Returns on investment in training: Research at a glance

The series 'research at a glance' is produced by the National Centre for Vocational Education Research (NCVER) to disseminate, in an easily accessible format, the findings and outcomes of research in vocational education and training (VET). It identifies the policy implications of the research and how those findings might be applied in the VET sector. It is hoped it will be an aid to both policy-makers and practitioners, providing information to improve the VET sector.

Returns on investment in training

A new body of research has just been completed on the returns on investment (ROI) in training in Australia. Prior to this research effort, little empirical research had been undertaken on the returns to training in Australia, and it was unclear if international evidence on ROI in training could be applied to Australian firms.This research at a glance synthesises the findings of the recent Australian research.

Summary of key issues emerging from the research

Until recently, the evidence for returns to investments in training by Australian firms was poor.This is because many firms do not carry out systematic evaluations of their training and even fewer attempt to calculate the returns to their investments. However, the recent Australian research changes this situation.The results from this work provide a solid body of evidence that across a range of sectors training investments can yield very high levels of returns for firms. The research has highlighted a number of important factors about returns to training.

• Returns to training investments are nearly always positive and can be very high.

Many of the researchers examined case studies of individual firms and found that returns on particular training programs can be very high.The rates of return depend neither on firm size nor the industry in which the firm is located but on the nature of the training program and its relevance to the business needs of the firm.

• Returns can come in many forms.

The returns to training investments are not always in the form of increases in labour productivity or profitability which have been the usual variables that researchers in this area have been concerned to measure. Returns may come in the form of higher levels of value-added activities as a result of greater levels of employee skills, increased flexibility amongst employees who can perform a range of tasks, reduced overhead costs to the firm (such as more efficient use of existing facilities) and greater ability to innovate in terms of adopting new technology and introducing better forms of work organisation.This means that firms need to be aware of the range of ways in which returns to training investments might be realised and develop means of measuring these.

• The immediate returns to training are highest when the training is highly focussed.

Training needs to be focussed on a clearly identified business problem.The more focussed the training on the actual needs of the business, the higher the returns that the firm will experience from its investments in training.Training also yields higher returns when it is linked to innovation, particularly technological change.

• Measuring returns is not always an easy task.

Although much of the data needed to analyse returns are available within firms, there are a number of methodological traps for the unwary that need to be taken into account when doing this work. Returns are also easier to calculate in some industries than in others; studies of service industries with their intangible products can pose particular problems.

• Training acts as a support mechanism for other changes in firms.

The research shows that training does not act alone to improve the performance of firms.The importance of training lies in the fact that it allows firms to introduce change more successfully. Thus firms experience considerable productivity benefits from the introduction of new technologies. But they may not realise those benefits fully unless employees have been properly trained to operate and maintain the new equipment. Similarly with other forms of innovation. Training pays its highest dividend to firms when it is linked to 'bundles' of other innovative practices such as new ways of working and new forms of organisational structure.

• Returns to training can be enhanced by other human resource policies in the firm.

Human resource practices that encourage staff to remain with the firm after training can enhance returns to training.Typical practices include promoting staff from within rather than external recruitment and the development of broad skills sets amongst employees such as leadership, team-building and other generic skills.