We are in the midst of one of the most sweeping talent realignments across the entire U.S. labor-economic market since the Industrial Revolution. It’s estimated that this year, employers will be unable to fill five million “STEM” jobs in science-, technology-, engineering- and math-related occupations, while millions of low-skilled Americans remain jobless. By 2020, that number will rise to 20 million unless employers and lawmakers take steps to retool the American workforce.
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If this major imbalance between the talent supply and job requirements is looming, why have so few businesses changed their talent management strategies? The answer, in large part, is because the training that’s so essential to developing a skilled workforce sits on the wrong side of the balance sheet.
Business has long accepted the financial concept that making physical capital investments today, such as building a plant or purchasing equipment, may yield a good profit tomorrow. However, business doesn’t apply the same management thinking in making talent investments because current business accounting standards are stacked against workplace learning. The U.S. accounting system classifies training and educating people as a business “expense,” and purchasing equipment, machines, buildings as an “investment.” Particularly for publicly traded companies, this means that learning programs are deducted from quarterly earnings, while capital investments can be depreciated over time (according to IRS regulations).
Depreciating Training
There is a precedent for depreciating training and education.
For tax purposes, when a company buys equipment such as computers, machines, trucks or furniture, that equipment is depreciated over its useful life. The amount that may be depreciated is the actual price plus freight charges, and the cost of setting up the equipment and training employees to operate it.
Consider this example. A bank buys a new computer system for $5 million, which, according to the IRS, has a useful life of five years. The computer manufacturer tells the bank that it will cost $200,000 to train current and future employees on the system over the first five years. According to purchasing managers, adding the technical training costs to the purchase price of the equipment is a commonly followed accounting procedure. Thus, the amount to be depreciated would be $5,200,000.
However, the bank also needs to provide additional types of training for the employees who will operate the new computer system, including advanced verbal and math education ($200,000), team training ($150,000) and interpersonal skills training ($100,000). Under IRS rules, it would appear that these, too, may be capitalized.
Internal Revenue Service Ruling 96-62 states, “Training costs must be capitalized only in the unusual circumstances where training is intended primarily to obtain future benefits significantly beyond those traditionally associated with training provided in the ordinary course of the taxpayer’s trade or business.”
It seems possible to classify the additional $450,000 in training as an “unusual” deduction because it has never been offered to the bank’s workers before and “is intended primarily to obtain future benefits significantly beyond those traditionally associated with training provided (in the past by the bank).”
Using this approach, the total depreciation would be $5,650,000 instead of $5,200,000.
In the minds of most business people, this makes investing in human capital a very unattractive business expense. Business guru Stephen Covey explains, “If people are an expense and not an investment, imagine the psychology that spreads throughout an entire organization. It’s like doing bloodletting when we understand germ theory. We can try to do bloodletting better, but the underlying paradigm is that people are an expense. And yet 80 percent of all value added comes from people.”
In a fast-paced 21st-century knowledge economy, expensing training doesn’t make any sense. Current U.S. accounting standards were basically written for a 20th-century that changed more slowly, and in which semi-skilled and unskilled jobs predominated. Today, American business needs a new talent-creating metric that can appear as an investment on a balance sheet to help a company’s workforce keep up with the rapid pace of change.
We need to develop new accounting standards and IRS regulations that will allow business to capitalize training, development and education investments. This is not unplowed ground; the IRS already allows some of these expenditures to be capitalized if the training involved is unique to the business (see sidebar).
Making this breakthrough will encourage business to:
1. Develop trainee positions for people who require further education and training to qualify for vital unfilled positions;
2. Provide motivation to incumbent workers facing layoffs or unemployed workers who have the aptitude and motivation to learn;
3. Greatly encourage ongoing employee training and education updates for employees throughout a business; and,
4. Enhance support of internships and community and technical college programs that are preparing students for in-demand careers.
All of the above will have an immediate or long-term impact on reducing the nation’s rate of unemployment. For businesses, capitalizing training has the potential to enhance worker performance, increase productivity and raise profit margins.
National trade organizations such as the American Society for Training and Development, the Society for Human Resource Management, the Association for Career and Technical Education, the IEEE and others could provide the expertise to work with the Internal Revenue Service in developing depreciation tables for business training, education and internship program investments.
Capitalizing these investments will allow the U.S. business community to develop the talent they will need over the next decade to fully exploit high-tech innovations. We could easily see annual U.S. business investment in talent creation rise from about $53 billion in 2010 to over $100 billion by 2020.
Until now, business has not viewed the talent crisis as an urgent matter. But now the true effects of a global talent showdown have begun to ripple across the U.S. and world business community. Unless we greatly enhance the education-to-employment system, between 2010 and 2020 companies will have few alternatives but to hire large numbers of people who do not meet their talent requirements, and then try to haphazardly fill in their knowledge gaps. Quality and customer service will deteriorate across the economy.
What is needed is a new talent investment metric to help America sustain a higher standard of living and prevail as a global economic power in the 21st century. Without an adequate supply of talented people, it won’t matter if a business tries to use advanced technologies, or if America hammers out better trade agreements. U.S. business investment in knowledge and talent creation is the single most important economic resource for short-term and long-term performance, productivity and profit.
Edward E. Gordon is president of Imperial Consulting Corporation. His new book is “Winning the Global Talent Showdown: How Businesses and Communities Can Partner to Rebuild the Jobs Pipeline.” He can be contacted at www.imperialcorp.com.
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