Several years ago, marketers began to consider customers as business assets recognizing that some were more valuable than others and some cost more to acquire than others. So they developed a tool called CLV, or Customer Lifetime Value, to determine how valuable different customer segments were and how much they should be spending to acquire customers in those segments.
That radical change in perception led marketers to recalibrate their thinking about marketing budgets. Instead of trying to figure out how to land more customers on the cheap, they now had to consider each potential customer’s worth before deciding how much to spend on luring them in. They also had to test their willingness to invest in boosting customer value over time, even to the point of giving away freebies that had nothing to do with the product they were trying to sell, when customer research showed how those seemingly irrelevant investments would pay off. If CLV wasn’t enough to shake up the world of marketing, this certainly was.
A new metric
Even though the customer-as-asset idea was a brave step in marketing, it’s an old and mostly ignored concept when applied to people in the workplace. After decades of proclaiming employees are our greatest business assets, business leaders are still more talk than action. In light of that, let’s imagine what it might mean to value employees as business assets in much the same way some companies are now valuing their customers.
In a nutshell, CLV measures customer purchases minus the cost expended to acquire the customers divided by their years as patrons. CLV is set as the maximum dollar amount a company would be willing to invest to acquire and retain customers in a given customer group. Now let’s apply the concept to employees. Like CLV, we could create a metric called ELV, or Employee Lifetime Value, by measuring the value of team or unit production minus costs of recruiting, training, salaries, benefits, etc. divided by employee years of service. Further data slicing and dicing would show us where our most valuable assets in the company are and could guide decisions about how we should invest in them.
Implications of ELV
For example, we typically view expenses as the evil nemesis of revenue. What is gained by adding revenue can quickly be erased by a few runaway expenses. In accounting systems, employees are labeled as one of those expenses. Just as marketers, prior to discovering CLV, treated customer acquisition as an expense and worked to keep advertising costs down, company practices that focus on employees as expenses ignore what employees contribute to profits. As a result, employee recruiting is deemed a success when we achieve the lowest cost per hire instead of the highest ELV, and we get the cheapest labor we can find.
What’s funny is that we would never consider hiring the cheapest lawyer in town to save us from a major disagreement with the I.R.S., or worry that the attorney we chose might be (gasp!) overqualified. Of course not! We would pay as much as we could afford to get the best lawyer relative to the expected value of possible sanctions. Yet old school views of employees as expenses cause us to make silly decisions like looking for the cheapest help instead of investing in expertise and labor that will give us the best possible returns.
One of the most glaring workplace examples of fixating on costs at the expense of value shows up in customer service groups. Customer service employees may be the lowest paid in the company, yet they often have the greatest direct impact on Customer Lifetime Value. If ELV were considered when hiring and evaluating customer service employees, CSRs would, no doubt, get a bump in social stature along with a bump in training, empowerment, pay, and other investments in them. A high ELV employee in customer service can extend the lifetime value of customers by retaining them beyond the average time customers stay with the brand. Besides retaining customers as loyal buyers, customer service employees can influence how often customers refer friends and write positive reviews, which are make or break propositions in some markets.
So rather than being distracted with how much time representatives spend with customers and how many calls they handle in a day, it may make a lot more sense to track how much customer value CSRs add each month, and then invest to help them do even better. Something as simple as reducing turnover in this group could make a huge impact on CLV.
Just like CLV changed the world of marketing, perhaps ELV can do the same for the world of work. By quantifying employee value and encouraging research and investments that boost employee results, ELV could also improve company profits. And who knows, like we found with some customer groups, a little research may surprise us by showing how the brunt of boardroom jokes—Silicon Valley’s seemingly silly preoccupation with free air hockey, M&Ms and smoothies—really does improve employee value.
TRYING IT ON FOR FIT:
Explore the concept of Employee Lifetime Value (ELV) and its application to your organization. Apply the ELV metric to your workforce and determine the value of your employees in each work unit. Segment your employees by tenure and work unit. Research the greatest threats to losing highest ELV employees and teams. Speak to employees to learn what you can do to raise ELV by making the work more engaging for them. Expanding opportunities to learn more about the business and operations, broadening work and decision latitude, and providing educational opportunities are some ways to do this. Apply what you learn about your particular workforce to get the best results. Send an email and let me know what you learn from your experiences. I would love to hear from you!
Kevin Herring is co-author of Practical Guide for Internal Consultants, and President of Ascent Management Consulting. Kevin can be contacted at email@example.com. Ascent Management Consulting is found at www.ascentmgt.com and specializes in performance turnarounds, leadership coaching, and appraisal-less performance management.