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Disseminating financial knowledge to develop engaged organizations
Financial awareness of key drivers are becoming the paramount leading indicators for organizational success. For most, the finance department is a corner office service that offers ad hoc analysis on strategic and operational initiatives to a company, and provides an ex-post assessment of the financial condition of the company among a select few. There are some key financial metrics that one wants to measure across all companies and all industries without exception, but then there are unique metrics that reflect the key underlying drivers for organizational success. Organizations align their forays into new markets, new strategies and new ventures around a narrative that culminates in a financial metric or a proxy that illustrates opportunities lost or gained.
Having been cast in operational finance roles for a good length of my career, I have often encountered a high level of interest to learn financial concepts in areas such as engineering, product management, operations, sales, etc. I have to admit that I have been humbled by the fairly wide common-sense understanding of basic financial concepts that these folks have. However, in most cases, the understanding is less than skin deep with misunderstandings that are meaningful. The good news is that I have also noticed a promising trend, namely … the questions are more thoroughly weighed by the “non-finance” participants, and there seems to be an elevated understanding of key financial drivers that translate to commercial success. This knowledge continues to accelerate … largely, because of convergence of areas around data science, analytics, assessment of personal ownership stakes, etc. But the passing of such information across these channels to the hungry recipients are not formalized. In other words, I posit that having a formal channel of inculcating financial education across the various functional areas would pay rich dividends for the company in the long run. Finance is a vast enough field that partaking general knowledge in these concepts which are more than merely skin-deep would also enable the finance group to engage in meaningful conversations with other functional experts, thus allowing the narrative around the numbers to be more wholesome. Thus, imparting the financial knowledge would be beneficial to the finance department as well.
To be effective in creating a formal channel of disseminating information of the key areas in finance that matter to the organization, it is important to understand the operational drivers. When I say operational drivers, I am expanding that to encompass drivers that may uniquely affect other functional areas. For example, sales may be concerned with revenue, margins whereas production may be concerned with server capacity, work-in-process and throughput, etc. At the end, the financial metrics are derivatives. They are cross products of single or multiple drivers and these are the elements that need to be fleshed out to effect a spirited conversation. That would then enable the production of a financial barometer that everyone in the organization can rally behind and understand, and more importantly … be able to assess how their individual contribution has and will advance organization goals.
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Implementing Balanced Scorecard Model for Employee Engagement
The Balanced Scorecard Model (BSC) was introduced by Kaplan & Norton in their book “The Balanced Scorecard” (1996). It is one of the more widely used management tools in large organizations.
One of the major strengths of the BSC model is how the key categories in the BSC model links to corporate missions and objectives. The key categories which are referred to as “perspectives” illustrated in the BSC model are:
Financial Perspective:
Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated. But the point is that the current emphasis on financials leads to the “unbalanced” situation with regard to other perspectives. There is perhaps a need to include additional financial-related data, such as risk assessment and cost-benefit data, in this category.
Customer Perspective
Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good. In developing metrics for satisfaction, customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups
Internal Business Process Perspective
This perspective refers to internal business processes. Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission). These metrics have to be carefully designed by those who know these processes most intimately; with our unique missions these are not necessarily something that can be developed by outside consultants. My personal opinion on this matter is that the internal business process perspective is too important and that internal owners or/and teams take ownership of understanding the process.
Learning and Growth Perspective
This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people — the only repository of knowledge — are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization.
Kaplan and Norton emphasize that ‘learning’ is more than ‘training’; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers, the engagement of the workers, the potential of cross-training that would create pockets of bench strength and switch hitters, and other employee specific programs that allows them to readily get help on a problem when it is needed. It also includes technological tools; what the Baldrige criteria call “high performance work systems.”
Innovation Perspective
This perspective was appended to the above four by Bain and Company. It refers to the vitality of the organization and its culture to provide the appropriate framework to encourage innovation. Organizations have to innovate. Innovation is becoming the key distinctive element in great organizations, and high levels of innovation or innovative thinking are talent magnets.
Taking the perspectives a step further, Kaplan and Cooper instituted measures and targets associated with each of those targets. The measures are geared around what the objective is associated with each of the perspectives rather than a singular granule item. Thus, if the objective is to increase customer retention, an appropriate metric or set of metrics is around how to measure the objective and track success to it than defining a customer.
One of the underlying presumptions in this model is to ensure that the key elements around which objectives are defined are done so at a fairly detailed level and to the extent possible – defined so much so that an item does not have polymorphous connotations. In other words, there is and can be only a single source of truth associated with the key element. That preserves the integrity of the model prior to its application that would lead to the element branching out into a plethora of objectives associated with the element.
Objectives, Measures, Targets and Initiatives
Within each of the Balance Scorecard financial, customer, internal process, learning perspectives and innovation perspectives, the firm must define the following:
Strategic Objectives – what the strategy is to achieve in that perspective
Measures – how progress for that particular objective will be measured
Targets – the target value sought for each measure
Initiatives – what will be done to facilitate the reaching of the target?
As in models and analytics, the information that the model spouts could be rife with a cascade of metrics. Metrics are important but too many metrics associated with the perspectives may diffuse the ultimate end that the perspectives represent.
Hence, one has to exercise restraint and rigor in defining a few key metrics that are most relevant and roll up to corporate objectives. As an example, outlined below are examples of metrics associated with the perspectives:
Financial performance (revenues, earnings, return on capital, cash flow);
Customer value performance (market share, customer satisfaction measures, customer loyalty);
Internal business process performance (productivity rates, quality measures, timeliness);
Employee performance (morale, knowledge, turnover, use of best demonstrated practices);
Innovation performance (percent of revenue from new products, employee suggestions, rate of improvement index);
To construct and implement a Balanced Scorecard, managers should:
- Articulate the business’s vision and strategy;
- Identify the performance categories that best link the business’s vision and strategy to its results (e.g., financial performance, operations, innovation, and employee performance);
- Establish objectives that support the business’s vision and strategy;
- Develop effective measures and meaningful standards, establishing both short-term milestones and long-term targets;
- Ensure company wide acceptance of the measures;
- Create appropriate budgeting, tracking, communication, and reward systems;
- Collect and analyze performance data and compare actual results with desired performance;
- Take action to close unfavorable gaps.
The link above contains a number of templates and examples that you may find helpful.
I have discussed organization architecture and employee engagement in our previous blogs. The BSC is a tool to encourage engagement while ensuring a tight architecture to further organizational goals. You may forget that as an employee, you occupy an important place in the ecosystem; the forgetting does not speak to your disenchantment toward the job, neither to your disinclination toward the uber-goals of the organization. The forgetting really speaks to potentially a lack of credible leadership that has not taken the appropriate efforts to engage the organization by pushing this structure that forces transparency. The BSC is one such articulate model that could be used, even at its crudest form factor, to get employees informed and engaged.
Economics of Employee Retention
It is a common fact that employee turnover in a company has significant cost consequences. HR departments and managers deploy programs to create great work environments to prevent employee turnover. Some industries have higher turnover than others. However, despite the expected high turnover rate, companies are realizing that the acquisition cost of getting a new employee to replace someone who has left is meaningfully higher.
There are a number of tangible and intangible costs that have been connected to employee turnover:
- Pre-departure costs—such as the reduced productivity of an employee who is discontented and using company time to look for another job, plus the costs of any efforts to retain the employee once he or she has announced his intent to leave.
- Termination costs—those related to termination of employment, including exit interviews, security precautions, pay calculations, and other recordkeeping costs, plus the unemployment tax impact and payments for severance, accrued vacation time, retirement plan contributions, and any extension to benefits.
- Recruitment costs—related to advertising, recruiting, interviewing, pre-employment evaluations, security and background checks, hiring bonuses, relocation, etc.
- Training costs—the cost of training new employees in necessary job skills can be significant.
- Productivity costs—related to new workers, who are generally less productive, require more supervision, and contribute less to customer satisfaction.
- Vacancy costs—lost sales or lost productivity while the position remains vacant, plus the cost of overtime or temporary help to cover fill in.
- Corporate culture – high turnover is a reflection of corporate culture. If potential candidate become aware of high turnover, this could further increase the corporate’s acquisition costs.
It has been estimated that the cost of employee turnover could range anywhere from 50% of the employee’s salary up to 500% of the employee’s salary.
Employee turnover= (Number of separations per year/ Average number of employees per year)*100
The general median is 130%. Here is a specific scenario to think through:
Assume there are 100 employees in an organization. The average compensation is $50K per year. The employee turnover rate is 10%. That means about 10 employees leave the company in any given year. If the average cost is $50K per year, and the median is 130% or 1.3X compensation cost, then the total impact in this scenario would be $650,000. Thus, it represents almost 13% of the run rate of payroll. If there are programs that could stem the flow out by 50%, that would save $325,000 which represents 6.5% of payroll. This is a fairly significant statistic. And since 130% is a median across all industries, I contend that knowledge industries have a higher median than industries that are driven by low or medium skilled workers at the lower end of the pay scale.
So what are some of the ways that would minimize this turnover? First, whatever the turnover number, the company would want to compare themselves to similar organizations in the specific industry or region. In fact, some turnover may be healthy to the company. Second, one single program may not be good enough. They have to consider multiple programs that could be deployed concurrently or over time.
So, companies seeking a performance-oriented approach to employee retention might seek to enhance work value in some of the following ways (courtesy of the Performance Improvement Council of the Incentive Marketing Association):
Employee involvement in job design, goal setting, and selection of rewards.
Clear communication about company goals and ways employees can contribute to and share in its success.
Incentive programs that reward people for significant and measurable performance improvements.
Recognition programs offering meaningful recognition to employees for both tangible and intangible contributions to their company.
Project-oriented approaches in which all employees can work on diverse, limited-term assignments rather than being sequestered within a single department or function.
Developing talent exchanges to enhance careers by connecting employees with appropriate projects, roles, and positions within their companies.
Training through coordinated programs designed to enhance employee knowledge and then rewarding employees for that increased knowledge. Consider cross training to enhance skills and improve productivity. This both satisfies employees and equips them to perform better.
Fostering feelings of support by setting clear goals for employees and rewarding them upon accomplishment, and by promoting consistent values and recognizing people who embody them. This directs retention resources to actions and values that have a measurable benefit to the organization.
Creating an atmosphere of fun with spot “atta-boy” rewards, contests, or meetings, specifically related to organizational goals and values. This creates an atmosphere conducive to retention while keeping the focus on achieving goals.
Addressing the measurement issue by instituting “real-time” goal setting, performance measurement, and skills development programs to ensure that people always know where they stand, and to address performance issues and skill gaps before they become problems.
Fair Compensation. No one said that compensation will have no effect on turnover and retention. Determine a fair wage in your labor market and do what you can to meet it. A fair and equitable wage and benefits package is the foundation for a successful employee retention program.
Build trust. As mentioned above, a “climate of trust” is one of the factors that influence employee retention. Trust is built with employees through fair working conditions, management responsiveness to employee concerns, realistic performance expectations, and open communication, including one-on-one communications between managers and employees whenever possible.
Don’t limit motivation efforts to star employees. Incentive, reward, and recognition programs should be expanded to include as many employees as possible, rather than just the top 5 or 10 percent. Remember, it is the large middle range of employees that can contribute the most in terms of improved productivity and lower turnover costs.
The Role of Motivation
Higher levels of motivation can translate into a 53 percent reduction in employee turnover, according to a recent study by Stephen Condly, associate professor at the University of Central Florida, Orlando, conducted for the SITE Foundation. No retention strategy can succeed without addressing the issue of employee motivation.
“Incentives, Motivation, and Workplace Performance,” a study conducted by the professors at the University of Southern California for the International Society of Performance Improvement, found the following factors critical to fostering motivation and loyalty.
- Work value. The research confirmed that people stay motivated when they value their work, no matter how mundane the task. Someone building a house for low-income tenants might get pleasure from the most arduous labor, knowing the good that can come from the effort. Organizations can foster work value by recognizing contributions in a meaningful way, and regularly communicating the organizational goals toward which each employee can contribute. They can add to satisfaction through use of incentive programs that set goals for quality or quantity, and reward those who achieve or surpass them.
- Training. Many people draw satisfaction from developing the capability to do their jobs better or acquiring additional skills or responsibility.
- Support. Most people gain satisfaction from knowing that their organization appreciates their effort. This often comes in the form of meaningful recognition to those who achieve their goals or who exemplify important organizational values.
- Emotional appeal. Yes, people work better when they feel happy. Properly structured incentive and recognition programs can foster an atmosphere of fun and excitement, even in dreary jobs.
- Measurement. Knowing how one is doing in the pursuit of a goal is another way to create satisfaction. Effective measures of quality and productivity keep employees focused on goals, especially if accompanied with proper recognition when they succeed.
Intrinsic and Extrinsic Motivation: Impact on Employee Engagement
The difference between intrinsic and extrinsic motivation lays the groundwork to reflect the qualitative dimension of motivation. The distinction is critical, in that – understanding it would serve the purpose of laying out the appropriate organizational architecture that would encourage the proper motivation that would drive employee engagement.
Intrinsic motivation reflects an engagement in activities that are performed with the sole end being satisfaction. An intrinsically motivated employee would do things simply for the sheer joy of doing things and assessing results. Tangible rewards or any rewards per se are not the ends that they drive toward. On the other hand, an extrinsically motivated employee is driven by tangible rewards – money, gifts, social approval; or they are driven specifically to avoid punishments – getting fired, rejection, being passed over for an important project, and career limiting responses.
Thus, in both instances, the theory was fairly mechanistic and behavioral. In fact, even intrinsically motivated employees can be framed in a mechanistic and behavioral world wherein the cause and effect relationship is an act and the joy of seeing a result. The only difference is that they are not connected to influences from without. But what has become a fact is that if the organization provides the appropriate structure to allow employees to ignite their intrinsic drives, the organization will benefit more than the alternative framework. This does not mean that one has to do without the other; it does mean though that depending on the nature of the work and the stage of the company – either or both motivation archetypes can be activated which will elicit the right engagement to advance the cause of the company. The questions though remain – What, When and How?
What? The culture has to address deficiency needs. These constitute the needs like security in the job, reasonable pay, and opportunities for growth, promotions, recognition, etc. Deploying a structure that only satisfies the intrinsic inclinations will be less likely to succeed if the deficiency needs are not clearly addressed. This would mean that good organizations would embark and deploy programs to address and mitigate deficiency needs. However, all that the organization has provided upon successful deployment is a sense of shared relief. But the organization needs to up their ante to allow for “growth needs” which is the manifestation of the intrinsic metric. That would mean to dive deeper on a case by case basis and as a group to deploy programs that fuel aspirational and idealistic goals of the employees. A great example that I immediately recall is the 3M model or the Google model wherein employees are given time to do their own thing on company time! Now this is obviously not practical for all companies, but certainly there is and will be some points that organizations can deploy to fuel “voluntary” engagement.
When? Timing is important. An organization can set a directional tone, but when to deploy what is driven by a host of discrete or related factors – for example, rush to go-to-market, liquidity crisis, major software pushes, declaring and preparing for earnings’ release, etc. When the organization is being driven on account of all these factors and more to ensure their survival, they do not have the degree of freedom necessarily to deploy the programs that promote “growth needs”. In fact, some organizations in a hyper-competitive environment may always feel as if they are in a pressure cooker and thus cascade that pressure across the ranks and files of the company. In the extreme case, if the organization is better insulated from the trials and tribulations of external factors, they would have a greater degree of freedom to nurture the “growth needs”. Now the latter scenario is very important to understand since today we belong in the information age rather than the mechanistic industrial age. In fact, we are being ushered at a break neck pace into an age where insight gathered against information is the salient competitive distinction — the morass of data and information is fast becoming now a millstone around an organization’s neck. So to success in the Age of Insights, so to speak, the company MUST deploy programs that anticipate and nurture the “growth needs”. The case for it is amplified further by the simple fact that people are mobile and have more and more choices. Hence, the Best Place to Work is an important metric that companies and employees follow since these companies have provided the right mix. To reiterate, timing the programs is important but the fact that both programs must be deployed to ensure an engaged culture is less debatable.
How? This is the penultimate question. Once the organization have assessed what is need and when, they have to execute. How do we establish a balanced set of programs that would fuel the appropriate level of engagement that will positively impact the organization? Conversely, how do we untether from legacy programs that were good for a particular set of circumstances, but may not be good going forward. This probably comes more in the realm of organizational psychologists but here are a few takeaways. First, employees have to be given free choice – in other words, given other alternatives, they would choose to do that alternative that optimizes and increases the value of the company the most. A fine example would be co-founders banging away at their work 24X7 and fuelled by dreams and possibilities for their creation. Put on a spotlight on this behavior – Multiply this behavior a hundred fold to characterize mass group psychology, and then figure out what can be done to create a “permanent immanence” or the state of continuous excitement and engagement. What we know based on studies, that engagement arising out of intrinsic motivation results in creativity, well-being, cognitive flexibility, loyalty, etc. By comparison, we also know that engagement as a result of extrinsic motivation may be as good – or depending on your perspective, may be as bad as a sugar high. Engagement ceases immediately or slowly once the extrinsic motivator is removed. In fact, a more extreme version suggests that introduced extrinsic motivation programs that serve “dependency needs” may actually depress engagement even lower than the original state.
So the general consensus appears to be to introduce not a plan but a surprise. For example, rewards that are expected, contingent on engagement or on task completion, and tangible are more likely to be detrimental to intrinsic motivation than rewards that are unexpected, not contingent, and intangible. More studies have in fact shown that employers should pursue the internalization of an employees’ extrinsic motivation for these tasks. Thus commending employees with unplanned surprises coupled with surfacing the value of the activity in and out of the organization appeals to the individual’s innate sense of worth to the company and outside of it. Hence, recognition at deeper granularity that is served with an element of surprise in an open environment is one of the better programs that ignite employee engagement.
Risk Management and Finance
If you are in finance, you are a risk manager. Say what? Risk management! Imagine being the hub in a spoke of functional areas, each of which is embedded with a risk pattern that can vary over time. A sound finance manager would be someone who would be best able to keep pulse, and be able to support the decisions that can contain the risk. Thus, value management becomes critical: Weighing the consequence of a decision against the risk that the decision poses. Not cost management, but value management. And to make value management more concrete, we turn to cash impact or rather – the discounted value of future stream of cash that may or may not be a consequent to a decision. Companies carry risks. If not, a company will not offer any premiums in value to the market. They create competitive advantage – defined as sorting a sustained growth in free cash flow as the key metric that becomes the separator.
John Kay, an eminent strategist, had identified four sources of competitive advantage: Organization Architecture and Culture, Reputation, Innovation and Strategic Assets. All of these are inextricably intertwined, and must be aligned to service value in the company. The business value approach underpins the interrelationships best. And in so doing, scenario planning emerges as a sound machination to manage risks. Understanding the profit impact of a strategy, and the capability/initiative tie-in is one of the most crucial conversations that a good finance manager could encourage in a company. Product, market and internal capabilities become the anchor points in evolving discussions. Scenario planning thus emerges in context of trends and uncertainties: a trend in patterns may open up possibilities, the latter being in the domain of uncertainty.
There are multiple methods one could use in building scenarios and engaging in fruitful risk assessment.
1.Sensitivity Assessment: Evaluate decisions in the context of the strategy’s reliance on the resilience of business conditions. Assess the various conditions in a scenario or mutually exclusive scenarios, assess a probabilistic guesstimate on success factors, and then offer simple solutions. This assessment tends to be heuristic oriented and excellent when one is dealing with few specific decisions to be made. There is an elevated sense of clarity with regard to the business conditions that may present itself. And this is most commonly used, but does not thwart the more realistic conditions where clarity is obfuscated and muddy.
2.Strategy Evaluation: Use scenarios to test a strategy by throwing a layer of interaction complexity. To the extent you can disaggregate the complexity, the evaluation of a strategy is better tenable. But once again, disaggregation has its downsides. We don’t operate in a vacuum. It is the aggregation, and negotiating through this aggregation effectively is where the real value is. You may have heard of the Mckinsey MECE (Mutually Exclusive; Comprehensively Exhaustive) methodology where strategic thrusts are disaggregated and contained within a narrow framework. The idea is that if one does that enough, one has an untrammeled confidence in choosing one initiative over another. That is true again in some cases, but my belief is that the world operates at a more synthetic level than pure analytic. We resort to analytics since it is too damned hard to synthesize, and be able to agree on an optimal solution. I am not creaming analytics; I am only suggesting that there is some possibility that a false hypothesis is accepted and a true one rejected. Thus analytics is an important tool, but must be weighed along with the synthetic tradition.
3.Synthetic Development: By far the most interesting and perhaps the most controversial with glint of academic and theoretical monstrosities included – this represents developing and broadcasting all scenarios equally weighed, and grouping interaction of scenarios. Thus, if introducing a multi-million dollar initiative in untested waters is a decision you have to weigh, one must go through the first two methods, and then review the final outcome against peripheral factors that were not introduced initially. A simple statement or realization like – The competition for Southwest is the Greyhound bus – could significantly alter the expanse of the strategy.
If you think of the new world of finance being nothing more than crunching numbers … stop and think again. Yes …crunching those numbers play a big part, less a cause than an effect of the mental model that you appropriate in this prized profession.
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