Bridging the Skills Gap: A Bold New Approach to Workforce Investment
We’ve identified three models to help companies rethink how they invest in reskilling and upskilling, and how they treat this investment during the accounting process.
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Unfortunately, despite acknowledging the need to embrace constant, profound workforce transformation—and the hidden costs of nearly constant talent recruitment to meet skills needs—many companies are still reluctant to make meaningful investments in reskilling or upskilling (re-/upskilling).
What if there was a better way?
The reality is that few companies set aside money specifically for re-/upskilling. Those that make investments do so using an unsystematic approach. Without meaningful, multi-year commitments to training, employers find themselves in a vicious and expensive cycle of firing and hiring to find the people with the right skills.
Severance and the Costs of Separation
Just how high are the direct costs of the firing and hiring approach to workforce transformation?
Severance costs will always vary by geography and sector, as different laws and rules apply to different groups of workers. However, Lee Hecht Harrison (LHH), the world’s largest provider of outplacement services, has estimated global severance costs to be more than US$600 billion. That is probably a very conservative estimate, given that it does not account for the added expenses of finding new people to take on new roles.
“CEOs don't always care about the cost of severance because they can take it below the bottom line,” said Hans Ploos van Amstel, CFO of The Adecco Group. “Management can position lay-offs as a reorganization or restructuring, reporting costs as an exceptional item. But when you get right down to it, these are workforce costs that do nothing to help you actually transform the workforce.”
The fire-and-hire trend also drives costs in other, less visible ways. For example, there is the growing use of “boomerang employees”—people who are laid off then rehired for a different job by the same company. In many organizations, between 15 and 25 percent of laid-off employees will be rehired at some point following a termination. This means that companies pay enormous sums in severance and outplacement support to people who ultimately return to the same organizations.
The solution to this dilemma involves shifting the focus of workforce transformation expenditures from “fire-and-hire” to employee re-/upskilling.
Our experience working directly with organizations in the throes of a workforce transformation shows very clearly that most would realize substantial bottom-line savings simply by re-/upskilling existing employees. In essence, re-/upskilling eliminates the need to displace employees.
Still, there are obstacles that prevent many employers from seeing the value of a re-/upskilling strategy.
Quantifying the Long-Term Value of Human Capital Investments
Most organizations that have dabbled in training know that it is nearly impossible within traditional financial reporting (IFRS, US GAAP) to fairly reflect the long-term value of human capital investments. Conventional accounting models record training investments as a sunk cost rather than an asset. Complicating matters, far too few tax incentives are available to offset this accounting disadvantage.
Combined, these current rules and standards form a powerful disincentive to any organization contemplating a significant re-/upskilling investment. Unable to estimate the value that human capital investments have on current and future returns, there is no way to justify these costs to owners or shareholders.
It has become clear that different models of investment, some that involve changes to accounting practices or legal frameworks, could help many companies get beyond this intrinsic disincentive and reclassify re-/upskilling costs as an investment rather than a sunk cost. This would help employers change the way human capital investments are capitalized over the long term.
LHH and The Adecco Group identified three models for re-/upskilling investment that all offer possible solutions to this dilemma.
All three models would require differing degrees of changes to accounting rules or government legislation and policy. There may also need to be changes to training-related tax incentives currently being used by some governments to encourage companies to increase their investments in re-/upskilling.
Under most existing incentive programs, businesses record training costs as a business expense. But training-related tax credits are only reported in the tax line, making them much less visible. Furthermore, companies that do not pay corporate income tax are unable to claim the same incentives.
Many companies may find the need to change accounting rules, laws or tax policy too burdensome. The potential benefits are so significant, however, that many employers should at least start discussing a new context for re-/upskilling investments.
Model 1: Employee Training Fund
In this model, employers would set up a separate fund exclusively to cover the costs of re-/upskilling. The fund would include contributions from the employer and, potentially, the employee. All contributions by the employer could be recorded as an investment and amortized based on the difference between total contributions and the year-end value of the fund, including interest from investments.
However, this model would require amendments to current accounting rules. Training is not currently recognized as an asset and may require legislation to make it acceptable.
Model 2: Employability Account
In this strategy, businesses would provide funds for an individual, transferrable training account for each employee to finance future re-/upskilling programs. The funds provided by the employer would be calculated as a percentage of salary costs and topped up based on years of service. There are no changes to accounting practices in this approach.
The cost of a fund like this would be offset by the fact that far fewer employees would need to be laid off, allowing the company to realize significant savings in severance and transition costs. For this model to achieve its full potential, however, it may need to be part of a government-led, nationwide initiative, with rules for a minimum investment by companies to participate.
Model 3: Long-Term Amortization
In this scenario, employers pay upfront for re-/upskilling. In return, employees agree to stay with the company for a prescribed period of time; if they leave before that prescribed time, they would repay some of the advanced training funds. This approach allows the initial costs to be capitalized as an asset and amortized over the benefit period. If the employee leaves the company, the unamortized balance would be repaid.
This model is easily scalable and relatively easy to adapt to existing accounting rules. In some jurisdictions, however, this kind of approach may face legal challenges or even have tax disadvantages depending on existing incentive rules.
Which Option is Best for Your Organization?
The global skills shortage and the billions of dollars now being spent on potentially unnecessary severance and recruitment are realities that no country or company can escape. With this in mind, companies and, crucially, lawmakers, have an obligation to begin a discussion aimed at empowering workers with value-adding skills and thereby reducing their exposure to unemployment.
It is no longer sufficient to rely on industry sentiment to lead a change in corporate culture at the level of the individual entity; government legislators must work with business leaders to find training investment frameworks that both support the rights of the worker and protect the future viability of high-value, high-employment industries.
Accounting rules are a key part of the solution. If training could be reported as an investment in an asset, rather than an expense, it would allow companies to treat it as a capital cost. This would change the entire profile of re-/upskilling from a corporate perspective. However, there is no getting away from the fact that changing accounting rules is a very steep hill to climb.
Those organizations that recognize the value of investments in re-/upskilling need to engage lawmakers to consider a wide range of amendments to legal and financial rules, including:
- Companies need to issue a direct appeal to accounting standard-setting bodies for change in the way human capital investments are recorded.
- Companies should engage in an appeal to both the public and political leaders to emphasize the societal benefits of human capital investments. This would include addressing aging workforce populations and the global shortage of new skills. Companies should motivate peers to push for similar change and statements.
- At the urging of companies, lawmakers must review the existing array of tax incentives to see if they can be used to support options like value-added employability funds. They should look to similar programs, like those in France and those proposed in the U.S., as a mechanism to reduce national unemployment and increase productivity.
- Business leaders must become more forward-looking and actively sponsor creative solutions to promote greater investments in training and mitigating associated risks.
A never-ending cycle of firing and hiring is simply not sustainable. Business transformation will always require a certain degree of workforce turnover. But it is simply not necessary to rely solely on the open labor market to acquire new skills and capacities. New skillsets can be cultivated among an existing group of employees if an employer has the patience and maturity to take a step back and consider the possibilities.
Re-/upskilling allows for more effective redeployment of existing human resources. It creates an opportunity to not only cut down dramatically on severance and separation costs, but also forge a more potent employer brand that will help in attracting new talent when it is absolutely necessary.
Changes to the ways in which we record re-/upskilling investment would be a game changer, of that there is no doubt. But there are still ways to change the game even without a new accounting context. All that we require is a commitment to a better way.
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