Would you spend $1,000 to ensure $60,000 revenue? Even the most risk adverse would likely say yes, yet when the question is posed, “Can we spend or even budget $1000 per person on training” the answer is often no.
Training is notoriously the item that ends up on the chopping block each budget cycle or if it makes it through, the item that is used as the “cushion” if revenue isn’t coming in as expected. Ironically the lack of spending on training and investing to protect the most expensive line item on a professional services P&L (hint your people/labor costs) is resulting in reduced revenue and employee turnover – which is driving additional cost to the bottom line.
Training Has Direct Impact on Revenue
Employees are the life blood of a Professional Services organization, if you don’t have people you don’t have a product from which to generate revenue. Product companies have entire departments devoted to the research and development of their tangible product, but the product of people is often underfunded and overlooked. Training is sometimes relegated to “on the job training” – euphemism for “figure it out as you go” or training becomes the responsibility of the employee, conducted in their spare time or off hours. While these might result in short term savings for the organization, the long term loss of revenue and increase in cost doesn’t justify the short term gain. Professional Services companies, whose entire business is people are often no better, pushing professional development to the side in favor of billable work.
In the short term, not budgeting for training or not even spending the budget for training is a very tangible cost savings and can bring a lift to the top line – for example, keeping a consultant in the field generates revenue. In the long run it may cost the business in lost revenue due to attrition of top performers, lower utilization as people don’t keep up with the latest skills, and reduce customer satisfaction as the result of turn over or less skilled resources. Training is an investment in the development of your product, people, ignoring that investment causes the people product to become stale, outdated and ineffective for the customer base.
ROI of Training Your Team
Let’s look at an example of a senior business analyst who is making $100,000 a year. Ideally a company would invest at least, on average, $1,000 a year and 40 hours of training for each employee (yearly amounts will vary based on employee needs and career goals, but $1000 is a good average for budgeting). Let’s assume this employee is billing at $175 an hour and is getting a 75% utilization or approximately a 50% project margin on this resource. Compare that to replacing the same employee with a new hire (at the same salary, rate and final utilization number) if the current employee left over the lack of opportunities*. Six months after their start date they begin generating an 11% project margin and at about 50% topline revenue of the employee who left. At twelve months the new hire is still only at a 34% project margin and is generating 30% less revenue. It wouldn’t be until year 2 that the new hire has caught up with the original employee. Expand this example to a workforce of 100 with a historical attrition rate of 10%. If the company is able to prevent just 3 people from leaving in a year, by investing $1000 in each of them for training, the company would be able to protect ~$170K of top line revenue and reduce their attrition to 7%.
Investing in people is imperative to the health of an organization. In the long run, not investing can actually be more costly for the organization. Companies wouldn’t stop investing in a product and expect to be successful, the same needs to be true for the product of people.
*per employeetraining.org one of the reasons for employee turnover is job dissatisfaction which springs from the inability of management to provide growth opportunities for individuals in terms of the personal and professional aspect