Talent Creation and the Bottom Line

The U.S. knowledge-based economy requires a new talent-creating financial metric that appears as an investment on a balance sheet, so that businesses can track the impact of training and education investments on both short- and long-term profits.

Across the U.S., the declining unemployment rate is being offset by a rising tide of people who have opted out of the workforce. The labor-force participation rate has shrunk to a 35-year low. On the other hand, an estimated 3.1 percent to 4.9 percent of jobs remained vacant as of June 2014. Why is the unemployment rate shrinking? Because people have absented themselves from the workforce, not because they are finding employment. Are talent deficits to blame?

News services are raising red flags with headlines including “‘Terrifying’ Oil Skills Shortage Delays Project” and “Global Giants Face a Fight to Lure Local Talent” (Financial Times, July 17, 2014). They also are beginning to ask uncomfortable questions, such as, “Just Whose Job Is It to Train Workers?” (Wall Street Journal, July 17, 2014).

The Federal Reserve’s May 2014 “Beige Book” economic survey, “The Accenture 2014 Manufacturing Skills and Training Study,” the National Federation of Independent Businesses July economic survey, and the Conference Board’s Help Wanted June Online Data Series are among the many employment indicators confirming that a nationwide talent crisis is in full bloom.

In the era following the victory of the Allied forces in World War II, U.S. production soared through the 1970s. The resulting demand for both low- and high-skill workers of all types meant that people easily found jobs in all sectors of the economy. Also, America’s educational exceptionalism fueled by the GI Bill and the space race gave it the best skilled workforce in the world. Furthermore, since the U.S. was the most dominant world economy, it was far easier to recruit foreign professionals and technicians who were eager to immigrate and help fill U.S. skilled worker shortages.

These talent advantages began to erode in the 1980s. Globalization motivated many American businesses to move their low-skill jobs to lower-cost overseas locations. The adoption of advanced technologies in the U.S. upped the demands for higher-skilled talent. As talent deficits grew, U.S. companies began to search the world for high-skilled workers and relocate some of their highskill jobs offshore. This process has accelerated over the last 20 years, with breakthrough digital technologies now displacing many middle-skill jobs.

Both individuals and businesses must consider changing their outlook for this new talent era. More people need a better education that includes specialized career skills. Businesses need to provide relevant job training and long-term employee talent development because they understand that talent creation is critical to their bottom line and their competitive survival.

Unfortunately, beginning in the 1990s, U.S. business culture increasingly has focused on short-term results. Low interest rates have helped fuel record highs on the major stock exchanges. Large corporate cash holdings have encouraged company stock buy-backs and large dividend payouts. The pressure for increasing quarterly earnings has led to a focus on cost-cutting and efficiency. To maximize short-term profits, American businesses in general have delayed making critical investments in plant and equipment and also have made huge cuts in spending on human capital development. U.S. business executives now are beginning to discover that today’s competitive global economy is running short on skilled talent. Short-termism is no longer a sustainable organizational strategy. The issue is no longer just talent management; it has become talent creation.

Why do talent investments rank so low on the corporate totem pole? Because they never appear on a balance sheet, most executives do not view them as a source of competitive advantage. Tom Peters, America’s senior management guru, asks why in a random 30-minute interview with a typical CEO he is unlikely to hear a word about employee training and education. “I would hazard a guess that most CEOs see an IT investment as a ‘strategic necessity,’ but training expenses as a ‘necessary evil.’” Peters argues that new business rules need to be written to solve the current talent crisis. He calls for “a human capital development manifesto at the enterprise and national government level.”

The U.S. accounting system classifies employee training and education as a business expense, whereas building a factory or purchasing equipment or software is treated as an investment. I foresee this would continue to be the preferred treatment for closely held family and smaller, non-publicly held corporations. But particularly for publicly traded companies, this means that training expenses are deducted from quarterly earnings, while investments in equipment or buildings can be depreciated over time (under Internal Revenue Service regulations). This situation makes it harder for business executives who invest in worker training and education “to make their numbers” to meet Wall Street’s quarterly financial expectations. This perpetuates a negative mindset about training and education throughout the business community.

When the IT bubble burst after 2000, intangible investments never recovered. For example, by 2010, U.S. business was spending 10 times more on IT hardware than on training and education, and by 2012, intangible investment in training and development had fallen below 2001 expenditures.

In 2013, the U.S. became one of the first adapters of a new international GDP accounting standard that will treat research and development (R&D) as a capital investment rather than a cost. Brent Moulton, a manager of national accounts at the Bureau of Economic Analysis (BEA), states: “The world economy is changing, and there is greater and greater recognition that things such as intangible assets are very important in the modern economy and play a role similar to tangible capital that was captured in the past.” This change will enhance corporate profits since companies no longer will be counting R&D after depreciation as a cost.

Steve Landefeld, director of the BEA, believes this is only the beginning in getting a more accurate picture of growth in the U.S. economy. “You need to go further in this exploration of intangibles. R&D is just a piece of the puzzle.”

I strongly agree. The Financial Accounting Standards Board (FASB) needs to update its accounting standards to allow publicly held corporations the option of capitalizing their expenditures on training, education, apprenticeships, or internships. Smaller, closely held, privately owned businesses could be given federal tax credits for training and education outlays.

Robert I. Lerman, an economist at the American University and the Urban Institute, suggests these actions will acknowledge the asset value of human capital. “The change would recognize in income statements and balance sheets that training investments generate assets that yield future benefits.” The U.S. knowledge-based economy requires a new talent-creating financial metric that appears as an investment on a balance sheet, so that businesses can track the impact of training and education investments on both short- and long-term profits.

In today’s fast-paced knowledge economy, expensing training in publicly traded companies is an anachronism. Current U.S. accounting standards were written for a 20th century massproduction economy that changed more slowly and in which semiskilled and unskilled jobs predominated. During that time period, continuing professional education largely was reserved for executives and professionals. Today’s talent development needs to include most of today’s and tomorrow’s workforce.

Talent creation needs to be atop every business agenda on a par with other capital investments. It is the human knowledge behind the technology that creates innovations for business growth and profit. Business investment in current and future talent has become a necessity—not just another option.

Edward E. Gordon is the president of Imperial Consulting Corporation. His latest book is “Future Jobs: Solving the Employment and Skills Crisis.” He can be contacted at www.imperialcorp.com.