lunes, 21 de agosto de 2017

Employee Lifetime Value: The Gold Standard

Although companies spend between 60% and 70% of their money on human capital, most organizations continue to hire and develop employee talent using intuition-based decisions. However, there are more thorough and effective methods at our disposal.
In People Analytics, the Employee Lifetime Value (E-LTV) determines the economic value that an employee brings to an organization for as long as they are in their position.

 In this post:

1.    Why is the Employee Lifetime Value the Gold Standard?
2.    What is the daily breakeven point?
3.    What is the cumulative breakeven point?

The E-LTV should be a key metric in all organizations. Why?

Because if we don't know what an employee brings in, we won't know how much we have to invest to hire them or what we should spend to keep them. Moreover, this is a measurement that should guide many of the decisions we make in the areas of selection, onboarding, talent development, loyalty, and motivation.
On the client side, the "Customer Lifetime Value" or CLV is a marketing metric that represents the total profit a company gets from the lifetime relationship with a customer. Some have called the Lifetime Value "the gold standard metric" because it helps us determine how much business we can expect from an existing customer in the future.
In the context of People Analytics, you just have to replace "client" with "employee." After all, our employees are internal clients. All of us (Marketing or HR), share the same end goal: to provide the best experience for our customers or employees and optimize their value.

Calculating the Employee Lifetime Value

With E-LTV, we'll be able to answer the following question:
-What net profit will an employee provide during the time they spend in their position?
To answer this question, we'll need three metrics: cost, performance, and job abandonment.

Harry Potter and the Sorcerer's Stone (Philosopher's Stone in Europe)


In the film, Harry and his friends discover that a Sorcerer's Stone, which guarantees immortality to those who use it, is hidden somewhere in Hogwarts. Wikipedia mentions that some authors compare JK Rowling's style with Jane Austen's. I'm very fond of both writers.
Hermione Granger:
The Sorcerer's Stone is "a legendary substance with astonishing powers. The Stone will transform any metal into pure gold. It also produces the Elixir of Life, which will make the drinker immortal."
Gold and immortality: a good combination for this chapter.

Cost and Performance

Let's focus on two metrics: cost and performance.
Using cost and performance, we'll be able to answer two other fundamental questions:
What is the break-even point of a new employee?
When does an employee start to contribute to the organization's net profit?
Answering these questions will help you make many decisions that significantly impact the income statement. It will also allow you to segment employees with a focus on value. Hence the "gold standard metric."
To better explain these metrics, I chart cost and performance. Let's look at them one by one.
Cost: How much does it cost to find, train, and maintain an employee in this position?
The cost curve records the amount of money spent during the time an employee is in a position. We're talking about the position, and not the time spent in the company. If they change to another position within the same company, a new cycle is started in the analysis.

The cost graph is like a daily record of the expenses associated with a new employee. You begin to measure from the first day they start in their new position. In the graph, you can see the weekly evolution of these costs for the first year of a newly hired Java programmer, who arrives with two years of previous experience before entering our company.
The "zero" point of the graph compiles the recruitment costs: advertisements, interviews, tests, etc. We start with €3105. It corresponds to the hiring costs. The analysis of these expenses requires a more detailed study. This screenshot can help us get started. All the details, including the sources and graphics, can be found in the Excel spreadsheet which you can download from my blog.

From Weeks 1-4, the salary is added to the orientation and training costs. After Week 5, there are only the expenses of salary, Social Security, and overhead. Overhead expenses are general costs, those that can't be mapped or identified with any particular cost unit and therefore do not directly generate profit.
Performance: How much income do they generate?
The income curve shows the contribution an employee makes to the company, starting on the first day.

Normally, until initial training and orientation are finished, revenues are equal to zero. In this example, the contribution begins in Week 5. Employees tend to increase their productivity after weeks, months, or years.
After a rising performance stage (Weeks 4-14 in this case), that level can stabilize, gradually increase, or even go down after several years. The final level of contribution can be directly calculated in some positions. In others you simply make an estimate.
Daily Break-Even Point

The graph shows the curves that represent costs and income for an employee for one year. At first, recruitment and training costs are high while performance is zero. Day by day, the organization loses money. In Week 13, the lines intersect for the first time. This is known as the daily break-even point.
After several weeks of equilibrium, from Week 28 on, for the first time, the employee delivers a net positive daily contribution.
Cumulative results

An organization's income statement with its employees varies greatly depending on the day the employee leaves the company.
The chart shows how by posting revenue on one side, and the debt incurred for hiring expenses and training plus salary, the net gain is negative until Week 127. At this tipping point, it's called a cumulative stalemate, or cumulative break-even point. Therefore, the company only obtains a net profit in their relationship with an employee with workers who remain at least 127 weeks. Anyone who stays less than that is a waste of time and money. In the worst case scenario, if an employee leaves the company between Weeks 11 and 34, net losses for the organization are over $15,000.
Turnover: How long will they stay in a position?
We're going to look at this point sometiem. But as a preview, I'll mention that you enter the territory of survival analysis, which involves the probability of an employee being in their position at different points during their stay with the company.

Takeaways:

1.    El E-LTV is the Gold Standard, because Because if we don't know what an employee brings in, we won't know how much we have to invest to hire them or what we should spend to keep them. Moreover, this is a measurement that should guide many of the decisions we make in the areas of selection, onboarding, talent development, loyalty, and motivation.
2.    An organization's income statement with its employees varies greatly depending on the day the employee leaves the company.

References

Jean Paul Isson, Jesse S. Harriott. (2016), People Analytics in the Era of Big Data: Changing the Way you Attract, Acquire, Develop, and Retain Talent. Wiley (http://amzn.to/2njPGUY).
Jeff Higgins and Grant Cooperstein, Managing an Organization's Biggest Cost: The Workforce, Human Capital Management Institute (http://bit.ly/2n6oec9).

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