Metrics-Based Management: ROI Spoken Here



METRICS-BASED MANAGEMENT:

ROI SPOKEN HERE

In today’s competitive environment, executives in every part of an organization need to obtain appropriate return on investment (ROI) and evaluate business alternatives. From information technology to marketing to human resources, managers are turning to corporate finance departments for help in finding new ways to measure costs and benefits, and then using those metrics to develop strategies, drive business decisions and secure project funding.

This article is one in a series from Microsoft Office System that explores issues and perspectives facing corporate finance executives.

Learning to Speak ROI

“If you can’t measure it, you can’t manage it,” according to legendary management guru Peter Drucker, who coined that adage several years ago to reinforce the value of metrics in developing and executing business strategies and improving business processes. The concept is simple: understand the numbers, and you understand your business; understand your business, and you can manage it for performance, profitability and growth.

“Economic uncertainty, and the need for companies to reduce or manage costs to strengthen their bottom lines and preserve shareholder value, has inspired a new call for solid metrics to justify investments and project costs throughout the corporation.”

Today, a more appropriate statement might be, “If you can’t measure it, you can’t get it financed.” Economic uncertainty, and the need for companies to reduce or manage costs to strengthen their bottom lines and preserve shareholder value, has

inspired a new call for solid metrics to justify investments and project costs throughout the corporation – including areas such as human resources that historically have been hard to quantify.

“Any business leader who doesn’t understand an ROI analysis is in trouble,” says Joe McCuine, director of finance for investment operations at Deutsche Asset Management, a global investment management firm. ROI, or return on investment, enables business executives to compare the financial consequences of two or more business alternatives over some specific period of time, typically 3-5 years.

During the economic boom of the dot-com era, companies were less con- cerned about hard data and more willing to make big bets on projects that were backed by little more than instinct and enthusiasm. These days, however, managers can’t get approval to spend money unless they can demonstrate a sound economic return.

“In hard times, fluff is out the window and ROI is king,” says Jeff Roster, a senior analyst at the Gartner Group, a leading technology research and advisory firm. Consequently, non-

financial professionals from marketing to human resources are learning the language of ROI, and finding new strategies and integrated technology tools to help them translate soft benefits into hard numbers.

“Technology is one of the newest intangible assets that finance professionals are trying to measure.”

This renewed emphasis on metrics-based management and measuring ROI is increasing the visibility and perceived value of finance professionals, as people throughout their organizations seek them out for advice. The shift back toward quantifiable metrics is also making it easier for Finance departments to provide more comprehensive views of their companies, because more and more functional areas are producing hard numbers to justify their investments and to measure their performance.

The Challenge of Calculating ROI

In the industrial economy that prevailed for most of the 20th century, it was often easy to calculate a clear return on investment. If a company purchased a new piece of equipment that allowed it to manufacture more products per hour, or to do the same work with 20 fewer employees, it was easy to measure the financial benefit to the company.

Then, about 25 years ago, as knowledge and information started to become the new commodities of the global economy, companies began to derive more of their market value from intangible assets such as services, solutions, and intellectual property, and less from tangible assets such as products, equipment, and facilities.

According to the Brookings Institution – an independent think tank in Washington, D.C., which focuses on public policy issues related to economics, foreign policy, and governance – the percentage of tangible assets versus intangible assets that comprised the market value of S&P 500 companies underwent a dramatic shift between 1982 and 1998. Tangible assets as a percentage of market value dropped from 62 percent in 1982 to only 15 percent in 1998, while intangible assets rose from 38 percent to 85 percent during the same period. (See chart on page 1.)

By definition, intangible assets are hard to measure. For example, technology is one of the newest intangible assets that finance professionals are trying to measure. One approach is to calculate the total cost of ownership (TCO) for new technology, but that is becoming increasingly difficult as different types of technology are more widely used. To assess technology TCO effectively, an organization must measure not only the initial cost of purchasing hardware and software, but also the cost of integrating it into existing systems, maintaining it, and training employees to use it so that the organization can achieve higher levels of productivity—a process that is aided significantly by building on familiar platforms and using software with familiar features and user interfaces.

“Intangible assets are, well, intangible,” says Edward M. Gurowitz, Ph.D., an organizational change expert and principal of Bespoke Solutions Ltd. in Bermuda. “Like electrons in a cloud chamber they cannot be measured directly, but only by the tracks they leave.”

With the right approach and the right tools, however, those tracks can be seen and measured. An article in the October 2002 issue of Harvard Management Update, a publication of the Harvard Business Review, offers one example of how qualitative benefits can be transformed into quantitative metrics to help business leaders make informed decisions. If an airline wanted to increase passenger

leg room, it would be easy to calculate the hard costs of removing a few rows of seats, but how would airline executives quantify the benefit of increased customer comfort?

One approach might be passenger surveys to determine what percentage of customers would be willing to pay a 15 percent premium for more leg room. It would also be important to estimate the financial impact of new customers the additional space might attract, any lowered costs for maintenance and training, and the higher customer retention rate that could result. Using a spreadsheet, employees working on the project could see how their estimates of financial benefits would change as they altered their assumptions.

“Integrated technology solutions can empower managers in new ways, with powerful integration, analysis, reporting, and collaboration tools.”

Employee training is a good example of an area that was once considered extremely hard to quantify, but where companies are now applying metrics to assess the impact of training programs on corporate performance. Historically, training programs have been unable to produce the hard data that demonstrate their value to an organization, such as boosting employee morale or increasing productivity. As a result, training professionals have found it difficult to compete effectively for company resources – especially when budgets are tight.

According to Training magazine, which does an annual ranking of the top 100 U.S. companies on the basis of their training programs, that trend is changing quickly. Today, more and

more companies are building a solid business case for training, and measuring the ability of training programs to drive revenue, improve quality, and enhance performance and productivity.

A.G. Edwards: Measuring the Impact of Training on Revenue

At financial services firm A.G. Edwards, new financial consultants (FCs) undergo a rigorous four-month training program. During the first eight weeks of training, new FCs receive structured coaching as they study for their licensing exams. The pass rate for new FCs at A.G. Edwards averages 92 percent compared to an industry average of 68 percent. Once they pass their exams, FCs begin intensive training on the company's products and services.

After this phase, trainees work toward the Accredited Asset Management Specialist (AAMS) designation offered through A.G. Edwards University's College of Financial Planning. The training moves them beyond product and service knowledge, and helps them solve complex financial planning issues for clients. Once the trainees receive the AAMS designation, they complete their training at the firm's headquarters where they formulate a business plan and build their selling and prospecting skills.

In their final week, trainees make calls and sales presentations to live prospects and receive additional feedback from trainers. During these live sessions, it's common for trainees to uncover an average of $2.8 million in client assets. These early successes build confidence and provide a pipeline of potential business once FCs return to the branch offices and begin their careers.

Included in A.G. Edwards' four-month program are upfront assessments, blended learning techniques, upper management involvement, third-party content providers, coaching, follow-up support, and ROI accountability.

During the program, trainees receive a four-month training salary, a generous per diem, and private hotel accommodations--all of which help the company recruit and retain talented people and build loyalty. Of the firm's top producers, more than 60 percent received their original training as financial consultants from A.G. Edwards. The training for new FCs currently costs $58,000 per trainee. During a sample period, the company trained 750 trainees at a total cost of $43.5 million. A.G. Edwards views this cost as a five-year investment, given what it takes for a new FC to build a successful business.

After applying turnover on the original 750 FCs, the total revenue generated by this sample group at the end of their second year was more than $89 million, for a two-year ROI of 205 percent. After five years, total revenue generated by this group reached more than $290 million, for an ROI of 667 percent. With such a significant return on investment, training new FCs should continue to be a cost-effective way for A.G. Edwards to ensure high productivity and increase its revenue.

Integrated Technology Solutions Enable Better Metrics

As we have seen, it has been difficult in the past to identify and assess critical business metrics for many corporate functions that measure their success by seemingly intangible, qualitative benefits like customer satisfaction, employee morale or

patient care. The growing need for organizations to assess ROI for any significant investment or expense has motivated business leaders to use surveys and other tools to gather information that can be measured – the first step toward developing sound business metrics.

In addition, finance departments often face ongoing challenges such as having financial data located in disparate systems, making it difficult and time consuming to gather information, or having to use cumbersome reporting tools that don’t provide the right level of information and visibility. As a result, business leaders often do not have easy access to the data they need to make fully informed decisions.

Integrated technology solutions can empower managers in new ways, with powerful integration, analysis, reporting and collaboration tools. In today’s competitive business environ-ment, it is increasingly important for business leaders to be able to accurately assess the current status of their organizations, in real terms and real time, and to develop metrics that allow them to plan for and measure improvement in every functional area - from sales to operations to human resources.

Integrated technology solutions enable financial managers to make these critical calculations and to ensure their companies are getting a good return on all of their investments and from all of their assets—both tangible and intangible.

Microsoft Office System Can Help

Identifying the right business applications to meet your organization’s needs sometimes can be overwhelming. Microsoft is experienced in helping companies address their critical business needs such as cutting costs while simultaneously planning for growth and innovation. Microsoft Office System is a reliable business platform that allows you to manage business insight, adapt processes to address ever-changing customer needs and leverage your organization’s strategic assets while improving productivity, visibility and integrity.

This document is for informational purposes only. MICROSOFT MAKES NO WARRANTIES, EXPRESS OR IMPLIED, IN THIS DOCUMENT.

©2003 Microsoft Corporation. All rights reserved. Microsoft and the Office logo are either registered trademarks or trademarks of Microsoft Corporation in the United States and/or other countries.

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Additional Resources

Microsoft Office System

office

Deutsche Asset Management

deam-

 

Gartner



 

Brookings Institution

brook.edu

 

Harvard Business Review

harvardbusinessonline.hbsp.harvard.edu

 

Training magazine



 

A.G. Edwards



Source: Brookings Institute 2002

Percent of Market Value Related to Intangible Assets

INTEGRATED

TECHNOLOGY

SOLUTIONS CAN

EMPOWER MAN-

AGERS

Integration

▪ Increase profitability with

improved decision making

by providing decision makers

with access to comprehensive

real-time information

▪ Empower decision makers

throughout the organization

with access to robust analytical

tools

▪ Create budgets that more

accurately model the business

▪ Minimize risk by actively

monitoring all projects underway

through a comprehensive

summary view of project status,

schedule, and cost

Analysis

▪ Spend time analyzing information rather than gathering data

▪ Take the pain out of the budgeting

process, and create more accurate

and more complete budgets in less

time

▪ Identify problem projects, and their

impact on other projects and the

organization, before it is too late

Reporting

▪ Streamline review and facilitate

discussion through shared work-

spaces and real-time communication

tools

Collaboration

▪ Increase the efficiency and

productivity of financial analysts

▪ Empower decision makers

throughout the organization

with robust, easy-to-use

analytical tools

Source: Microsoft 2003

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