The word “cost” makes the hair on the back of most peoples’ necks stand up. Unfortunately, cost carries a perceived negative connotation of loss and implies a significant reduction or change. Even so, when assessing and applying cost, it can also open opportunities for learning and development (L&D).
For most organizations, the learning function is perceived as a cost center. However, finance, marketing, production, information technology (IT) and human resources (HR) are also cost centers, and – like learning – they add value to the business. Consider rephrasing, “What will this cost?” as, “What value will this add?” Cost always implies contribution and added value to business objectives.
Costs are front and center, because employee training and development places exceptional demands on organizational resources. Furthermore, the learning function is under pressure to demonstrate how learning costs lead to sustainable value. The learning function is no longer just about training; it is about competency in business, financial literacy and operational processes.
The first step is identifying the purpose for your learning efforts. Your answer is probably not what stakeholders want to hear. Respect their intent, complexity of the need and the nuances stakeholders expect from a substantive response.
What your stakeholders are looking for in your answer involves a combination of:
- Actual costs for learning activities.
- Support costs for learning infrastructure.
- Forecast financial expectations.
Actual Cost of Learning
Stakeholders want accountability when asking, “What’s this going to cost us?” Decision-makers are educated to assess cost in two ways: short-term and long-term value. Both types of costs deliver value but are accountable to the business for value in different ways.
First, “cost” defines both actual cost and associated expenses. Expense is a cost, but costs are never expenses. This distinction applies across all industries and business functions. For learning, the delineation is between costing for the training activity, an expense because of its immediacy, and the “costs” to acquire learning infrastructure, categorized as an investment for the long-term benefits it is expected to deliver for the learning effort.
You don’t have to know how to delineate between each, but you should respect why stakeholders do. It will allow you to better define the value of your learning efforts. If you are delivering training – instructor-led, eLearning or otherwise – it is probably a short-term expense. If you require items, such as a learning management system (LMS), chances are it is an investment to support learning over time.
Cost of Learning Activities
Why is the actual training activity an expense? For one, it is usually executed within a set time period, then it is complete. Moreover, there is no tangible outcome from the activity itself.
The intangibility applies to similar expenses, such as marketing. Like learning, marketing is an expense for the moment. For example, a Superbowl advertisement is an expense, and there is no tangible way to correlate it to actual sales. It would be irresponsible to state the ad was the sole reason for a subsequent increase in sales. However, tracking the ad, by applying a promo code or digital cookies in an algorithm, would help prove its impact.
Say you designed and deployed an on-demand eLearning course for manufacturing employees. They complete it, and the production manager sees a product output increase in in the following weeks. Would it be responsible for learning to take full credit? Are there other factors at play? Like the Superbowl ad, it is probable the eLearning contributed to the increase. This is usually where L&D professionals get into trouble – claiming full credit with no tangible evidence. What if there was a way to measure the positive contribution training delivers?
Luckily, there is. However, it requires an understanding of the operational processes in question, the performance expectations stakeholders must achieve and the cost versus the benefit of pursuing a learning intervention.
Learning professionals often develop learning solutions prior to evaluating and addressing the actual issue. This leads to ineffective interventions and further erodes value. You must first understand the process to diagnose the need. By evaluating and targeting the issue, you may discover that training is not the solution at all. Either way, you will demonstrate value.
Learning value is about improving performance and defending its cost. Identifying performance expectations allows learning leaders to identify key performance indicators (KPIs). KPIs are evidence of how well your learning efforts contribute to improving operational performance.
You cannot avoid the question of cost. Acceptance or rejection lies in the value learning will deliver – not the cost itself. Stakeholders refer to this as a cost-benefit analysis. Since the learning activity is an event or occurrence, the cost or expense must demonstrate measurable value.
Many learning leaders fail to recognize the complexity of delivering an effective learning initiative. While most focus on expected results, stakeholders preoccupy themselves with cost decisions and the sustainable value the organization can expect. Learning professionals will need to create structure between cost estimates for learning and costs for supporting long-term learning effectiveness.
Cost of Supporting Learning
Learning professionals believe that purchasing learning infrastructure technologies is simply about getting stakeholder approval. However, stakeholders consider learning infrastructure support purchases an organizational investment.
The word “investment” translates to an indirect contributed value over an extended period of time, typically multiple years. An LMS request, for example, is the same as purchasing production equipment, a building or data server. Its intent is to deliver return through long-term operational value.
The response is more involved when stakeholders ask, “What will this cost?” Any capital investment directly impacting cash flow requires financial literacy and profitability analysis. No one expects you to be a financial expert, but stakeholders do expect you to enlist support from those who are.
Estimating costs for a learning investment requires accounts for the initial cost, as well as ongoing costs over time. The investment must demonstrate how it will contribute to the organization’s financial growth. For learning investments, indirect contribution is about improvements in productivity, efficiency and performance, and improvements are measurable to the extent they correlate to financial results.
From a stakeholder perspective, consider the benefits gained from having, let’s say, an LMS. Making the business case for an asset purchase must show how it will contribute to improving operations. For the LMS, the business case is not “managing employee learning.” Instead, the justification is, “helping track and address employee knowledge skills gaps and develop them to become more productive and efficient in their roles. This will translate into a cost savings of X%.” Suffice to say, your objective is demonstrating cost-benefit value for the LMS through results they expect.
Simply put, every investment or long-term asset a company acquires is meant to contribute, direct or indirectly, to improving cash flow. It must lead to improved profitability since the asset costs the business. This is what stakeholders refer to as return on investment (ROI) and applying a variety of cost-benefit methodologies to arrive at an ROI for the proposed asset purchase.
Forecast and Budget for the Learning Function
Learning professionals must acknowledge the learning function is a business activity. It is an internal business with a responsibility to deliver value for internal clients and the organization as a whole.
Like other support cost centers, learning revenue is largely dependent on budget allocations from profit centers. Learning must budget accordingly and account for its expenditures. L&D professionals must engage with stakeholders to forecast organizational growth. It provides an opportunity to appropriately budget and invest to meet operational performance expectations.
This requires addressing two financial aspects: the cost of supporting learning and its ability to meet internal client requirements.
Like any business, budgeting for the learning function involves itemizing costs essential for effective operation. This involves everything from HR needs to technology support for specific tools. These are fixed costs required to operate the learning department and are not transferrable to internal learning requirements. It accounts for current needs but also forecasts for future growth.
Like every other support function, the learning department typically receives revenue from their internal clients’ budget allocation. Unlike profit-focused areas, learning performs like a nonprofit, delivering financial accountability and performance value for their learners.
These two elements guide your learning offering and how much it will cost your internal client. Involve your finance and IT departments in the development of your operational budget. When it comes to developing learning initiative, cost the initiative by identifying the direct costs to learners’ various business functions. Remember, the client is paying for the training activity, not for items you wish to buy as part of the activity.
Back to Basics
Estimating costs for learning is an intentional, detailed and essential process required to build credibility with stakeholders. Learning professionals will claim this isn’t what they were hired to do, but – to be part of the business and to be taken seriously – you don’t have a choice.
Learning value, as with any other operational endeavor, is what you must demonstrate to stakeholders. However, learning value is never about what employees learn; it is about ensuring that performance expectations exceed the cost of developing and executing the effort.
It doesn’t matter whether you’re an instructional designer, an eLearning technologist or a trainer. Every learning role and what they contribute to improving operations is a cost to the business. Account for your costs, and demonstrate performance and business value to every stakeholder. This will build learning value and establish stakeholder credibility.