Measuring the Impact of Training and Development on SMEs (Working Paper)
Ali Sajjadi
Senior Lecturer in School of Human Resource Management and Organisational Behaviour
Leeds Beckett University
Email:
Dr Julia Claxton
Principal Lecturer in School of Human Resource Management and Organisational Behaviour
Leeds Beckett University
Abstract:
This is a working paper based on an ongoing PhD study. This research will investigate the statistical relationship between the training and development variables (including: the existence of training and development strategy, the average amount of money spent on Training and Development per person per year, type of training programs used in different sectors, etc.) and SMEs’ financial success variables (including: profitability, Sales, Earnings per share, Return on assets, etc.)
This research will use a mixed method. Quantitative research will be done by using a broad survey (sent to 600 SMEs) to collect the information about Training and Development and its related variables in those companies. Then the collected data will be matched and compared with some financial information from the same companies which are collected from the FAME data base. Statistical correlation will be investigated by using SPSS software. At the second part of this research qualitative method will be used to collect some descriptive data by using 10 interviews with those companies who are willing to participate more in this research. Results will be used for triangulation and revalidation of the finding from quantitative part.
Since this research is at the data collection stage at the moment, the current paper is more a literature review paper which is looking at the research background and the critical gap in the body of knowledge in this area.
According to the research plan collected data will be available to be presented in the UFHRD conference in June.
Introduction
From the middle of twentieth century until now many attempts have been made to measure the impact of Training and Development activities. There has been always this issue that most of the attempts have been conducted to measure the impact of specific interventions like a snapshot at only a single point in time (CIPD fact sheet 2010). So it was always difficult to find an overall view of the long term impacts of training and development policies in the organisations. The other challenge is that there are different levels of impacts for each intervention and lots of the models are getting stocked in the early layers and they are not able to make a holistic view of the whole impact of training and development policies in the organisations. According to CIPD L&D survey (2011) 41% of organisations are evaluating the impact of their Learning and Development activities through feedback from employees involved in the initiatives. 40% are evaluating the impact of their programmes through feedback from line managers, 35% through the anecdotal observation of change and only 28% have a formal annual evaluation process at an organisation-wide level.
Sometimes, the evaluation process is avoided because it is considered as an expensive and time consuming process (Buckley and Caple, 1991). At other times, the reason is the lack of right measurement system for determining the impact of those activities (Sole and Mirabet, 1997).
“one in six organisations report that they do not evaluate learning. Evaluations are most likely to occur in larger organisations with a specific training budget.”
CIPD survey (2011)
Getting the market more competitive the demands for ability to measure the financial impacts of Training and Development activities have increased. Most of the decision makers want to know if by spending a lot of money on these activities they could expect more profitability in their organisation or not.
“By the mid 1980s calls began to emerge for return on investment (ROI) analyses of T&D efforts.”(CIPD fact sheet 2010). But these efforts have been facing some serious limitation as well. For example it is always difficult to convert the impact of those interventions to monetary value. Sometimes it is easy to calculate the value of those changes which are made as the result of our training programmes, especially in the manufacturing industries which any performance improvement is usually equal with more production. But for example in service sector it is more difficult to convert the performance improvement to monetary value and find a general figure of organisational success. The other unsolved challenge is to isolate the impact of training and development activities from other influences. It is almost impossible to isolate the impact of all other influences from the impact of the Training and Development strategies because in the real world there are lots of affecting factors which are surrounding the organisation and its employees and as a result the outcomes of the ROI models or other evaluation methods could not be very reliable.
“Unfortunately, it seems that a sort of holistic study – that is, comparing what actually helps to raise performance rather than beginning with an assumption that training is the answer – has not been repeated seriously.”
(CIPD fact sheet 2010)
So still this question is remaining for the managers that how important is the role of Training and Development interventions and do we need to spent vast amount of money on these interventions in the recession time or these are some kind of luxury expenses which we could cut them to help the financial situation of our organisation. When the development activities are not well evaluated, the investment and its effects cannot be tested and resources can be wasted in inadequate activities (Gomez et al., 1996; Foot and Hook, 1996).
This issue is more serious about the Small Medium Business. There are some efforts to analyse the impact of T&D practices in large organisation but Small Medium Business are ignored in most of these researches. Small and medium size companies are 99% of all the European companies and they are providing 66% of all the job positions in the Europe (ECSB Newsletter). So their contribution to employment growth is extensively recognisable. Despite the important role of these companies in today’s job market there has not been enough attention to their T&D strategies. Most of these companies do not have a HRM department and they are managing their personnel based on their personal styles.
The other fact about these small, medium size businesses is about their high failure rate. Data from the U.S. Census Bureau’s Business Information Tracking Series shows that from those businesses which started between 1990 and 1992 in United State 34% did not survive within the first two years, 50% did not survive within four years, and 60% did not survive within six years. So it seems that these companies are more vulnerable and they need more managerial attention to be able to improve their chance of survival.
Based on all the above mentioned and because in the current economic climate it is more important than ever to be able to prove the value of T&D activities, this holistic research intend to do a broad survey in a national scale on the SMEs to identify the possible relationship between the T&D interventions and financial success variables to help managers to find out which kind of T&D interventions are more likely to help them to improve their chance of survival.
T&D variables: training characteristics, development strategies, learning and development budget, external development options such as external conferences, workshops and events and formal education courses, internal development programmes such as job rotation, secondments, shadowing, coaching and mentoring.
Financial performance variables such as: profitability, Sales, Earnings per share, Return on assets, etc.
Contingency factors which are going to be considered about the SMEs in this research: business strategy, organisational structure, perceived environmental uncertainty, intensity of competition, organisation size, sector and etc.
The main concern of this research is to identify whether T&D practices and SMEs Performance are significantly linked together in different contexts or not? And if yes, which T&D strategies would cause more impacts on financial success in different contexts?
This research is not focusing on evaluating the impact of one T&D intervention in one occasion; it is trying to evaluate the impact of ongoing learning process on the organisational success.
Aim of the Study:
The aim of this study is to understand the relationship between T&D interventions and SMEs financial success variables. By understanding these relationships we could identify to which extend the T&D methods are going to affect the SMEs success in different contexts.
Research Questions:
1- Could it be proven that well chosen T&D Methods in the SMEs will play a considerable role in their business success?
2- To which extend the growth rate is depended on T&D policies in SMEs?
3- Does the impact of different formal and informal T&D interventions depend on the organisational sector and its contingency factors and what are the most effective T&D strategies in each sector?
4- What measures and indicators do SMEs use to assess the impact of their formal and informal T&D interventions and does this vary by organisational sector?
5- Could it be possible to make a guideline for the managers to design their T&D policies based on their organisational context and contingency factors to get the most out of their T&D activities regarding their organisational success?
Research Objectives:
1- To identify if there is a considerable impact of T&D interventions on the SMEs financial success.
2- To identify the extent to which the SMEs financial success is dependent to their T&D practices.
3- To discover the possible correlation between T&D interventions and the SMEs performance within different contexts.
4- To provide a guideline for Human Resource practitioner to choose the right T&D strategies considering their sector and organisational contingency factors.
Research Hypothesis:
1- T&D activities will have positive impact on SMEs financial success.
2- SMEs with higher investment in T&D will obtain better profitability and effectiveness level in compare to similar companies with lower investments.
3- Business owners approach toward their Training and Development has a direct effect on business success.
4- Informal learning and development activities are more effective in improving the business results of small companies in compare to formal T&D activities.
5- Investment on T&D programmes will have delayed returns over a long period of time.
Literature Review
It has been always important for the organisations to well manage their human resources. However this importance is sometimes neglected in the Small Medium Enterprises (SMEs) (Storey, 2007).
Based on small firm statistic from DTI research in the UK (1998) more than 9,418,000 people are working in small firms with less than 50 employees, 2,544,000 people are working in medium size companies with less than 250 employees and 9,112,000 people are working in large companies with more than 250 employees. Although Small Medium Enterprises are providing more jobs in the society in compare to large organisations their investment in training programme is considerably less than large organisations. According to Cambridge Business Research Centre (1998) only 41% of people who are working in the small businesses with less than 50 employees are going to external training courses and most of these people are the business managers not the normal employees. This ratio is 57% for companies with 50 to 100 employees, 66% for companies with 100 to 250 employees and 81% for companies with more than 250 employees. Although the external training courses are not necessarily the most effective method of training they are obviously one of the most costly methods and these statistics are proving that Small Medium Enterprises are significantly investing less money in their human resources in compare to large organisations. This issue will become more severe when we realise that those small firms which are investing less in their human resources have got considerably higher failure rate in compare to the bigger firms.
Failure rate of UK SMEs 1990-5
Employment size / Death rate0 – 49 / 29.8
50 – 99 / 24.3
100 – 200 / 16.5
200 - 500 / 18.3
Source: Centre for Business Research
Westhead and Storey (1997) have concluded that employees in small organisations have less chance for training opportunities in compare to people in large organisations. They have provided two explanations for this situation; the first one is “Ignorance” which is saying business owners are not aware of the impact of Human Resource Development (T&D) programmes on their business results and they do not believe in the benefits of these investments.
The other explanation is “Market Forces” which is saying that business owners of SMEs are not providing enough development opportunities for their employees because they believe that the costs of these activities are more than their returns and they have some other priorities to consider to be able to survive in the market. According to CIPD L&D survey (2011) resources and funds available for learning and development in the past 12 months have decreased for two fifths of organisations.
A well trained human resource is always known as a crucial element to maintain the competitive advantage of organisations in the global market. Also it is acknowledged that T&D is able to play an important role in organisational growth and consequently in increased profitability (Cosh, Duncan and Hugh, 1998). However most of these researches have evaluated the impact of T&D activities on large organisations and the relationship between T&D interventions and business results in SMEs is not very clear yet.
The main argument in the related literature is to answer whether there is a significant positive impact from T&D programmes on the business results of small firms or not. Some researchers have identified the positive correlation between T&D interventions and SMEs success factors whereas some other are saying that there is not a significant link between T&D activities and business success in SMEs.
Patterson et al. (1997) in a study of sixty seven small manufacturing companies in the UK identified that 19% of changes in the profit rate of these companies was because of HRM practices and specially because of two main factors of HRM activities which are innovation and strategy. Another research by Cosh et al. (2000) investigates the relationship between training activities and employment growth in small firms. This research has identified a positive relationship between training activities and employment growth especially when those activities are surrounded by some other HR solutions such as job rotation, quality circles, performance related payment system and total quality management. In another study of medium size companies in the UK Storey (2002) found that there is no direct link between training programmes and companies performance. However he found that there is a positive relation between the bundles of attitude toward Human Resources and practices of HRM from one side and the level of organisational performance from the other side.