By Theresa Seagraves
2004, 246 pages, Paperback with CD-ROM
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The Financial Value Chain
Figure 2-1 shows the layers of people in an organization as a financial value chain.
For simplicity's sake, four levels are used to describe the movement of value through any organization. Depending on the size of the organization you work with, there may be more or fewer actual levels in your organization. No matter how many organizational layers you really have, the people in these layers tend to operate like one of the four levels in this model.
The first level (shown at the far right in figure 2-1) is the level of the Individual performer. This is the level that workplace learning and performance (WLP) professionals are most comfortable with simply because this is where most of the people in an organization reside and where the majority of the 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.
The second level is the First-Level Management/Operations (1st/Ops, pronounced first ops) layer. This is a tactical layer comprising first-level supervisors and high-level operations contributors who have a great deal of influence over the financial performance in other jobs. An example of a 1st/Ops person 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.
Moving to the left in figure 2-1, the next level in the financial value chain is the Middle management (Mid) layer. These are the 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 final, or Senior level.
You will recognize the Senior level (at the far left in figure 2-1) by the use of certain words in their titles. Chief anything (chief executive officer, chief financial officer, chief information technology officer, and so forth) is a tip-off that a person occupies the Senior layer.
The word "senior" or "executive" coupled with a title is another clue. For example, many corporations use several levels of vice presidents. Senior executive vice president is a typical senior title. In other organizations, such as the government, there can be many levels of directors. Senior executive director is a higher form of the title of director and is more likely to be used at the top of the organization. The focus of the Senior layer is to create the vision, direction, and pace for the rest of 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 2-2 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 is a broad, financially based measure of a Senior executive and the right-most measure is a specific, performance-based measure of an Individual contributor.
In the example shown in figure 2-2, Senior management is concerned about the organization's contribution profit margin (CPM). The contribution profit margin 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 (R&D), 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 contri- bution 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 organizations, Senior managers know what it means not to be able to keep ahead of their competitors or not make payroll, loans, or taxes. It means layoffs, restructurings, and other unpleasant situations to have to deal with. 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 their Mid managers a portion of the organization's costs to control or revenue to generate. In the case illustrated in figure 2-2, Mid manufacturing management is concerned about the growing cost of goods sold (COGS) and how that affects the contribution profit margin. The cost of goods sold is defined as the total of the material costs, labor costs, and overhead costs required to make or buy the products that an organization sells. Organizational insomnia gets worse as Mid managers tighten their focus on COGS. With all this lack of sleep, is it any wonder that your audiences have such short attention spans when you are trying to communicate your value?
Now, Mid managers will not go it alone either. COGS is made up of material costs, labor costs, and overhead costs. In this case, the focus is on material costs. Since people will manage to their measures, lst/Ops-level managers are completely focused on getting material costs under control. In figure 2-2, contribution profit margins, COGS, and material costs finally make it down to the Individual contributor in the iorm 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.
How to Translate Value
Each level of manager in each separate department, division, or unit has more or less responsibility and, therefore, smaller or broader measures depending on his or her level. This is one part of going back to the basics.
Another part of the basics that many of WLP professionals miss is that each level of your audience will not make the translation for you of what, say, a change in rework rates means to material costs, COGS, or contribution profit margin. Because many WLP professionals are not comfortable with the language of financial measures or skilled in mapping financial value chains, it is easy to fall into the trap of hoping it will be obvious how valuable they are if they speak the language of performance.
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 is their job to make that translation because no one will give 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 tell me what the value of HPT was. It was my job to tell him. He had people approaching him every day telling him exactly why and how they could help him accomplish his goals. If I could not tell him why HPT was valuable to him, then I was wasting my time and his.
Financial Value Timeframes
Even if you are giving people information at their level and in their terms, you may still be overlooking another basic piece of the puzzle. In figure 2-2, 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 are 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.
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 at 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 or the 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 value directly to your immediate audience. You also need to help the audience communicate value to the next level and up.
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