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 .

Figure 2-2: A sample financial value chain.

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 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 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, 1st/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 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.

Important ‚  

Most WLP professionals focus on the Individual layer. The language of this profession is the language of performance objectives. WLP professionals must ask themselves questions such as: ‚“How can we best train our manufacturing workers to minimize the rework rate in plant seven? ‚½ At the Senior level, though, the language is the language of finance. Senior managers ask themselves questions such as: ‚“How can we improve our contribution profit margin? ‚½ At the beginning of this chapter, it was noted that many WLP professionals feel as though they just did not get it when they were asked, ‚“What is my return-on-investment for this program? ‚½ To get it when communicating value, WLP professionals must be able to make the connections in the financial value chain visible so that they understand the perspective of their audience.