Emma Lind How to Measure the Unmeasurble18-12-23
Emma Lind – How to measure the unmeasurble18-12-23
Abstract
The study is an experimental deductive study of the relations between investments in certifications and the return on investment, i.e. the financial utility. The study is based on Swedish firms.
This thesis is constituted on two parts this written document and a computer based model. When constructing the computerized model I have had a co-worker, Rikard Oxenstrand. He will, based on this model do further research regarding technology issues when constructing a model like this and what impacts these technologies have. His work will be presented at the department of computers- and systems (DSV). The construction of the model have been a part of my study and I therefore call it my model even though Rikard has had input and ideas regarding the construction of its structure.
My research question is regarding the possibility to find and prove a connection between an organization’s competence, financial result and the customer value. The purpose is to develop a model that tests the possibility to prove the connection and relations between competence, financial result, and the customer value. I would like to here point out that the certification in it self is the process and the connections between different areas that is vital to this study and of greater importance than the certification in itself. In order to fulfill the purpose, the study employs a research method that combines positivistic theory, system theory, rational theory and quantitative theory. The working process of this study has been accordingly of deductive experimental study.
The study’s theoretical foundation consists of theories from the fields of knowledge, competence and human capital, with focus on competence, viewed from several dimensions. In order to incorporate these dimensions in my model, I have been affected and incorporated by both traditional theories within accounting and statistics but also tried to incorporate these within the perspectives of the Balanced Scorecard theories. I have also accounted for the theories that I have used and that have had an impact when constructing my model. These models have also more or less constituted the boundaries and limitations of the model. These theories have been shown to be very difficult to adjust to this specific case and I am fully aware of the limitations within the presented models, which has also been incorporated into mine. But I believe that by using other models the internal validity have been increased or at least higher than it would have been if these previous tested connections would not have been incorporated. The empirical data was mainly collected from three different firms but my model also includes secondary data collected from various reports. By using several sources I have tested the reliability of the model and can conclude that the model have at least been applicable on the cases tested within this thesis.
The result shows that relationships between competence, financial result, and customer value are difficult to find, and it can be discussed if I have found such a relationship but at least I do not believe that my theory regarding these relationships have been falsified. I have tried to follow some provided steps in order to have an acceptable level of construct validity, quality, and usefulness of the measures.
This thesis is the result of my learning within Business Economics and IT-systems, which has also probably limited my thoughts to the boundaries of these fields. In order for the reader of this thesis to understand my research I have tried to describe my computer-based model in words, diagrams, and illustrations.
This foreword is over – so:
Adviser: Johan AdolphsonA deductive experimental study - Emma Lind
Table of content
1Introduction......
1.1Background......
1.1.1Research question:......
1.2Purpose of the study......
1.3Delimitations......
1.4Definitions and clarifications......
1.5Outline of the study......
2Research Method......
2.1Scientific approach......
2.1.1Positivism versus Hermeneutics......
2.1.2Management science and rational theory......
2.1.3Scientific Paradigms......
2.1.4Methodological point of view - System theoretic perspective......
2.2Study approach......
2.2.1Working process......
2.2.2Qualitative versus Quantitative......
2.3Data Collection......
2.4Critical Examination of Method......
2.4.1Reliability......
2.4.2Construct Validity......
2.4.3Internal Validity......
2.4.4External Validity......
2.4.5Parsimony......
2.4.6Sources of Errors......
2.5The Impact of the Delimitations......
2.6Data Analyses......
2.6.1Approach to Qualitative Analysis of Quantitative Data......
2.7Alternative Methods......
3Theoretical Framework......
3.1Aspects of competence and related concepts......
3.1.1Defining knowledge......
3.1.2Aspects of knowledge......
3.1.3Knowledge and Learning......
3.2Competence classification......
3.2.1Training......
3.2.2Formal Competence versus Functional Competence......
3.3Human Capital......
3.3.1Human Capital on the Balance Sheet......
3.4Balanced Scorecard theories......
3.4.1Related theories......
3.5Measuring Competence......
3.5.1Calculating Competence......
3.5.2Cost-benefits of training......
3.5.3Measurement banks......
3.5.4The allocation of expenditure on training – time perspective......
3.5.5The Balloon model......
3.6Utility – Expected Monetary Value......
3.6.1Risk analysis......
3.7Aspects of simulations......
3.8Software......
3.8.1Comparison......
4The model......
4.1Critique against the construction of the model......
4.1.1Software tool......
4.2Innovation and development perspective......
4.2.1Influences from other perspectives......
4.3Internal processes perspective......
4.3.1Influences from other perspectives......
4.4Customer perspective......
4.4.1Influences from other perspectives......
4.5Financial perspective......
4.5.1Influences from other perspectives......
4.6Input data......
4.6.1Company A......
4.6.2Company B......
4.6.3Company C......
4.6.4General assumptions......
4.6.5Calculation assumptions
4.7Risk analysis......
5Findings......
5.1Output data......
5.1.1Explanation of output data:......
5.2Findings regarding the original data......
5.2.1Risk analysis......
5.3Findings when simulating value changes......
5.3.1Turnover......
5.3.2Salary increase......
5.3.3Value of logotype......
5.3.4Interest Rate......
5.3.5Level of influence between the perspectives......
5.4Identified relations within the model......
5.4.1Amount of certifications......
5.4.2Turnover......
5.4.3Salary and salary increase......
5.4.4The working area of the certified employee......
5.5Identified relations between competence, financial result, and customer value......
5.5.1Factors influencing the organizations competence......
5.5.2Factors influencing the financial result......
5.5.3Factors influencing the customer value......
5.6Factors not included in the model......
5.7Faults and defects found in the model......
5.7.1How these where handled......
5.8Critical success factors......
6Analyze......
6.1Findings versus presented methodology and research......
6.1.1The findings relation with the methodological point of view......
6.1.2How the theories interacts and synthesize with the findings......
6.2Critical examination of the result......
6.2.1The reliability of the study......
6.2.2Validity of assumptions and proposition......
6.2.3Internal Validity......
6.2.4External Validity......
7Concluding discussion......
7.1.1Factors explaining my findings......
7.2Personal reflections......
7.3Further research......
References......
Articles......
Books......
Reports......
Essays......
Company statements......
Internet......
Dictionaries......
Interviews......
Table of figures
Figure 1.1 The connection between competence and the financial result......
Figure 2.1 Research cycle according to the positivistic paradigm
Figure 2.2 Paradigms within business economics......
Figure 2.3 Diagram of a System’s parameters, boundary and environment......
Figure 2.4 Simplified cybernetic model of the MBO process......
Figure 2.5 The Logical Structure of the Quantitative Research Process......
Figure 3.1 The knowledge of an organisation-exemplified......
Figure 3.2 Focus of tasks that need to be handled......
Figure 3.3 Formal versus functional competence......
Figure 3.4 To translate vision and strategy: four perspectives......
Figure 3.5 Casual connection of measurements......
Figure 3.6 Skandia Business Navigator......
Figure 3.7 Example of influence diagram......
Figure 3.8 Decision flow diagram......
Figure 4.1. The model and the perspectives within the model......
Figure 4.2 Personnel turnover costs – costs of more attractive personnel......
Figure 4.3 Financial costs......
Figure 4.4 Table of Input Data......
Figure 4.5 The measurements distribution over time-periods......
Figure 4.6 Risk- diagram, from the model......
Figure 4.7 Simplification of the risk analyse......
Figure 5.1 Table of output data......
Appendixes
Appendix 1Table of articles used in my research
Appendix 2 List of assumptions
Appendix 3Certifications
Appendix 4List of simulation data
Appendix 5Risk analysis charts
1Introduction
This master thesis constitutes the foundation to a report commissioned by Microsoft AB. The object is to identify new ways of evaluating education and investments in knowledge development (certifications[1]). This means that the study is constituted above the individual level and more focused on the processes and the relations on a management level.
1.1Background
A cook, in order to succeed in the market, has to pull together all four types of capital: energy and raw materials, equipment, technologies, information, knowledge, skills, social context, and organization. If we equip two cooks with identical capitals of the first two kinds: the same raw materials, the same pots and pans, the same cookbooks. Yet, they could conceivably prepare two entirely different products: one a masterpiece, valued and rewarded by the market, the other to no use at all. The difference lies in the knowledge (as ability to coordinate cook’s action) and in the social infrastructure capable of appreciating the product.[2]
This example shows that rational and fast operational changes require a platform of formal qualifications.[3] Perhaps is human capital and knowledge the most important form of capital for rapidly developing organizations since it is the employees and not the abstract organizations, who exist, who act and generate the results.[4] Wealthier organizations have accumulated most of their capital in human and social resources and infrastructures, while poorer organizations still maintain most of their capital in natural resources and man-made assets. Simply stated[5]: the poor and unsustainable economies dig for coal and build dams while the rich and sustainable ones educate people and build virtual and self-sustainable organizations. A theoretical skill base can lead to a greater understanding of how to operate in altogether new circumstances with greater ease.[6] In other words human capital and knowledge is the ‘software’ and ‘brainware’ of an organization, and without investing in competence development organizations will have difficulties matching the power and influence of modern, technology- and knowledge based service activities.[7]
Microsoft, Novell, Lotus Notes, and other software vendors have recently increased its focus on product certifications. This has lead to a demand for a structured way of measuring the competence that a certification leads to. Many of the reports in this area are done with the aim to prove a return on investment, whereas my interest is more in the process that in the end might conclude in a positive return on investment. Is it possible to quantify this process on order to get a quantifiable result?
According to Skandia[8] and Konradsgruppen[9] there are two types of capital within an organization; financial capital – deriving from the financial result, and human capital - deriving from competence development. In a historic perspective is the financial risk capital, contributed by the shareholders, the most vital limited resource for industrial organizations[10]. A knowledge intensive organization is not fully as material and capital dependent. Instead are the personnel and their knowledge a more important production factor and income generator. I.e. a knowledge intensive company is living of selling its knowledge.[11] In order for a service company to produce and sell its services it has to have access to different types of capital.
1)Studies shows that companies that invest more in training are more profitable[12]. Such companies are also more highly valued on the stock market, and their market value is growing.
2)When managers are asked to estimate the share of a company’s success that is dependent on the knowledge of the employees, a frequent answer is 80%[13].
3)Knowledge intensive companies often have a high market value compared with the substance of the company. This is most evident in the difference between a company’s book value (based on identifying and valuing assets in accounting terms) and its market value, which often is 10 or more times larger.[14] The average market-to-book ratio was higher by the end of 1996[15] for companies with high training expenditures.
4)For example, Microsoft’s shares are bought for about ten times higher then their accounted value. This means that 90 percent of the value lies in invisible assets. These assets, software, brands, marketing channels, are all three are direct products of human knowledge.[16]
I believe that much of this difference is human capital. A powerful external source when evaluating a company is the stock market. Because stock prices are driven by available information, stockholders don’t reward (they don’t by stock) investments such as training that can’t be reported as a measure accurately across companies. The statistical relationships reported[17] don’t necessarily prove causation, but they may suggest a relationship between a company’s training practices and measures of its financial improvement. But at the same time have the stock market been quite positive for service companies compared to industrial companies the last ten years[18].
Concluding; I have now tried to show a connection between competence and the financial result. A possible connection between an organization’s assembled competence and organizations financial result is the foundation for this reasoning. This logic is also to be found in the Balanced Scorecard model. In order to make this connection even more distinct to the reader I would like to present some logical reasoning from another author[19]:
1)The result is based on that the customers are supplied with a value in some form.
2)In order to create and supply this value the employees of an organization have to solve a number of tasks.
3)The ability to solve these tasks is the organization’s competence.
4)To develop this competence is to increase the ability to solve the tasks in order to supply our customer an increased value, or alternative solve these tasks to a lower cost.
5)The customer will reward this by paying a higher price, and provide the organization with an increased income with unchanged prices and/or show a greater customer loyalty.
Figure 1.1 The connection between competence and the financial result
Source: Based on Anttila (1997)
A connection between the financial result and competence development often indistinct, and in areas such as training and competence development a connection to the balance sheet has to my knowledge yet not been found[20], (c.f. section 3.3.1). The indistinct connection between competence and result is one reason why competence development often does not get the financial aids needed for organizational development.[21] Inversely: If a connection would be distinct the competence development issues would probably be more prioritized, been given resources, handled and be evaluated in a much more efficiently than how it is presently handled. Therefore is it important to make the connection between competence and the financial result more distinct to the personnel and management.[22]
Numerous efforts have been made to provide a tool for converting these intangible assets and transforming them into financial value. Since human capital investments rarely appear as an investment on cooperate balanced sheets, little information on the effectiveness of such investments are presented. Due to the inability to prove a connection between investments in competence and the financial result, I believe that the knowledge of measuring this kind of capital is limited. The absence of this information also complicates for corporate decision-makers to make well-informed choices about how much money to spend on training or what types of training to offer.
Since the personnel’s ability to solve those tasks they are confronted with, is an important factor for the survival of an organization[23]. I conclude that the effectiveness of the competence development is of central importance for the organizational development, and in the end, its result. Some people are of the opinion that intangible assets such as human capital should be managed but not measured[24], other people are of the opinion that only the measurable is manageable. However, many of the leading researchers within this area base their research on that human capital de facto can and should be measured.[25]
In order to invest in training and education there is often a requirement[26] to demonstrate return-on-investment, which is near impossible to do without methods of measurement. I also believe that I have presented some facts that shows that companies profits from treating training expenditures as an investment and measure them accordingly. I do not intend to create neither an accounting model nor a finical model for the stock market. But I think by showing the problems within these to areas I hope to show the relation that the competence development the formula behind corporate success, which has been identified as consisting of several key factors[27], following the financial result.
According to reports[28], books[29], articles[30], and essays[31] within this area, two areas are lacking in models and research. One is how to evaluate personnel’s competence i.e. the organization’s competence capital in quantitative measurements. The other is the possibility to simulate such measurements. This of course does also imply that these areas might be very complicated to study or of not such great importance, and in the worst case both. I though believe lack of research is more due to that it is a new area then lack of importance. In order to improve these areas I believe that the process connecting the investments in competence development and the financial result has to be researched and if possible proven.
1.1.1Research question:
- Is it possible to find and prove a connection between an organization’s competence, financial result and the customer value? I.e. to prove the relations visualized in figure 1.1.
1.2Purpose of the study
To develop a model that tests the possibility to prove a connection between competence development, financial result, and customer value.
1.3Delimitations
(See also the section 2.5 regarding the impact of delimitations)
- I am basing my model on existing theories. The model will therefore be delimited, to the boundaries of these models.
- The theories that I present are mostly originally developed for an overall strategic implementation, whereas my focus will be more on the measurement process. I.e. I delimitate my usage of the models presented in this thesis to its structure and its correlations with measures within this structure.
- There are several ways of measuring performance in an organization. I will only test relationships and interactions that I have found in this area and that are presented within my model.
- I will only test and measure certification activities[32]and not other kinds of human capital.
- I my model, only the certifications that require that the employee attends a course or studies for the examination, i.e. he or she does not posses enough skills and competence (know-how) to write the tests without preparations.
- I will only include quantitative measures; i.e. measures that are not quantifiable are not included.
- The primarily data collection is delimited to three different companies.
- The computerized model constitutes a part of the research, thought I do not intend within this thesis to discuss the technology issues when constructing a computer-based model.
1.4Definitions and clarifications
Competence