Building and Using a Financial Imperatives Scorecard

The basic layout of the financial imperatives scorecard is shown in figure 9-1. There are a few rules you should rely on when creating and using the information from a scorecard. As each scorecard item is discussed in the sections that follow, you ‚ ll have an opportunity to examine a completed scorecard that Marcella might have used to describe the value she created with her changes to the new hire training program described in chapter 8. This approach will help you see how the scorecard is built piece by piece.

Figure 9-1: Layout of the financial imperatives scorecard.
You may go to the companion Website (www.astd.org/astd/ publications ) to download a PowerPoint file for this scorecard.

Creating the Scorecard: Intervention and Basis

The first part of the scorecard to examine is the two lines at the top labeled Intervention and Basis. Completing the intervention line is easy. Simply name the intervention that you will be tracking with your scorecard.

Basis is a bit more difficult, but not much. The first decision that you must make for your scorecard is to define how you will count your numbers . Basis refers to how you will count so that you are comparing like to like, or apples to apples, so to speak. There are three parts to your basis: monetary units, intervention units, and time units. The term monetary units simply means the currency you are counting your value in. For many of you, this will be an easy choice because you will be tracking interventions that only occur within one country. For those who are working across national boundaries, it is critical to note if the numbers reflect U.S. dollars, Canadian dollars, yen, euros, pounds , or some other unit.

Intervention units define how you will count benefits and costs in terms of either the participants in the intervention or some other countable item that is to be changed for the business. Examples of intervention units may be per participant, per workgroup, or per assembled product.

Time units are used with benefits and refer to how often your benefits will be counted. Examples may be hourly, daily, weekly, monthly, quarterly, or yearly. To compare like to like, it is important to know that you are counting benefits over the same periods of time.

During Marcella ‚ s 3-year tenure as a training manager at ABC MediCompany, she has made several changes to new hire training for the contracts renewal department. The changes are perceived as having varying degrees of value by managers at ABC MediCompany. The actual value of Marcella ‚ s changes is summarized in the completed financial imperatives scorecard shown in figure 9-2. In Marcella ‚ s case, her intervention is the contract renewal new hire training. The basis of her scorecard is to count in U.S. dollars, per new hire, per month.

 

Figure 9-2: Marcella ‚ s completed financial imperatives scorecard.

Creating the Scorecard: Calculating Benefits

The next thing to observe are the benefits listed on the blank scorecard in figure 9-1, lines 1-3, in the Measures/Category column. This description of your benefits is where you tie your work in identifying financial value chains in chapters 4, 5, and 6 to your financial imperatives scorecard. In line 1, you ‚ ll see a notation for Senior Measure under the word Benefits. In lines 2-3, you ‚ ll see notations for Individual, 1st/Ops, and Mid measures. In your own scorecards, you can always add more measures (more value chains) by adding more lines.

To tie your scorecard to your value chains, you need to note which Senior-level measures you intend to impact with your intervention. As you recall from chapters 4, 5, and 6, Senior-level measures include contribution profit margin, operating earnings, current assets, current liabilities, and cash flow. The rest of the measures in lines 2 and 3 of the benefits section are also taken directly from your value chains. The first measure on each line is the Individual measure that you are affecting with your intervention. Underneath each measure, it is very helpful to list the 1st/Ops and then the Mid measures so that you can literally see the value chain(s) that you are tracking by reading down the Measures/Categories column of your scorecard.

In Marcella ‚ s case, the changes that she made to the new hire training increased renewals, decreased turnover , decreased lost work hours due to experienced employees being required to repeatedly explain procedures to new employees , decreased errors, and improved the cost of the training program itself.

By reading ABC MediCompany ‚ s income statement (chapter 5), Marcella was able to identify a critical Senior manager measure for ABC MediCompany: the contribution profit margin. The contribution profit margin is the first profit margin line on an income statement. It is created by subtracting from revenue the cost to manufacture or provide products, as well as other expenses incurred by an organization to sell its products. It is often very closely watched by Senior managers because if the contribution profit margin is too small, Senior management will have to take drastic measures to ensure that there is a final net profit for the business.

 

The focus in Quick! Show Me Your Value is on tangible benefits that can be converted to monetary terms. Intangible benefits are defined as benefits that cannot be, or are not cost effective to be, converted to a monetary value relative to the solution that created them. Though intangible benefits will not be addressed further in this book, do not underestimate the ability of intangibles to support the financial value statements you will make. WLP professionals who have presented the results of detailed ROI studies report that such intangible benefits as increased morale , improved customer satisfaction, greater likelihood for high-potential employees to remain with an organization, or decreased stress are very favorably received in the boardroom.

Marcella believed that turnover rates would be too hard to quantify, so she simply noted them to herself as a possible intangible benefit. Marcella put the rest of the changes from her new hire intervention into contribution profit margin financial value chains, as shown in figure 9-3.

Figure 9-3: Marcella ‚ s financial value chains.

If you compare figure 9-3 to figure 9-2, you can see that the number 1 above the Senior measures in the picture of value chains corresponds to line 1 of figure 9-2, the completed example of Marcella ‚ s financial imperative scorecard. All of her value chains point to the Senior measure of the contribution profit margin. If you look at the numbers 2-5 next to each value chain in figure 9-3, you can see that these value chains correspond to lines 2-5 of Marcella ‚ s scorecard shown in figure 9-2. By reading each line in the scorecard, you can see at a glance all of the value chains being tracked for a particular intervention and how all of the chains are related to each other.

 

Rule #1: Track Benefits. Workplace learning and performance professionals who have some experience in measuring or estimating benefits know that trying to figure out a realistic amount of benefit takes time and sometimes a great deal of effort to track down the right numbers. If figuring out benefits were easy, many more WLP professionals would already be doing it regularly.

Rule #1 of financial imperative scorecards is to never present costs without drawing a connection to the benefits that those costs have brought to the organization. Here ‚ s why working out the benefits to the organization is absolutely critical to your success. Many WLP professionals know that they are expected to be more financially savvy, so they talk about the only numbers they have easy access to: the numbers that describe the costs of their WLP programs. Your costs or the costs of your department are already known to influential members of your audience. If they already know your costs and cannot figure out what benefit they are receiving from them, they will draw their own conclusions.

Just as in the children ‚ s game of Rumor, your audience ‚ s conclusion may be nothing like what you expect them to conclude. That can be disastrous. Highlighting your costs without pointing out offsetting benefits only makes your situation worse . Presenting costs without expected or actual benefits simply reinforces a subconscious belief that the costs must be out of line or unnecessary. If the perceptions of your value have fallen into a given state, your audience ‚ s conclusions about your value will be especially harsh .

Your audience will not tell you the value of what you have done. That ‚ s your job. You can only draw your audience ‚ s attention to financial benefits if you have worked them out for yourself first. The discipline of creating a financial imperatives scorecard allows you to present a more balanced picture between benefits and costs. It is critical that you do the work of naming your benefits and then quantifying them.

Rule #2: Quantify the Value Add. Now it ‚ s time to move across the scorecard and fill in the numbers that tell how much financial value your interventions have created for the organization. In the blank scorecard in figure 9-1 you can see that there are enough columns to reflect three different sets of changes in an intervention. You can add or remove as many columns as are needed to reflect your own situation.

These changes are referred to as value adds. Value adds are calculated by first estimating or assigning a numerical value to each of the performance measures of the Individual contributor . The first baseline in column II is noted as the original baseline. This means that the value of each of the performance measures for the Individual was measured as it existed before the intervention was introduced. Each of the other baselines was estimated or measured again after each change in the intervention. The dates that each baseline is estimated or measured and notes about the amount of time between measurements are noted in columns II, III, V, and VII of the blank scorecard in figure 9-1.

Now, take a look at Marcella ‚ s situation. As described in chapter 8, Marcella made three changes to the new hire training over a multiple-year period. Marcella ‚ s first changes were implemented six months after she was hired . Marcella changed a three-week classroom training program into a two-week classroom training program with an additional one-week on-the-job mentorship in performing renewals.

In order for Marcella to know how much value she did (or did not) add, she first needed to measure how much renewal revenue the new hires were bringing in per month and how much cost was being spent on lost work time and errors per month before the improvements in the new hire training were introduced. These numbers are reflected under Baseline #1 in column II in figure 9-2. Marcella documented her measurements in May 2001 and noted that these measurements were taken before her first change to the program.

Marcella measured how well the new hires were doing nine months later and documented the changes in column III. In column IV, Marcella multiplied the amounts of additional revenue and cost savings by the amount of her intervention basis (nine new hires) and amount of her time basis (nine months) to get the total impact of her changes on the organization.

Marcella ‚ s second change to the new hire program was to update the mentorship and add an additional week of mentorship for each new hire. Marcella used the numbers in column III as her baseline of how new hires performed before the second set of changes took effect. Marcella measured again nine months later and documented the additional revenue and cost savings in column V and her totals in column VI.

Marcella ‚ s third change involved cutting a few costs from the new hire training budget without really modifying the format of the intervention in any way. When she made her third change, she documented the effect of her changes in column VII and the total impact to the organization in column VIII.

 

Rule #3: Be Disciplined About Your Value Adds. Tracking benefits for long periods, sometimes for years , requires foresight and discipline, but it is important to your ability to continuously communicate value. Rule #2 of financial imperative scorecards is to keep your scorecard up-to-date because as noted in chapter 8, once you have communicated the value from your scorecard, it becomes a given expectation. Salespeople know that once they have communicated their story, they must have something new to say or they wear out their welcome for more conversations with their customer. Without regular updates on your financial contributions, you won ‚ t be welcome for long either.

The third rule is a corollary to the second: Capture the data right away, as it is happening. Data and memories fade astonishingly fast. It is almost impossible to recreate data when your intervention has dropped into a given state, you ‚ ve adopted a defensive position, some of the people originally involved are no longer around, and you can ‚ t remember critical details about what happened . It is far easier to document something while or immediately after it has occurred. It is also much more credible. It is easier for your audience to agree with you or to correct your numbers when the situation that produced them is fresh and recognizable. Without such numbers, it is difficult to ask for more support later or to reactively defend your value to the organization.

Although Marcella did document numbers several months after her changes, she had new hires who were actively demonstrating the desired behaviors and value at the time she captured her data. This rule holds as true for capturing costs as it does for capturing benefits.

 

Creating the Scorecard: Summarizing the Benefits

A little later in this chapter, you ‚ ll read some important points about isolating the impact of your interventions from other changes or initiatives within the organization and about the importance of being very conservative with your numbers.

For now, assume that Marcella was taking very conservative credit for numbers that she could show were created only by her changes to the new hire training. This being the case, you can see that on line 8 of Marcella ‚ s scorecard, the gross benefits that Marcella generated for her first changes in the new hire program were $79,380. The gross benefits from the second round of changes were $54,747, and the gross benefits from the third changes were $5,100.

On the blank scorecard in figure 9-1 and on Marcella ‚ s scorecard in figure 9-2, you can see that there a line for the total gross benefit to be displayed and a calculation for the cost per intervention unit. This is displayed on lines 5 and 6 of the blank scorecard and lines 7 and 8 of Marcella ‚ s example. Marcella ‚ s intervention unit is per new hire. Later, in chapter 13, you ‚ ll see how to use this kind of number in communicating value to certain audiences. For now, assume that Marcella not only knew what the total gross benefit of her changes were (something that will be of interest to Mid and Senior managers), but she also knew what this meant for each new hire (something that will be of interest to 1st/Ops and Individuals). For her first change, each new hire brought in or saved an additional $8,820. For the second change, per new hire benefit was $4,977. For the third change, per new hire benefit was $510.

 

Creating the Scorecard: Categorizing Costs

The next section for your scorecard is the costs section. On the blank scorecard, line 7 contains the heading Intervention Costs and a notation for the Senior measure. This Senior measure may be different from the one for your benefits. This Senior measure is the area of the income statement where the costs of your interventions will be allocated. The costs of your intervention are most likely to show up under the contribution profit margin or in operating expenses, depending on how your organization or target organization tracks WLP costs. It is a good idea for you to find out what part of the income statement the costs of your interventions are charged to.

The next four lines in figure 9-1, lines 8-11, reflect cost categories for you to track the costs of your interventions. There is no one right way to categorize the breakdown of costs in your scorecard. You simply need to be consistent in your categories and in what types of detailed items you group together in your categories.

You can see in figure 9-2 that Marcella chose to categorize her costs according to the ADDIE model. As a model for developing interventions, ADDIE has been around for decades. ADDIE is an acronym that stands for analysis, design, development, implementation, and evaluation (Kruse, 2002). Marcella ‚ s cost categories are shown in lines 10-14 in column I of figure 9-2.

Moving across the columns in the scorecard, it is important to track costs each time you change your intervention. Costs are tracked per unit of intervention and added together to a total for each category. In figure 9-1, columns III, V, and VII are set aside to track costs per intervention unit. Columns IV, VI, and VIII are used to total the costs for each cost category. In Marcella ‚ s case, she has tracked the costs per new hire to analyze, design, develop, implement, and evaluate each of her changes in columns III, V and VII. She totaled her cost categories in columns IV, VI, and VIII.

In lines 12-14 of the blank scorecard and lines 15-17 of Marcella ‚ s example, the costs for each change are totaled and, then, for use later, divided by the intervention unit. In Marcella ‚ s case, the total cost for each of her three changes was $7,740, $2,200, and $490, respectively. The cost per new hire was $860, $200, and $49, respectively.

 

Creating the Scorecard: Showing Your Value

Now that you have calculated your benefits and your costs, you can summarize your value ‚ that ‚ s what executives really want to see. Finally, you are able to compare the relative value of your contributions against all the other competing ways that executives could have spent the organization ‚ s money to gain the most good for all.

Your executives want you to act like a general manager or a salesperson. General managers know that there are always too many demands for the too little money that the organization has available to it. It is rare for a general manager not to deal with this issue daily. As stewards of their organizations, general managers must answer questions such as, ‚“Do we truly need this? ‚½ or ‚“What would happen if we didn ‚ t spend this money? ‚½ or ‚“What other ways can this organization get to the same answer for less cost? ‚½ or ‚“If this is the right solution, are we getting the most we can for the least amount of money? ‚½

Successful salespeople know that they must be able to answer these questions and create a compelling case for why their solution is the best use of the organization ‚ s money. They must be able to discuss why they bring the best total benefits for the lowest costs. Salespeople are never without the case for their solution. As a steward for your people, your job is to never be without yours so that you can demonstrate your value at a moment ‚ s notice.

Rule #4: Be Ethical. When creating your scorecard, rule #3 is to track the obvious and be consistent in counting costs. A WLP professional can make any intervention look better if he or she ignores some known costs or doesn ‚ t include some of the costs of delivering the intervention.

Such behavior has led to major corporate scandals. Don ‚ t fall into this trap. There is always a bit of skepticism in every audience when someone is communicating his or her own value. Your ability to communicate your value rests on how consistent and credible your audience believes your numbers to be. If your audience discovers that you do not have a good explanation for why you haven ‚ t included some costs, your credibility will suffer ‚ perhaps irreparably. Credibility is one of your most precious assets in communicating value. Once gone, it will be very, very difficult to get back. Rule #4 is to track the obvious and be consistent in how you track what your solutions cost your organization ‚ every time.

Creating the Scorecard: Summarizing Value

The final section of the financial imperatives scorecard is the value summary. Lines 15-17 in figure 9-1 (the blank scorecard) and lines 18-20 in figure 9-2 (Marcella ‚ s scorecard) are set aside to summarize value.

The first value summary line lists total net benefit, which is calculated by subtracting total costs (line 12 in figure 9-1) from total gross benefit (line 4 in figure 9-1). This calculation is done for each value add.

In Marcella ‚ s scorecard, she subtracted line 15 from line 6 to get a total net benefit of $71,640 for her first change, $52,547 for her second change, and $4,610 for her third change. Marcella ‚ s total net benefits are shown on line 18 in figure 9-2.

The second value summary line is the benefit-to-cost ratio. This ratio is a quick, shorthand way of telling your audience how many dollars it got back for every one dollar it invested in your intervention. The benefit-to-cost ratio is calculated by dividing total gross benefits by total costs.

In Marcella ‚ s case, the benefit-to-cost ratios for her three changes were:

These ratios means that Marcella ‚ s first change gave back $10 in benefit for every $1 in cost. Her second change was even better, giving back almost $25 in benefit for every $1 in cost. When described as a ratio, Marcella ‚ s third change looked as good as the first. The third change returned $10 in benefits for every $1 in costs. In figure 9-1, benefit-to-cost ratios are shown on line 16. In Marcella ‚ s scorecard, you can see her benefit-to-cost ratios on line 19.

 

The third value summary line is return-on-investment, or ROI, which appears on line 17 of figure 9-1. The ROI is calculated by subtracting the total costs from the total gross benefits. This number is then divided by the total costs. The result of the division is multiplied by 100 to get a percentage.

Marcella ‚ s ROI numbers are shown on line 20 in figure 9-2. To summarize, the ROI for her three changes were:

Marcella ‚ s first change had a 925 percent ROI. The second had a 2,388 percent ROI. Marcella ‚ s third ROI looked even a little better than the first at 940 percent.

As you can see from the scorecard, Marcella had a significant impact on the bottom line with her first change (line 18 of figure 9-2). Nearly $72,000 over a nine-month period was a significant difference to her company ‚ s contribution profit margin. It could be argued that Marcella ‚ s improvements were even better with her second change, because it took her proportionately less cost to achieve almost another $53,000 in benefits. These findings are reflected in the comparisons between her first and second benefit-to-cost ratios and ROI percentages.

So, where did Marcella take a wrong turn ? Over the period covered by Marcella ‚ s first two changes, her managers came to expect this type of payback from the changes that Marcella rolled out. Unfortunately, with her third change (line 18, column VIII of figure 9-2), Marcella does not make the same level of contribution to the organization ‚ s financial imperatives. Her third improvement is less than 10 percent of the size of her last one nine months ago, and it is certainly not impressive at a time when everyone in the organization is being asked to do more with less.

Yet her benefit-to-cost ratio and ROI percentage are nearly the same or better as for the first change she made only six months after she joined the organization. Only a few months after Marcella ‚ s third change, her budget was cut. Why? Marcella ‚ s ability to make big contributions to the bottom line had become taken for granted. For Marcella, ‚“big contributions ‚½ meant the final size of the impact on the financial statements, not just the size of the benefit-to-cost ratio or the size of the ROI. Marcella ran into the downside of givens (chapter 8). Marcella really had made excellent contributions to the bottom line. In the minds of the managers around her, it was time for her to do it again. Yet for her third change, Marcella did not stay consistent within her established pattern of contribution. By not staying consistent, she bucked her trend.

Marcella may, in fact, have had excellent judgment in not cutting costs further for the new hire program, but to manage perceptions she needed to aggressively make her case for why this was so. Instead, Marcella let others draw their own conclusions. Kathleen did not have the history in the organization to fully understand what benefits Marcella had previously contributed . At the same time, Kathleen was under intense pressure to create a bigger size of impact on the financial statements.

Marcella had not been tracking numbers the way it ‚ s been demonstrated in this chapter. She had assumed that the value of her interventions was well understood by line and staff managers and was subconsciously estimated to be as high as what Marcella herself believed the value to be. Marcella let others draw their own conclusions. The results of Kathleen ‚ s conclusions showed up later in the forced cuts to Marcella ‚ s budget.

 

Effectiveness Versus Efficiency. Marcella ‚ s story is very predictable for many WLP professionals. Excellent, but repeated, interventions often level out in terms of the size of the contribution that additional improvements can make on the bottom line. This is the law of diminishing returns ‚ the economic concept that it takes more and more effort and cost to gain smaller and smaller additional results. For this and other reasons, an intervention often stabilizes in a certain format. At the same time, the perception of the intervention ‚ s value is usually dropping into a given state. Because it is likely that a WLP professional ‚ s management team will change every two to four years, many WLP professionals who work within an organization (or who have continuously sold the same product or service to an organization) run the risk of Marcella ‚ s story playing out at some time in their own careers.

Important ‚  

The discipline of measuring and updating scorecard numbers goes a long way toward changing the end of the story because that discipline helps improve communication and perceptions. The scorecard brings another potential benefit for the WLP professional: It helps the WLP professional manage the trend of the numbers as the numbers shift from reflecting effectiveness to reflecting efficiency.

Effectiveness in WLP interventions means creating new or additional impact on an organization ‚ s financial measures or financial statements such that the impact makes a significant or sizable difference to the success of the organization. Marcella ‚ s first two changes were changes of effectiveness. Large, consistent changes in effectiveness go a long way toward earning you a seat at the table with your executives. Efficiency is defined as delivering the same level of benefit as has been had previously, but at a lower intervention cost. Marcella ‚ s third change was a change in efficiency. It is possible, but often much more difficult for changes in efficiency to have the same type of impact on the bottom line that changes in organizational effectiveness can have.

Because the same formulas are used to calculate ROI or benefit-to-cost ratios whether you are talking about effectiveness or efficiency, effectiveness and efficiency can be thought of simply as convenient ways of noting what and how much has changed each time you communicate your value.

Important ‚  

The more effectiveness you can communicate, the more likely it is that you can keep your value perceptions between surprise and the high end of the negotiables ( chapter 8 ).

Be Cautious When Communicating ROI. When using benefit-to-cost ratios and ROI, there are a couple of points to be careful about when summarizing your value. On one hand, the difference in productivity between high performers and low performers can be astronomical, as has been documented in research studies (Hunter, Schmidt, and Judiesch, 1990). This means that the size of WLP ROI and benefit-to-cost ratios can, quite legitimately, be huge. But, even if your numbers are consistent, conservative, and correct, their size can simply seem impossible to managers who are used to the types of returns available from investments in property, machinery, or short-term market securities. Using such a large ROI number without carefully explaining how conservative you were in counting costs and in isolating the cause of the improvement can lead your audience to scoff and stop listening.

Important ‚  

Savvy managers know that you can get a large ROI from a very small set of numbers, as Marcella did with her third change. It is important to be able to quantify your actual contribution, rather than just using ROI percentages to communicate value. This practice can help you maintain your creditability.

Timing. The time to gather all the information that you need to demonstrate your value is not when you are in a crisis. To be sure, using the format of a financial imperatives scorecard will help you even then, but the best time to make sure you have your case put together is before you need it. You ‚ ll be thinking much more clearly then.

The very act of gathering data and making estimates can be turned to your favor. Updating data often leads to new ideas and more perceived value by the client. As you learned from Marcella ‚ s dilemma, had she maintained financial imperatives discussions, she might either have garnered more support from other managers when her budget was cut or she would have discovered that she needed to have made more effort, connections, or changes. Marcella could then have adjusted her efforts far earlier and avoided an unpleasant and awkward situation. In any case, she wouldn ‚ t have been caught unprepared.

Rule #5: Be Conservative. It is very educational, but usually very time consuming to research all of the potential costs or benefits resulting from WLP interventions. Many WLP professionals do not have as much time as they would like to perform detailed financial analysis.

If you are external to an organization, you may not have access to the information you want. Because time is always limited and you will never have all the information you could possibly want, tracking solution costs and organization benefits necessarily involves estimation. Estimates absolutely beat no data at all because when you have no idea where you stand it is very difficult to counteract a downward value slide. For this reason, adhere to rule #5: Be conservative in your estimates to preserve your creditability.

One way that WLP professionals tend to overstate their benefit estimates is by not acknowledging the potential contribution of others to those same benefits. Don ‚ t claim all cost savings, increased sales, or better morale in an organization because you ran training or some other performance intervention programs. WLP professionals rarely work in a vacuum within an organization. There may easily have been other initiatives within the organization that could also have created some of the same benefits at the same time. Being able to credibly separate your contributions from the contributions of others is known as isolating the effects of your intervention. Jack Phillips has made many contributions to the WLP profession, including many recommendations on how to be conservative and credible in presenting information about the ROI for WLP interventions. Some of his most valuable work has been to research, develop, and promote isolation techniques. A reference to one of his books describing isolation techniques can be found in the Additional Resources section.

In Marcella ‚ s case, some of the reduced errors were because of the change in class format and on-the-job mentorship, but some of them could also have come from an information technology system redesign to make the renewal process more straightforward. When it was noted earlier in this chapter that Marcella was careful to isolate the benefits for her training program, this meant that she subtracted out of the total contract renewal benefits from the impacts of the change in the information technology system and the impacts of other possible changes. She left herself only what she could reasonably verify as benefits resulting from the training program itself.