Knowledge firms have long understood that their most valuable asset is their human capital. This is especially true in the context of IT services firms, where the ever-changing technology landscape necessitates large investments in employee training. We have seen the sprawling campuses of Google, Infosys, and Wipro, with dedicated training showpieces. The output of the Indian education system, while producing engineers and MBAs by lakhs, is still not deemed by employers as “work ready.” No wonder that companies spend the first six months or so of their employees’ tenure in foundation training.
But does training really increase employee performance and productivity? If yes, what are the kinds of training that an employee should invest in? Are there differences across employees – lateral or direct hires – when it comes to training benefits? To analyse these questions, we collected detailed employee training, performance and demographic data from one of the largest Indian IT services firms. The data archives cover a period of three years, providing an opportunity to not only look at the impact of training but also uncover the propensity to take training.
The key challenges in analysing a problem of this nature are the various factors that can derail our findings. For example, we do not observe employee attributes such as motivation and drive. Barring the foundation training that all direct hires undergo, the firm in question does not have a mandated training programme. Since we consider only those employees who have some experience and are beyond the foundation level, any training they take is on their own initiative, conditional on their time and project constraints. This leads to our first concern in the analysis: the selection issue. In other words, are there any factors that increase the likelihood of an employee taking training? If we do not account for these issues in our analysis, our results are going to be biased and the implications will not be reliable and appropriate.
So when does an employee take training? We find that in our sample, women in general tend to take more training than men. Perhaps women work under greater time or cultural constraints, such as lack of adequate mentor and peer networks within the firm that prevent them from pursuing informal channels for learning. Thus, they find formal training more appealing.
Those who have had a longer tenure with the firm are also more likely to take formal training. This interesting result is consistent with the concept of knowledge attrition, that is, the employees’ need to replenish and update skill sets continuously. This finding can be generalised to all knowledge intensive firms where both technology and business practice landscapes change rapidly.
But how is training related to the previous performance of an employee? We expected that the “‘laggards” would be the ones most likely to take training, so that they can use their newly acquired skills to enhance performance. Instead, and contrary to conventional wisdom, we find that star performers are more likely to train. It appears that training is a “‘luxury good.” The impact of training is not seen to be immediate. Hence the laggards cannot afford to take formal training, and perhaps focus more on instant “on-the-job” efforts to improve performance. Or perhaps stars use training not only to improve performance, but also to signal their true worth to senior management.
The Impact of Training
Let us examine the impact of training on actual performance. We use sophisticated econometric techniques to counter the bias caused by intangible and unobservable attributes such as motivation and ambition. Our findings consistently show that training has a positive impact on performance. An additional training course, for example, can help employees improve performance by 3.6 percent, ceteris paribus. At the same time, there is knowledge attrition due to high degree of technology obsolescence in IT services. Hence, overall years of work experience have a negative impact on performance. In contrast, the more time one spends in a firm, the better is one’s performance. Does being longer in a firm mean that your mentor and peer networks help in learning and improve your performance? We analyse this as well.
The firm hires its employees either directly from an educational institution (“direct hires”) or as a “lateral” from another IT services firm. This distinction, coupled with the overall employee experience (low vs. high), plays a significant role in shaping the impact of training on performance. As we expect, people with higher work experience benefit more from training, both for laterals and direct hires. But there are significant differences in the impact of training on these two employee types. In general, laterals benefit more from formal training than direct hires, and this difference is more pronounced for employees with greater work experience. With similar attributes, why does a lateral benefit more from formal training? It could be that laterals are hired from a superior pool, when there is more information available about not only their academic credentials but also their job performance, and hence training these superior employees improves their performance. More importantly, because of their wider work exposure, they may be better able to imbibe the training into improving their performance.
However, there may be another phenomenon at work. We argue that employee performance may be driven not by what-you-know but by who-you-know. Direct hires, having stayed longer in a firm, will develop a social network that helps with their learning. Consider your buddy in the foundation training programme that aced her domain and technical courses. If you face a problem in the same technology, are you more likely to seek help from your friend or are you more likely to enrol in training? This “water-cooler” learning mechanism is denied to laterals, which is why they rely on formal training.
What Kind of Training?
Human capital literature distinguishes between general and specific training. General training inculcates learning that an employee can use not only within the current firm, but outside as well. Examples include training on say the Sarbanes-Oxley Act, certain audit processes, technologies such as Java, etc. In contrast, specific training focuses on learning specific to an organisation, such as various proprietary processes and software that cannot be used outside the firm boundary. We find that while general training consistently manifests a significant positive effect, specific training seems to have no effect on employee performance. We find that these findings hold, no matter how we slice the data. We contend that firm-specific training may not result in performance differences between employees, but rather creates value that is appropriated at the firm level. Thus, following the right firm-specific processes and using firm-specific software may reduce costs at the firm level, but since all employees would be mandated to follow these, learning from specific training programmes may not result in performance improvements over and above your colleagues.
General training, on the other hand, increases the marketability of an employee and helps improve performance and subsequent bonuses, and may give employees incentives to stay on with the firm. The significantly positive impact of general training on performance motivated us to investigate further.
General training, in our study, comprises domain and technical training. Our results show that both improve employee performance. However, and more interestingly, domain has nearly 2.5 times the impact of technical training on performance. IT is increasingly being used as a strategic rather than an operational tool, and the strategic nature of current IT applications requires that knowledge workers are more cognizant with the domain rather than the technology. We were also interested in assessing the interaction between domain and technical training. We find that domain and technical training substitute for rather than complement each other. Thus, taking domain and technical training in the same year actually diminishes performance. We suspect cognitive dissonance to be at work here. Employees should focus on only one to optimise performance. We also find that “one size fits all” may be the wrong approach when it comes to training employees. Direct hires, for example, benefit more from domain training at the earlier stages of their careers, and laterals benefit more from technical training at the later stages of their career. Therefore, tailoring programmes to suit an employee’s profile may work best.
Our study has several important implications for firms in the knowledge and services sector. The main implication for senior management is that training investments lead to improved employee productivity. However, merely investing in training may not be enough; firms need to manage training programmes more effectively so that they can get the highest returns from their investment. Firms need to realise that focused training helps improve performance, and mixing types of training may be detrimental. Training should be a tool to fill in the knowledge gap, and should not be repetitive or redundant. Firms should also understand that training is important at all employee levels, because skills erode and become outdated over a period of time, and need to be replenished. Finally, firms should understand that training is seen to be a luxury good, and it may be prudent to mandate training for poor performers. The positive feedback loop, for star performers taking more training, may exclude poor performers, and mandating training may lhelp the laggards perform better.
