Employee engagement is critical for any enterprise, especially in a booming economy with record low unemployment. Everyone intuitively understands how important it is, but how do you make a strong business case for a specific plan with clear financial outcomes? How you do you pitch employee engagement initiatives to a CFO or senior finance person who has to approve your budget?
The CFO is not interested in how your initiative will improve employee engagement in of itself. She doesn’t care how it will improve morale with abstract promises of improved productivity and retention: She cares about business outcomes. She’s looking for initiatives that have a direct connection to clear outcomes that align with the financial metrics and KPIs that she cares most about.
What’s the KPI?
When you’re pitching your CFO, or any executive for that matter, you must first determine which business outcome she cares about most. Most people will automatically think sales or profit as most important, but that assumption may be wrong.
It could be any number of metrics she cares about most. And before you make your pitch, you would do well to be prepared to show how your initiative moves the needle she cares about.
Let’s start with a simpler example of improving employee engagement with corporate employees. Then we’ll dive into how you’d pitch employee engagement for the plant workforce at advanced manufacturing companies.
Corporate Employee Engagement
The first step is to find out what KPI your CFO cares about most. Let’s say they care about net income, which is simply revenue minus expenses.
There are two ways to improve this metric: Increase revenue (or sales) while keeping expenses at the same level or decrease expenses if the sales remain a constant.
Next you need to find out how employee engagement is limiting sales growth and how it’s increasing expenses.
To keep this simple, let’s just look at employee turnover rates, assuming all other variables stay constant.
A study by the Center for American Progress (CAP) showed that the replacement cost for mid-range positions earning $30,000 to $50,000 a year was 20% of their salary. That means an employee making $45,000 would cost $9,000 to replace.
This estimate means that if your company lost 100 employees averaging a salary of $45,000 a year it would cost your company $900,000 in replacement costs.
Your employee engagement initiative might cost $50,000, including leadership development for your managers, a social event once a month and scheduling a daily rotation of food trucks for lunch.
If your goal is to reduce turnover by 20% it means you plan on losing only 80 employees this year through your employee engagement initiative. You’d save the company $9,000 times 20 employees, resulting in a savings of $180,000.
Your initiative costs $50,000 and you net the company $130,000. You increase the net income of the company, the KPI the CFO cares about most, simply be reducing replacement costs.
Advance Manufacturing Employee Engagement
However, how do you link something like employee engagement in an advanced manufacturing company with a more complex financial metric? It requires a little more legwork, but it’s worth presenting a successful pitch.
Again, first find out what KPI she cares about. Maybe it’s Asset Turnover. This ratio measures how much sales revenue is being generated by total assets. The way to increase this KPI is to grow sales and/or reduce assets.
The company was recently acquired by a private equity group and they’re looking to improve how efficiently the company utilizes its assets before selling it to a large conglomerate buyer with multiple similar manufacturing divisions.
They don’t care so much about expenses on the income statement, also known as OpEX or operating expenses because most of it will be consolidated once the large conglomerate acquires the company. Their focus is Asset Turnover.
In this case, you find out that the company lost 100 highly skilled operators and maintenance staff at one particular plant. With an average salary of $50,000 a year and a replacement cost of 20%, that cost the company $10,000 per employee or $1,000,000 total to replace those 100 plant workers.
You propose an initiative that’ll provide leadership coaching for managers and supervisors. You’ll also provide additional training and development opportunities for the operators and maintenance staff.
You also install a factory-wide sound system to pump in popular music and put up posters and banners with motivational quotes around the plant to improve morale.
The maintenance workers have also complained about an old machine that’s constantly breaking down and causing huge headaches. Even though it doesn’t cause significant downtime or costly parts, it’s a huge annoyance. We’ve included replacing the machine to make the maintenance staff happy.
|Training Plant Workers||$100,000|
|Posters and Banners||$5,000|
This initiative will cost $200,000 to execute and seek to reduce turnover by 30% or 30 plant workers, saving the company $300,000. That should be a slam dunk, right? ROI is clear and this project should be green-lighted by your CFO, right? Well, maybe not.
This plan includes 3 OpEx events: coaching, training and posters at a total of $130,000. Again, the CFO doesn’t care as much about OpEx, or expenses on the income statement side. The Asset Turnover ratio doesn’t include OpEx and only includes revenue and total assets.
However, she does care about Capital Expenses or CapEx, which adds assets to the balance sheet. Your proposal includes $70,000 worth of equipment that increase the assets on the balance sheet and negatively impact her Asset Turnover number.
Even though $70,000 CapEx is less than $130,000 OpEx, she cares a lot about the lesser amount and virtually not at all about the higher amount, even if it is counterintuitive.
How can we change the proposal to get a slam dunk approval from the CFO?
Instead of installing a sound system, we’re going to change the policy to allow workers to listen to music on their phones. We’ll have to produce a 30 minute training video so workers do it safely and appropriately.
Instead of buying a new machine, we’ll provide free soda and snacks. Here’s how the costs breakdown now.
|PROJECT BUDGET 2.0|
|Training Plant Workers||$100,000|
|Posters and Banners||$5,000|
|Personal Audio Training||$10,000|
|Soda and Snacks||$60,000|
The dollar costs remain the same, but now we’ve moved all of the expenses on to the income statement and we’re not adding any new assets on the balance sheet. We’ve also freed up $100,000 that the CFO can redeploy to marketing and generate more revenue.
What Do You Mean By That?
One of the key phrases we teach in our business acumen simulations is, “what do you mean by that?.”
It’s assumed that the CFO is seeking to improve the organization’s financial performance. But what does that mean?
Does it automatically mean increased sales or reduced costs? Maybe. But maybe not.
It pays to figure out what KPI’s your CFO cares about and craft your pitch directly to that. Then watch as your project gets greenlighted by a CFO that’s impressed with your business acumen!
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