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This article was first published in the March 2012 UK edition of Accounting and Business magazine.
Last month, I looked at what is meant by organisational and people (O&P) strategy. This month’s article examines its impact on economic value, a key concern of the accountant.
I defined O&P strategy in the first article as: ‘the plans, programmes and intentions of developing an organisation to meet its present and future competitive challenges in order to generate superior economic value’.
So O&P strategy is about:
- building distinctive capabilities
- supporting growth
- ensuring that the organisation develops and changes to deliver the competitive strategy and accomplishes this at speed
- behaving in such a novel way that the customer experience is one of being cared for as if they are truly loved.
So how does this matter in terms of economic value? There are two main ways in which O&P strategy can add value:
- offensively – through helping generate more sales and/or more margin, either directly or indirectly (offensive value).
- defensively – through avoiding losing sales and/or more margin, either directly or indirectly (defensive value).
Value through people
In last month’s article I mentioned how Metrobank has placed a strong emphasis on genuinely caring for its customers; the kind of people it deploys, their style and behaviours are geared to create a very different banking experience. Here the O&P strategy is inextricably linked with the brand strategy. This should lead to acquiring new customers and increasing sales to existing customers. Word of mouth should also reduce the need for marketing spend.
Where customer service is not good, then it is a certainty the economic value will be destroyed. For example, on my second wedding anniversary I was told about a restaurant that specialised in paella. I booked for two. The experience was damaged by the following:
- When we arrived the lady who welcomed us was unsure whether she worked there or not (apparently her shift hadn’t quite started).
- We ordered the wine only to be told that the list was the old one.
- We ordered what we thought was the ‘big paella for two’. The waitress took our order as ‘two paellas’. My wife wasn’t sure that this was correct. I was sent to check. It turned out this was a smaller paella with a free glass of wine; when I asked about this the waitress said that I had ‘confused her’. I explained that I had gone by the menu and not by the offer that was written on a chalkboard outside and that they had confused us.
- At no stage did anyone ask ‘how is your food?’, only ‘are you done?’
- The tip was automatically added.
- No-one bothered to say goodbye.
I have not even mentioned the paella; even if it had been the best in the country we wouldn’t be going back. In this case, the ‘product’ was almost peripheral; it was all about the experience, and it is largely people that make experience. Understand this and you get a key insight into economic value.
At bottom, many value drivers boil down to human behaviour. I would be amazed if that restaurant was still open in a year’s time. Only the least discriminating customers will venture back – there won’t be regulars, nor positive word of mouth, and they will need lots of ‘special offers’.
The root cause of this problem seems to have been the lack of investment in hiring, training and motivating staff to a sufficient level to come over as waiters and waitresses of a medium-priced restaurant. No doubt the owner has made a cost budget set in isolation from what the restaurant’s positioning is and its brand values, its marketing strategy, and the overall vision of what the customer experience should be like.
So one of the important lessons from these cases is that the HR budget should never be seen strictly in cost centre/cost control/ headcount control-only terms, but should be matched with economic value creation.
Another is that if you try to achieve two rather different strategies at once – in this case, product differentiation and a low-cost strategy – it is very unlikely to work. In the desire to control costs, customer value is destroyed and you will feel this in lost sales and margins. Research suggests it is usually at least five times as expensive to acquire a new customer as it is to avoid customer attrition.
So O&P strategy needs to be managed strategically to generate economic value. The implications are as follows:
- Define your vision for the customer experience of your products and services – linked to marketing and brand strategy.
- Identify the possible O&P resources that will deliver that – while minimising the cost (but not in an unenlightened way)
- Identify the specific ways in which that resource mix will add offensive and defensive value.
- Estimate the extra value that will add, and any extra costs entailed (eg training and processes, mentoring, team building, attracting and retaining talent, resource deployment and planning future capabilities).
- Draw up business cases to justify this.
In effect, people investment is not considered in isolation but as an inextricable part of the whole ‘business value system’ – ie ‘the organic network of value-creating activities that combine to generate much more value than the sum of the parts’.
By ‘organic’ I mean ‘growing’ and also ‘dynamic’, in the sense that the ‘business value system’ is probably a more useful concept than just the ‘business model’, which has more static connotations.
This is a multifunctional job and one that is not just the HR director’s role. The input of the finance director is essential to target and estimate economic value. The rest of this article focuses on just that.
Targeting that value
Let us take as a case study the UK’s West Midlands Police. Some years ago the director of learning and development said to me: ‘I wish we could put a financial value on our learning and development.’ So we looked at emergency driving training, advanced murder investigation interview skills, and training in physical arrests.
As the time horizon for applying skills averaged about two to five years, there was no pressing need for worrying about discounted cashflow, so we worked in pure cashflow (officers moved on to other things). We developed a simple metric of the ‘value-to-cost ratio’ (VTCR) as the net value of cashflows over the benefit period divided by the investment cost. Without an exhaustive estimation of all the value drivers we came up with ratios in the region of 8 to 20 (20 in advanced interview techniques; for murder investigations, which are extremely expensive, any shortening of their time has huge cost savings).
This environment for assessing these intangibles was extremely challenging as data was sparse, officers were unused to thinking this way, and there was no real price mechanism for assessing the value the public would put on a better service or avoiding a worse one.
Nevertheless, the business cases were solid. In the case of physical arrest training, the (quantified) value drivers included:
- injuries to members of the public avoided
- injuries to police staff avoided (a big one)
- without full training police might be more hesitant about making arrests and this would affect public perception and undermine confidence; the force would pay a lot to avoid this
- without this training officers would not know the operating processes, so this could lead to complaints and higher costs
- defensive value. There was an ‘insurance value’ in reducing the chances of serious injury/death; very rare, but damaging and costly
- without this training police officer attrition would be much higher.
These value drivers (and others) were a ‘value tree’, and for each one the value indicators were identified; ie types of evidence that value had been created and these were either estimated using past data, expert opinion forums (‘Delphi’ sessions), or through ‘what-if’ modelling of what could go much better or go wrong, led by myself and reality- checked with senior officers.
This was challenging but exciting work and underlines how accountants can spread their wings in the quest for economic value.
Dr Tony Grundy is an independent consultant and trainer, and lectures at Henley Business School