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Is It Time To Measure Employee Lifetime Value?

Graham Hill | Jan 28, 2008 2,327 views 11 Comments

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There is lots of talk about turning employees into anbassadors. But how do you know whether they are successful? And more to the point. How do you know that being an ambassador has created financial vlaue for the company? As the old adage goes, “What gets measured gets managed and what gets managed gets done!”. We have long measured the short and long-term value of a whole host of things: from internal technology all the way to outside customers. So why shouldn’t this apply to those that bridge the inside-outside gap, to employees? Including to employee ambassadors.

Now I know what you are thinking. Don’t we already use a balanced scorecard of measures including employee measures. That is true, (although we should note that employee measures were never a part of Kaplan & Norton’s original balanced scorecard), but are soft employee measures really enough? Or is it time that we started to calculate the hard financial value of employees, particularly front-line employees, whose actions are directly responsible for the creation or destruction of customer value?

A simple comparison with the components of Customer Lifetime Value provides a strawman to illustrate how Employee Lifetime Value (ELV) could be calculated:

  • Customer Revenues in CLV corresponds to Employee Revenues in ELV. The revenues just needed to be allocated across employees instead of across customers. And following the customer value chain should allow the revenues from non-front-line staff to be calculated as well. If customers are not willing to pay for their work, or it doesn’t directly support activities that they are willing to pay for, then the activities have no value and should be scrapped.
  • Customer Costs correspond to Employee Costs. The same customer value chain thinking applies to the calculation of costs as well. Indeed, employee costs should be much easier to calculate than customer costs because they are regularly monitored by Human Resources.
  • Customer Lifetime corresponds to Employee Lifetime. Again this is much easier to calculate than customer lifetime due to the involvement of Human Resources. You even know their individual reasons for defection if you conduct Exit Interviews.
  • Customer Value at Risk corresponds to Employee Value at Risk. This is the calculation of how much of the value locked-up in an employee (and therefore in their value-creating interactions with customers) could be lost by management decisions, for example, the decision to cut-back on employee training because a recession is looming.
  • Customer Portfolio corresponds to Employee Portfolio. Just as companies need to manage customers as a portfolio of balanced value and risk, so they need to do the same for employees too. Some employees may be natural innovators who create additional value through their experimentation, but also create additional risk at the same time. Companies need a balanced portfolio if they are to prosper.

Once we start to calculate the hard financial value of employees (and modern value managemnt systems allow us to do this if we want) then we can start to manage employees as a critical part of the value creation system. We can start to optimise the mix of employees so that they maximise their contribution to value creation. We can start to optimise the mix of training, technology and support so they maximise their contribution. We can reward star employees based upon the financial value they create. And we can start to get rid of employees who destroy value, or who don’t create anough value to cover their costs of employment? Tough, certainly, but companies are not an arm of government Unemployment Bureaux. And no harder than doing the same for customers. And isn’t it time that we started to make decisions based upon some semblance of facts, rather than the wooly decisioning that passes for human resource managtement in most companies.

I know that this may fly in the face of your value system, particularly if you were brought up in a social democratic country in Europe. As I said at the beginning, this is a strawman for you to pick apart and improve with your own constructive suggestions. I look forward to your comments and the ensuing discussion.



What do you think? Are employees too valuable to measure with hard numbers? Or are they just another factor in production like land and capital?

Post a comment and get the conversation going.

Graham Hill
Independent CRM Consultant
Interim CRM Manager

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11 Responses to Is It Time To Measure Employee Lifetime Value?

  1. Francis Buttle January 29, 2008 at 12:00 am (70 comments) #

    Graham

    What a good piece! I remember talking about 6 or 7 years ago with the Juliet Williams, the founder of boutique management consultancy, Strategic Management Resources about this very issue. Juliet had been at Northwestern University, home to some many of marketing’s deepest thinkers, and they had been working on this very issue. My memory of that conversation is that Juliet’s position was that ELV equates to the total value of all customer relationships ‘owned’ or ‘part-owned’ by the employee.

    Having had just a few years to think about it, I now don’t think that goes far enough. Relationships with other stakeholders are also important. The ELV of a Director who is well connected in political circles may be calculated in gigagargantuan dollars. Retired politicians who find positions on the boards of banks, resources companies and engineering firms are testimony to that assertion.

    Francis Buttle

  2. Graham Hill January 29, 2008 at 4:19 am (992 comments) #

    Francis

    Thanks for your comments. They are much appreciated.

    This topic has been in the making for some time. McKinsey have been looking at it recently and has created a range of thought leadership around measuring Profit per Employee and creating Markets for Talent.

    I agree with your suggestion about following the extended value creation chain beyond just relationships with customers. Obviously, care has to be taken in not including everything as a potential value creation driver; the value of the sum of all employees shouldn’t logically exceed a company’s market capitalisation. Otherwise Private Equity will become interested.

    The tools to identify where value is created in the extended value chain are already available. They hail from other value-based disciplines such as Value Engineering and Environmental Cost Analysis. The $64,000 question is if management is willing to stand-up and count its own worth.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  3. Daryl Choy January 30, 2008 at 2:47 am (129 comments) #

    Graham

    Interesting post.

    Is there any relationship between Employee Lifetime Value and Employee Value Proposition (EVP)?

    And why should firm measure ELV? Would that upset employees and thus performance? If we believe happy employees make happy customers, why would firm do anything that would potentially jeopardize the relationship between firm and employees?

    If firm has to measure ELV, then should employees measure Enterprise Lifetime Value in return?

    Would the process regrettably lead to a vicious cycle of misunderstanding and conflicts?

    Daryl Choy, the founder of Touchpoint eXperience Management, helps firms make a difference at every touchpoint. Choy can be reached at wisdomboom.blogspot.com.

  4. Graham Hill January 30, 2008 at 3:58 am (992 comments) #

    .. And what gets managed get done, as the old saying goes.

    You raise some interesting questions to the strawman I put up. Particularly the ‘should we measure ELV at all’ question. In reality, we already use extensive employee measures. Human Resources already looks at employee satisfaction, days at work, productivity and many other measures. And management already looks at a whole host of operational measures as part of the annual staff performance appraisal process. In most companies, this appraisal is used as the basis of pay raises and promotions for the highest performers, and training and support for the lowest performers.

    ELV is merely an extension of the measurement process. But unlike the other often subjective measures used today, it is an objective measure. Isn’t that fairer to employees than what often passes for staff appraisal today? Shouldn’t the best performers be identified and rewarded for the value they create Or the best teams? And shouldn’t the worst performers be identified and given the additional training and support they need to improve value creation? Or in the worst cases, fired?

    As I said at the start. What gets measured gets managed. And what gets managed gets done. Maybe it’s time to close the employee measurement loop and do ELV.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  5. Scott Santucci February 1, 2008 at 9:36 am (34 comments) #

    I view a company as an engine. It converts fuel (funding) into energy (wealth) and it has a variety of different parts (business units, functional areas, etc) which come together to create value for its customers. In an engine, every part has a specific purpose and measurable value. Engineers know the exact tensile strength required for a given bolt to meet performance objectives.

    My point here is that for a company to be able to measure (other than sales people of course) the worth of a particular employee, they need to understand the role that employee plays in the value delivery or value communications chain.

    Without a diagram of those relationships, you really can’t determine the value of most employees.

    Scott Santucci

  6. Bob Thompson February 1, 2008 at 10:46 am (875 comments) #

    Examples of successful customer value management are few and far between. A nice theory that’s hard to implement in the real business world.

    Employee value management could suffer the same fate.

    All this VM stuff is so very left-brained, and there’s too much of it in business already. Customers and employees are people. I think companies would be better advised to improve their emotional connection with human beings, instead of trying to make everything a cog in the enterprise profit machine. Would you want to work at a place like that?

    Bob Thompson, CustomerThink Corp.
    Blog: Unconventional Wisdom

  7. Graham Hill February 1, 2008 at 11:51 am (992 comments) #

    Scott

    In principle I think you are right about the complexity of an organisation. If anything, I don’t think you go far enough.

    Organisations are not really like machines at all. You can take a machine apart, understand how the individual parts work and put it back together. The machine is just the sum of all the individual parts. But organisations are too complicated for that. They are complex adaptive systems whose behaviour emerges from the interactions of the indivdual parts. Organisations should be much more than the sum of their individual parts.

    Having just made my life more difficult, I need to find a pragmatoic solution upon which to base employee valuation. Rather than look at roles, responsibilities and relationships, I prefer to look at the activities people actually carry out. There is a vast toolkit from value engineering, lean/six sigma, activity-based costing and other disciplines that we can use to understand what value an activity contributes (if any) and thus what value someone who carries it out contributes.

    These are still early days, like for many value-based management activities. And they are difficult to do. But invest in developing and improving them we must, if we are to make management more fact-based. As Bob points out, this can make business seem much much more hard-nosed. But ask yourself, “What is the alternative?”. It is better to have some knowledge of who is creating value and to manage accordingly, than to suddenly find the collective workforce unproductive, uncompetitive and unemployed, as their jobs get outsourced to new technologies, or to lower-labour cost employees in an emerging economy.

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  8. Scott Santucci February 1, 2008 at 4:56 pm (34 comments) #

    Graham –
    I’ve been spending a lot of time studying complex systems, because you are right,(click here for a link to the New England Complex Systems Institute http://necsi.org/) – businesses are infact adaptive systems and behave more like ecologies than machines. But, it’s true that humans are much more efficient when rules are in place.

    I must have been writing my soap box rebuttal to Bob (which I think I am strongly agreeing with your premise of measuring things) when you posted your comments back to me.

    I have found some success measuring peoples value contributions in a variety of complex processes, and have mapped these out into a blueprint. I can send you a copy of the visual tools I’ve used to help break this down into categories and we can discuss it if you’d like.

    For example, a proceed like “supplying a video network” to a business has some value (if people use it) which you can quantify. Then, the costs of providing that service should be less than what the value of that service is. By drilling into the specific people who perform functions in that workflow, you can then have a basis for valuing individual tasks.

    It’s my supposition that before you can measure the value of an employee – you need to understand what workstream(s) they are involved in – and what the economic contributions of those processes are on the business.

    It looks like you and I are equally anal in terms of value, so if you’d like to share ideas – I would be happy to do so.

    Scott Santucci

  9. Scott Santucci February 1, 2008 at 5:11 pm (34 comments) #

    Yes, people need to feel valued, and no one wants to feel exploited, and you need to feel heard, etc.

    But that’s no way to run a business. It’s a fact that people work better with some degree of structure. A company where some people are accountable for delivery and others are not is going to foster tremendous resentment.

    Additionally, if you are in a role where you are contributing a ton of value, but it’s not understood by the business, then your morale is going to suffer. The people who are passionate about serving your customers are the ones most likely to get frustrated first.

    Like it or not, left brain or right brain, customer demands are forcing fundamental changes to businesses. Companies need to look past their internal silos and that means to get things done, an individual employee requires more inputs from others. If you are on the front line trying to solve a customer’s problem, and you require input from other people who aren’t doing their job, how happy are you going to be? How will you react after working in this environment for a while your manager says “I understand how you feel Bob, we value your input. Our employees are our greatest resource. Here is a certificate to show you just how valued you are.”

    I’m sorry, but that’s just hogwash. It’s insincere and it’s insulting. Perhaps it’s just my generation-x cynical nature, but I hate it when I am given rhetoric about how valued I am. The people I’ve worked with in the past are far more energized when they feel a part of something bigger, and that means a lot of folks rowing together. This requires details.

    Everyone has been in a company where the CEO says overarching things like “we are going to broaden our base and deepen our penetration” which translates to “we are going to do everything for everybody” at the worker bee level.

    Structure, order, and accountability – I just don’t accept these are things to shy away from, and because many companies don’t do it well today that people should focus on emotional connections. It’s a waste of time, money, and effort to invest in programs to boosts emotional connections without a purpose, and that purpose should be grounded in adding value to customers.

    I work a lot within the outsourcing industry and deal with a lot of these “touchy feely issues”. In the US IT professionals are losing their jobs because no one has documented the value of “soft intangibles” like – understanding the culture or slang, the benefits gained from being on location, etc. There is no one who can convince me that the overall value of IT services is higher delivered by an offshore provider than that of an internal, native group. However, without any real connection to how those people add value to the enterprise, they lose their jobs to the lowest cost alternative.

    Lets not fool ourselves here, businesses exist to make money. If you cannot connect the dots between an employee and the value that employee provides, that employee IS going to be treated as a commodity and all of the well intended emotional improvement stuff really just works to pacify employees until they are replaced. I get to work with a lot of really large companies and I see it everywhere.

    Layoffs are a reality and I see companies cut bone (instead of fat) in a lot of places because they have no way of valuing a particular position or role. How does that effect morale when people who are valued within a workflow are downsized because the corporation doesn’t understand the value of that position?

    Bob, regretfully, I could not disagree more strongly with you on this topic. Employees know in their heart of hearts they are a cog in a machine – they just want their machine to function well. The truth is that everyone’s salary is paid in some way by the value they provide customers. The more you can trace a role to adding value to a customer, the happier that employee is going to be because they will be truly valued.

    Perhaps my strong opinions are tied to some real world experiences I’ve seen. One very large professional services firm believed it needed to “improve employee morale”, so marketing got the project. To make a long story short, they sent out to all 20,000 employees a mirror with the company logo on it and the text “You are our brand”. At a cost of $6 each, do you think the morale of this company improved or declined knowing management just spent $1.2 million dollars on something like that?

    The reality here is that many companies do these kinds of things which prove to their employees they don’t know what’s going on. So, to say focusing value management is “great theory” is certainly your prerogative. However, I would counter that investments in disingenuous, “emotional connections” have a negative return unless grounded in some kind of business reality.

    I’m sorry for the soap box here, but I’ve seen tens of thousands of jobs replaced through outsourcing agreements. Those people are just referred to as “FTE’s” and treated as accounting items. Through no fault of their own, someone failed them because in the calculus for their role, the only thing that could be compared was the functions they did versus the functions someone else did in India. Cold, hard cost calculation. Everyone knows they are susceptible to that.

    I think it’s inhumane for us NOT to outline the real value of each employee, to provide for them what specifically is expected of them, and to start quantifying the value of the relationships they develop internally and externally. The more you can articulate the value of people’s contributions, the less they can be viewed as a commodity. How many people had to lose their jobs to Indian call centers before businesses began to realize – hey, people don’t want to talk to my comany unless they understand the people on the phone.

    Scott Santucci

  10. Andrew Rudin February 5, 2008 at 8:12 pm (861 comments) #

    Bob’s right. I view employee value metrics as stuff that often looks great on a white board in a conference room, but can’t get traction anywhere else in an organization.

    Not that it isn’t admirable or smart to think about a long-term view when hiring employees. It is–but I believe hard, cold metrics worked best for legacy sweatshop assembly lines, when real value was measured by how many (note: not how well) rear-view mirrors you could bolt into Ford Fairlanes.

    I’d like to think that the employee valuation methods that Graham has described are effective, but I’m admittedly jaded. I’ve never seen them work in the long run. And if you show me a company that is a showcase for such management-by-numbers, I’ll show you five that failed because not one member of the company’s executive staff could lead himself–let alone a team of people–off of an Excel spreadsheet.

    Measuring the value of today’s knowledge workers can’t be accomplished easily. I know. In my sales past, I’ve been evaluated by discrete metrics. Looking back, it’s still repugnant to think that the often-Herculean efforts of talented individuals were (and are) distilled to a few measurements that appear in Column N of a spreadsheet–only to be “interpreted” by a manager in a remote city who has no more analytical skill than a cricket. In one famous example, a company I worked for divided quarterly total salesperson revenue by mileage driven (known as “windshield time” in sales-speak) to determine some type productivity measurement–I’m not sure what. Then, in total-serious mode, the District Manager presented the “findings” at our sales meeting (you can stop snickering in the back row–I am not making this up!). If there was a person in the room who benefited from that analysis, it was a well-kept secret.

    This is a poignant example of a manager who had way, way, way too much time on his hands, and nearly hanged himself with his own howling delusions in the name of managing by numbers.

    As evidenced by the preceding example, formulating and maintaining metrics are frequently a crutch for dodging true leadership imperatives. It’s easier not to lead when we’re inundated with data about employee’s activities and given tools that purport to help us glean false insight from that data.

    As Jack Welch wrote in “Straight From the Gut,” finding, growing, and rewarding valuable employees is comparable to the work of a gardener. You cultivate what shows promise. That takes leadership, not accounting. At GE, the numbers were reserved for measuring and evaluating financial performance, the byproduct of effective leadership. It’s not the other way around.

    AR

  11. Scott Santucci February 6, 2008 at 11:46 am (34 comments) #

    Andrew – I think using a quote from Jack Welch to close out your argument works against you. Mr. Welch is a big fan of metrics – he’s every Six Sigma consulting company’s posterboard. He’s also the same guy who advocates being number 1 or 2 in a market.

    I think the issue here isn’t having metrics – it’s what the metrics people are evaluating. As a sales person myself, I hated activity based metrics (did you make this number of calls, did you have this number of meetings, etc) but I loved VALUE based metrics (what is my average deal size, how long is my sales cycle time, etc).

    The key objective here isn’t to create BS metrics to hold people accountable to performance, but to find measurable ways how people contribute real value. I agree people should run from the hills with stupid, meaningless performance based metrics that Dilbert’s pointy haired boss would use to have inane employee reviews with. However, If I can actually show you, with real evidence- how I added value to the enterprise, then my discussion about a raise would be a lot easier.

    I will say this again, the reality is that companies are under tremendous pressure for margin improvement and every CFO’s low hanging fruit is to cut FTE expenses. This is why offshoring is so huge right now, and only the cost side is entering into the calculus. If you don’t counter balance the cost with value delivered, employees are going to be treated as commodities (of course outside of the top 20% who have been identified as exceptional by management).

    Scott Santucci

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