Decoding Value
By Theresa Seagraves
Adapted from Quick! Show Me Your Value, this article covers how to translate the value of performance solutions into financial terms.
“What is my return-on-investment for this program?” This question is one of the most frustrating questions today’s WLP professional can face. Even if you give what you think is a good answer, you may often get the sinking feeling that your audience is thinking politely that you just don’t get it. Even if you’ve gone to the effort to determine a return-on-investment answer of, for example, 125 percent, you may still be left with the sense that you didn’t answer the real question and that you’ve blown it, but you don’t know why. What went wrong?
How the ROI game works
When people say “my return-on-investment” or “my ROI” or “my value” for a program, sometimes they’re asking for a number such as 125 percent, but more often, they’re not. They’re using ROI as a codeword—that may mean something different for each person who uses it. To see how fast the definition of value changes and why it is important to be able to connect your answer to what is meant by each individual person, let’s reminisce about a childhood game of communication called Rumor.
Children usually play Rumor with eight to 10 people. The players sit in a chain, and the first person makes up a rumor that he or she whispers into the ear of the person next to them, who in turn whispers to the next person, and so on. When the rumor reaches the last person, he or she announces what he or she heard. Then the first person in the chain shares the original rumor, which usually bears little resemblance to the rumor after it’s been passed along by all the children in the chain.
Understanding value in an organization works much the same way. What is described as valuable in an organization changes as it moves from the beginning of the chain (a senior executive) to the end (the individual performer). What’s different in an organization is that the change in how value is described is much more predictable than in a simple game of Rumor. That predictability is the key to breaking the ROI codeword.
Using the principle of cascading metrics, the financial measures at the top (profit, liquidity ratios, cash flow) are always broken down into more specific measures for the next layer of management. That management layer breaks the metrics down again. Eventually, what began as the financial measures of the top officers becomes the performance metrics of the individual contributor.
The financial value chain
For simplicity’s sake, four levels are used to describe the movement of value through any organization:
senior ß à mid-level ß à operations ß à individual
Depending on the size of the organization you work with, there may be more or fewer actual levels. No matter how many organizational layers you really have, the people in these layers tend to operate like on of the four levels in this model.
Individual performer. This is the level that WLP professionals are most comfortable with simply because this is where most of the people in an organization reside and where the majority of WLP professional’s work is focused. WLP professionals know how to talk at this level because they often think of the success of their WLP programs in terms of performance objectives—in other words, in terms of the individual performer’s metrics.
Operations/first-level management. This is the tactical layer comprising of first-level supervisors and high-level operations contributors who have a great deal of influence over the financial performance in other jobs. An example is a lead buyer in a purchasing department. This person may be an individual contributor but, depending on the business, would need to be highly positioned to work closely with other 1st and mid-level managers in manufacturing, distribution, or marketing units.
Middle management. These are managers of managers. These people operate at a strategic level. They are, however, still required to stay within the budgets they have been assigned. They must still follow the directions of the senior level.
Senior level. You will recognize the senior level by use of certain words in their job titles; chief anything (CEO, CFO, CIO, and so forth) is a tip-off that a person occupies the senior layer. The focus of the senior layer is to create the vision, direction, and pace for the rest o the organization. This layer has the most discretion in moving funds across the organization and the most clout in supporting key initiatives that get time, resources, and attention.
Translating value through the chain
Communicating value seems difficult because it is invisible. If the terms for value at each layer become visible, then understanding the code for value suddenly becomes easier to do.
Figure 1 is a sample financial value chain that shows how the definition of value changes as measures move through the four layers of an organization. A financial value chain is defined as a cascading, linked set of measures where the left-most measure and right-most measure is a specific, performance-based measure of an individual contributor.
In the example shown in Figure 1, senior management is concerned about the organization’s contribution profit margin (CPM). The CPM represents the difference between how much money comes in and how much money it costs to create and deliver products or services, before one worries about things like being able to spend money on new research and development, pay fixed expenses, make loan payments, pay taxes, or announce dividends.
Most organizations operate on much slimmer margins than many people realize. If production costs creep up faster than revenue comes in, the contribution profit margin slips. The business is headed for trouble. Eventually, there may not be enough money to invest in crucial R&D, make payroll, or take advantage of new market opportunities. As stewards of their organization, senior managers that means layoffs, restructurings, and other unpleasant situations. You can bet that the contribution profit margin keeps many senior managers awake at night.
Senior managers share their sleeplessness with others. They assign each of the mid managers a portion of the organization’s costs to control or revenue to generate. In Figure 1, mid manufacturing management is concerned about the growing cost of goods sold (COGS) and how that affects the contribution profit margin. Now, mid managers will not go it alone either. COGS is made up of material costs, labor costs, and overhead costs. Because people will manage their measures, operations-level managers are completely focused on getting material costs under control. In the example, contribution profit margins, COGS, and material costs finally make it down to the individual contributor in the form of improving rework rates. The rework rate is defined as the percentage of goods or actions that are defective or of such low quality that they must have additional material or labor added to them before they can be sold or accepted.
Most WLP professionals focus on the individual contributor layer. The language of our profession is the language of performance objectives. We must ask ourselves such questions as, How can we best train our manufacturing workers to minimize the rate of rework in plant seven? At the senior level, though, the language is the language of finance. Senior managers ask themselves, How can we improve our contribution profit margin?
It’s often noted that many WLP professionals feel as though we just don’t “get it” when we’re asked, What is my ROI for this program? To “get it” when communicating value, WLP professionals must be able to make the connections in the financial chain visible so that they understand the perspective of their audience.
How to translate value
Each level of manager in each separate department, division or unit has more responsibility and, therefore, smaller or broader measures depending on his or her level. This is one part of going back to basics.
Another part of the basics is that many WLP professionals miss that each level of your audience may not make the translation for you of what a change in rework rates means to material costs, COGS, or contribution profit margin. Because many WLP folks are not comfortable with the language of financial measures or skilled in mapping financial value chains, it’s easy to fall into the trap of hoping that the value of performance interventions will be obvious if they speak the language of performance.
Unfortunately, in the Information Age, people have no time. They are completely focused on value in the terms that they know it by. They simply will not translate for you what you are trying to say. Your senior managers want you to act like a salesperson. A key reason is that salespeople know it’s their job to make that translation because no one will give them five minutes of their time to translate for them.
A personal story may help illustrate this point. I once worked for a high-level sales manager who had a short attention span and a blunt communication style. I interviewed him as part of a research study on how executives viewed the value of human performance technology (HPT). During that interview, I asked this manager what he believed the value of HPT to be. His response was that it was not his job to explain the value of HPT. It was my job to tell him. He had people approaching him every day telling him exactly what and how they could accomplish his goals. If I could not tell him why HPT was valuable to him, then I was wasting my time and his.
Translating value is your job. If you force others to make the translation fro you, they will either assume there is no value, or they will draw their own conclusions. Just as in the game of Rumor, their conclusions may not bear any resemblance to what you wanted them to hear. That can be disastrous to making a sale. It is also disastrous in communicating value. If you are being looked at as though you didn’t get the ROI codeword, the first thing to determine is whether you stated your value in terms that matched the audience level and the audience’s measures.
Financial value timeframes
Even if you’re giving people information at their level and in their terms, you may still be overlooking another basic piece of the puzzle. The final piece of the picture is the timeframe that each audience is interested in. Knowing the timeframe of each level’s measures is important when you’re showing that you can follow the value story down the chain and that you get the code.
Timeframes are dynamic. What the levels of management care about depends very much on how the economy is doing. In a poor economy, urgency goes up and time gets even shorter. All measurement timeframes compress. Here are some guidelines about the effect of the economy overall.
|
Financial Value Chain |
Good Economy |
Poor Economy |
|
Senior |
manages financial measures to meet the goals of a three-
year to five-year plan |
wants to know what you can do for them in a year |
|
Mid |
works to achieve goals within a one- to three-year period |
wants to hear about results you can achieve in this quarter |
|
Operations |
manages in a timeframe of one quarter to one year |
needs information that will help them in four to six weeks |
|
Individual |
works in one-week to one-quarter periods |
needs immediate, daily, or weekly help from your program |
You not only need to match your value to the terms of the audience, but you must also acknowledge the timeframe the audience needs to have results delivered in.
Building financial value chains
If you have never built a financial value chain, your next question might be, Where do I start? The answer is anywhere. Start the bottom and build up, at the top and build down, or in the middle and build out. Start with whatever you know.
If your target organization that you want to communicate value to is a megacorporation, you may never communicate directly with the CEO or CFO, but the management layers you work with often do. You need to be able to communicate directly to your immediate audience. You also need to help the audience communicate value with the next level and up.
No matter how much you think an audience ought to care about the value you are communicating, the fact remains that people only have so much tome and attention to spend. They will focus on results that solve their most pressing priorities, as they understand them from their managers. You will go a long way in being perceived as “getting it” if you communicate value that way, too.
Theresa Seagraves is author of Quick! Show Me Your Value and principal of her own consulting firm. contact her at www.drive-roi.com.