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TOOL Training Budgets 101

The bottom line on training budgets: work to ensure you're funding the right efforts to keep your company competitive and get it to its future goals.

November 1, 1998
There’s a general guideline about budgets: True learning organizations will spend between 3 percent and 6 percent of their payroll on training. Although the American Society for Training and Development (ASTD) doesn’t have a formal position on budgets, the Washington, D.C.-based National Association of Manufacturers does—it recently said firms should spend 3 percent of payroll on training.

While ASTD remains mum as far as advocating a budget number, Laurie Bassi, vice president for research at the Alexandria, Virginia-based firm, says ASTD studies confirm companies that spend 3 percent of payroll on training do achieve exemplary financial results (she adds, however, that companies making such a commitment to training usually combine that training with smart HR policies in general).

But it’s not just having a big budget that ensures big results. You have to be smart about what you budget for and why. If your company isn’t quite at the lauded 3 percent, don’t beat yourself up—the actual average is .9 percent, according to ASTD. Throwing money at training won’t ensure employee excellence. More importantly, some companies and functions simply don’t need as much money for training as others.

Big budgets don’t ensure big results.
To determine a training budget, says Kevin Wheeler, head of consulting firm Global Learning Resources in Freemont, California, first consider the type of company you are. Learning organizations require more diverse, intense and ongoing training efforts than will manufacturing firms that require workers to have a narrow expertise. Also consider who you’re hiring, says Wheeler. Companies that promote from within generally are going to need bigger training budgets than those that prefer hiring candidates who already have the necessary skills.

While these considerations help you get an idea of the size of budget you need, the most crucial aspect of putting a price tag on training will be the type of training you want to do. A good starting place is identifying the core skills most employees must have to work at your company. Kathy Leck, executive director of LEAP—Leadership Education Advancing Performance—at the Lake Forest Graduate School of Management in Illinois says, "Some skills need updating constantly. The dollars should be parallel to how intense competition is for your company. So the question is: How much would you lose if your people stay at the status quo? That’s the question I ask [companies], rather than [asking about] their economics."

If you’re primarily a customer-service company, for instance, everyone should go through customer-service training, even if some employees aren’t likely to have direct customer contact. "Other than those cores, training will probably have to be worked out, if not on an employee-by-employee basis, then by a department basis," Leck says. With this decentralized budget model, you can cover the core training in your budget, and if departments want more, they can choose to spend it.

Laraine Mancuso, head of training and development for Reliance National Insurance in New York City, has a similar approach to budgeting. One chunk of the training budget is hers to spend as she identifies the company’s needs. But most of the training she does comes at the request of departments on a charge-back basis. Mancuso likes this approach because she can decide what training she wants to offer, and also stay involved with each department.

Develop a budget strategy.
However you divvy the pot, be strategic. ACCO World Corp., a school and office product manufacturer in Lincolnshire, Illinois, has a zero-base budget, in which each item is justified on the basis of cost or need. The learning-and-development department is a key function of HR and carries its own budget line. Two questions arise in justifying any training: Does it support overall HR, and does it support the company’s strategy of learning and development for the coming year?

Valeria Stokes, vice president of learning and development, submits her budget, then negotiates each item with HR. Although her function is considered overhead on the budget, Stokes also tries to generate money. She leases space in her classroom each week. And grant money she receives from the government for subsidized programs, such as retraining the workforce, is counted as income. So although her budget remains zero-base—similar to a nonprofit model—she brings some revenue in. "We’re not necessarily a profit center, but a center that covers its own costs," explains Stokes.

The George Group Inc., a consulting organization in Dallas, also starts with the company’s business strategy to determine where training money goes. The company regularly draws a skill profile of its consultants, and matches the profiles with skills the company will need in the future. This helps it draw a skills gap, so it knows where to put training money. "You can take a group and draw a map of the skills you want. Then you draw a map of the skills you have and it shows you in what areas those people have to develop," says Max Isaac, skill-center vice president.

The Forum Corp., based in Boston, recently helped a banking company move toward a more strategic training budget. Before, all regions held onto their own slice of the pie, whether they needed it or not. Training’s impact under this model was low, and the budget wasn’t being used to move the company forward as a whole. In the new model, the regions put all the current budgets on the table, and the company presents where it needs to go in the next year. "Looking at it that way, the decision makers can decide how to line up all that money to have impact on the major priorities—and still keep some funds for things that have to be done locally," says Sarene Byrne, Forum Corp. executive vice president.

A business-strategy approach also helps safeguard your training budget from being cut, says Wheeler. He suggests taking the actual business strategies for the company and attaching the training necessary to achieve each strategy, along with your projected cost. That way, you’re not making a plea for a block of money. Instead, you’re presenting the training that has to be done for the company to get where it needs to go.

The bottom line on budgets: Don’t worry about keeping up with the Joneses on a monetary level—don’t fret over percentages. Work to ensure you’re funding the right efforts to keep your company competitive and get it to its future goals.

Workforce, November 1998, Vol. 77, No. 11, pp. 91-92.