CFOs and human resources leaders managing a workforce might have something to learn from a modern gauge of customer value.
Following the lead of the software industry, where high customer value derives from long-term subscribers who generate substantial, recurring revenue, many companies today try to estimate a customer’s potential with the following equation: customer purchases, minus the cost expended to acquire the customer, divided by the customer’s expected years as a patron.
Companies thereby “consider each potential customer’s worth before deciding how much to spend on luring them in,” writes Kevin Herring, president of Ascent Management Consulting, in a blog post.
The corollary equation for the value of an employee should, according to Herring, go like this: value provided to a team’s or unit’s production; minus costs of recruiting, training, salaries, benefits, etc.; divided by the employee’s years of service.
“Company practices that focus on employees as expenses ignore what employees contribute to profits,” Herring writes. “As a result, employee recruiting is deemed a success when we achieve the lowest cost-per-hire instead of the highest [employee lifetime value], 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 IRS.”
Calculating employee lifetime value is clearly a step in the right direction for companies trying to get the most bang for their payroll buck. Keep in mind, though, that it can’t necessarily be applied to all employees. For a majority of companies in today’s economy, which is no longer dominated by manufacturing, it is often difficult to objectively determine “value provided to a team’s or unit’s production.” That might work for evaluating salespeople and, as Herring points out, customer-service representatives, but how about administrative workers, IT staff, maintenance crew members, even marketers? There are lots of positions that companies need to fill for which the value contributed is inherently subjective, at least in part.
Besides, the equation uses an employee’s value as one aspect of determining his or her value. That doesn’t sound right, does it?
Still, getting employers to consider an employee’s lifetime value potential is another step forward in the battle to convince more companies that employees are assets, not expenses.