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Develop or dismiss: balancing costs and benefits

Opinion New! Written by John Berry on 6th October 2017. Reading time: 4 minutes

Balance with gold and silver ballsWhilst the argument in favour of developing staff is strong, it’s not universally accepted. As this article shows, the argument rests on the various costs and benefits and ultimately on the ability of staff to ‘make the grade’.

Both sides of the argument must be considered.

The duality of technology and humans

Most managers agree that the environment in which a firm exists is changing. That applies to every firm, in every industry sector and market segment. The only disagreement might be the speed of that change and its direction.

Advancing technology enables firms to enjoy greater capability and productivity. On the one hand this threatens to de-skill and on the other, demands huge skill increase as it amplifies human knowledge and intelligence to achieve greater capability. Technology therefore fuels increased competitive advantage for those who embrace it.

Technology is not the whole story. Tech and humans exist in a duality – though the ratio of one to the other is changing at differing rates between firms. Competitive advantage therefore also comes from the skills and competencies of staff. Certainly in knowledge-intense businesses and in personal services activities, the firm’s capability is unlikely to be wholly satisfied by machines any time soon.

The most successful in the coming years will be those firms that are able to dynamically match market need with organisational capability as their market need changes.

To understand what’s needed in your own firm, you need to be able to determine market need and from the need, determine the capability you’ll put in place.

Building capability

Capability comprises technology function and human reasoning ability, personality, competence and behaviour. Reasoning ability and personality are substantially fixed for all but the youngest employees. But competence and behaviour can be changed in everyone. Other attributes like confidence can also be changed by learning from experience – so there’s much to do.

To progress, managers must determine the competencies and behaviours required in each job and also from each jobholder. Then, determine whether it’s right to develop the people depends on three things: learning gap, timescale and cost.

Firstly, the learning gap, demands that an assessment is made on current competencies and behaviours and that this is compared to what’s needed. Secondly, adding the timescale for change then allows a budget to be prepared. A short timescale might swing the cost-benefit balance toward dismissing existing staff and hiring new with those new competencies and behaviours. And the various learning gaps might tell whether or not certain people will make the grade.

Finally, the cost-benefit analysis needs to be done company-wide.

So let’s look now at what you might discover.

Example case

Let’s assume that the employee is on a salary of £35k. That generally means a total cost to the firm of employing that person of around £60k.

Let’s assume that the employee is lawyer. They have good knowledge – but critically they don’t have unique competencies and behaviours when compared with others in the labour market. The learning gap is modest – simply requiring continuous development to keep up with change in the law and to develop their methods. Let’s assume a cost for development of £5k per annum. Assuming that they are on a month’s notice and have five years’ service, this then sets the scene.

Because the lawyer is not unique and the learning gap is modest, it could be possible to hire a new employee with better skills. The cost to dismiss and re-hire would be around £11k ignoring management time[1]. Assuming that the lawyer can bridge the learning gap year-on-year, the balance is £5k versus £11k – clearly in favour of development.

If on the other hand the lawyer will not make the grade, this means that there is an opportunity cost – a value of lost opportunity of new work types using the new competencies and behaviours.

Opportunity cost

A lawyer costing £60k likely revenues £80k.

If we assume that, as a result of not keeping their skills and knowledge up, the lawyer is less useful to his or her employer. This means that the scope of work they are capable of dealing with reduces year-on-year. The opportunity cost might therefore amount to nil in the first year but £10k in the second, spiralling thereafter.

We are therefore balancing something like £15k (for hiring new plus the new employee’s development) versus £40k to stick with the existing employee, wasting money on development and loosing revenue.

The key decision is about whether or not the employee will make the grade; will the necessary competencies and behaviours be achieved by development? If they can be developed, invest – and if not, replace.

The argument in favour of replacing gets stronger if the learning gap is big.

Now, of course, these figures aren’t the whole story but the calculation should serve to show what’s to be considered – the cost of training versus the cost of replacement moderated by opportunity cost if the training fails.

Decide and plan

The message is clear.

  • First, know the competencies and behaviours needed for each job and jobholder.
  • Second, know the ability of the employee to respond to development.
  • Third, make a decision about what to do considering timescales and costs.

Then make a plan and execute.

  • In cases where the characteristics of a job change and existing skills and knowledge fall short of requirements to compete, managers are within their rights to make the existing job redundant, dismiss the jobholder and run a recruitment for a new job. The legal justification is that there is diminished need for work of a particular type – though there is need of work of a different type with greater competencies and behaviours. But discuss the detail with us before taking action.

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