ILT construct to one that embodies the spirit, passion and vision of Learning 2.0: a formal, informal and social learning paradigm.

We have not cut out formal ILT, but we’ve decided the old model had way too much of it, for low return.

It’s a win-win for everyone, including executives, shareholders, the learning team, vendors and of course the employee population.

I’m certain there are detractors out there, but I’d nonetheless love to hear from you whichever side of the fence you are on.

7Comments

  • Holly MacDonald / 5 April 2010 2:12

    Hi Dan – I am most definitely on your side of the fence, but I think you’ve (we’ve) got more than one problem against you (us):
    1. lack of understanding of the learning applications of technology (and I’m sure you’ve blogged before about training vendors who only know how to sell courses)
    2. general lack of business acumen when it comes to training – many learning leaders are trainers who have worked their way up and may not be so savvy at playing the numbers game
    3. C-suite that does not have faith that their learning leaders can produce results from something unfamiliar
    4. Technology vendors that sell the gee-whiz factor and prey upon people who don’t know a lot about technology and buy something that sounds mainstream (mention facebook and twitter).
    5. Lack of real evidence that bolsters the business case – I do the ROI, and attribute a portion of the change to the learning intervention, but still it isn’t easy to sell.

    I like how you’ve put dollars to your example and I think sharing this with other learning leaders would be helpful.

  • Marty Blow / 6 April 2010 1:05

    It isn’t that training departments aren’t willing to transform from bricks and morter. We are being reduced in numbers within OD so we have less capacity to train face to face, and business is moving faster than anyone can build a participant guide. We also get very excited with the flexibility of social, informal, and web based learning. The business leaders don’t believe or trust that learning happens outside of a formal classroom. (It’s still an old-school world at the top.) That belief is starting to crumble, but change is very slow even when you prove ROI and budget savings. We often lament that if we were vendors instead of internal associates, perhaps they would trust our professional knowledge and judgement.

  • Danielle / 7 April 2010 4:21

    There is a cultural shift that has to happen, as Marty states, there are still skeptics about learning being effective outside of the classroom (i.e. are people really paying attention, are they checking e-mail instead of listening or participating, are they distracted by the sounds around them) the C-level group still believe that you have to be “removed” from your normal environment in order to participate in focused learning. Given that I run customer facing learning, this is even more blatant…people want to travel to a software company’s head quarters to say they have been there, they want to see the offices, they aren’t satisfied with other methods (as much as we want them to be). I also strongly believe that it depends on what you are learning. If you take something such as leadership training, you can gain a lot from meeting with your peers across the organization. I am on your side of the fence too but I think we have to do a better job of defining the pros and cons of bricks and mortar v. social based learning etc. When I look at groups of software engineers, for example, these guys can collaborate and learn from their peers with use base scenarios on social media based learning environments etc…but often when you look at soft skills that peer-to-peer group work is beneficial.
    On the metrics front I totally agree with Holly. We, as learning leaders, have not done a great job of defining these for both internal and external learning…we spend time measuring more of the altruistic pieces of the business…and for the software industry (in my case) it has to be about how training drives user adoption, partner sales adoption, and ultimately better customers who spend more with your company….
    that’s my opinion for the day anyway..

  • Dan Pontefract / 7 April 2010 6:13

    @Holly – could not agree more that there are myriad numbers of learning leaders who rose through the ranks, and are stuck in the ‘bums in seats’ model. Ditto for your technology vendor point. At the end of the day, I think the ROI needs to turn into ROP – return on performance. How can we link the formal-informal-social learning paradigm to actual individual/team/company results and metrics. That’s the sweet spot.

    @Marty – nice point about the misperception of the internal associates not having a credible opinion on the matter. If we hire an external ‘expert’ to prove the case, is that demonstrating ROI? 😉 Ironic I know.

    @Danielle – miss you sista. I’m all for formal learning, don’t get me wrong, I just strongly believe the formal learning (be it for customers, partners or employees) can and should be complimented with the informal and social learning space. Sure, we may reduce the amount of formal learning, but imagine the F-I-S service package you could sell to a customer these days? It would be fabulous (think BOX on steroids) and I truly believe revenues would increase, as would profitability. On the leadership front, sure … it may require ‘more’ formal learning, but that doesn’t stop the learning from happening in other informal and social ways. Think virtual mentors, reading nuggets, short webcasts, 7-minute video trainer, and of course all of the social means in which to carry the dialogue through blogging, micro-blogging, discussion forums, comments, tagging, etc. As always, would love to work with you again. 🙂

  • Danielle / 9 April 2010 11:08

    Couldn’t agree with you more Dano! Would love to see BOX on steriods! If only people could see just how valuable that informal learning really is at the end of the day…

  • Holly MacDonald / 9 April 2010 1:20

    @Dan – ROP for sure – I am a big proponent of the HPT model and find that one of the most challenging discussions I have with clients (same applies when I was internal consultant) is to have them describe the desired performance. Not learning outcomes, but what do they actually want people to DO differently. It makes it easier to measure when you can articulate and recognize it.

    @Danielle – one client I worked with did cusotmer training and they were trying to transition away from classroom dominated – I used the analogy of amazon to help identify how the organization could use push/pull approach to sell alternative types of learning (and help the user learn better because there is more performance support), among other things. Scary to let go of for software company, but in the age of reduced travel, security and carbon reduction, it is a risk mitigation strategy as much as anything. Happy to share what I can. Feel free to contact me if you want more info – holly at sparkandco.ca

  • Bruce / 19 May 2010 10:21

    Couldn’t agree with you more Dano! Would love to see BOX on steriods! If only people could see just how valuable that informal learning really is at the end of the day…

Want to leave a comment? I'd love to hear from you. Cheers, dp.