Your People Are the Third Step to a Higher Valuation
Updated: Oct 7, 2020
Your people are your most valuable asset, even though they don’t appear on your balance sheet. Employee engagement, Organizational Strategy, Job Descriptions and other best practices are a key element to grow, drive value and create sustainability of your business. This Article summarizes keys to growth and value acceleration.
This is the fourth in a series of nine articles that follow a business owner, John. He is taking action to increase the value of his company before transitioning or selling it and moving into retirement. In the first article, he learned that Tom—who owns a similar business—had sold it for a much higher price than John was told his company was worth. In the next two articles, John discovered the importance of having a business plan and what it should include, and how strong leadership drives the transferable value of a business.
Quick Refresher: Business Value Enhancement 101
John now understands that value drivers affect either the earnings or the worth of an operation. Being in business is about making a profit and creating sustainable transferable value.
Value isn’t always about the numbers. Environmental and qualitative value drivers have a dramatic effect on a company and its ability to grow. Knowing what creates—and destroys—value helps owners and managers make better day-to-day decisions. That also allows them to build, increasing a company’s value into its culture.
The place to begin is a detailed discussion about the quality of the organization. John knows this should include him as the owner, his management team and advisor. At Birkdale, we use the results in our Deep Discovery and an Enterprise Value Assessment and the Value Enhancement Process. An initial conversation broadly examines the eight main value drivers:
In taking an in-depth look at each area, John moved to the third category: people. He understood they are his most valuable asset, even though they don’t appear on his balance sheet. John met with the business advisor Tom recommended. He wanted to learn more about the best practices a company can use to strengthen employee engagement. The advisor shared these ideas.
Increasing Employee Engagement
Employee engagement and attitudes toward their employer affect how they approach their jobs and treat their colleagues, customers, vendors and others. Research reveals that a high level of employee engagement increases a business’s profitability, growth and value. Companies that invest in a better-trained and service-minded workforce will be more innovative and competitive—whether delivering a service or manufacturing a product.
There is a direct connection between employee engagement and business results:
Employee Satisfaction – employees who are dissatisfied or lost their enthusiasm for day-to-day activities have greater absenteeism and poor work quality
Employee Identification – employees who don’t identify with the organization won’t represent its culture and values, which results in a dearth of innovation and new ideas
Employee Loyalty – employees who aren’t loyal to the organization often reveal trade secrets or treat customers unfairly
John asked how he could assess and implement improvements to increase employee engagement at his company. His advisor mentioned an article in the MIT Sloan Management Review. This identified five dimensions of employee engagement: satisfaction, identification, commitment, loyalty and performance. For a company to get the most out of employee engagement, it must develop a strategy that aligns these components with the mission, vision and overall strategy. John’s advisor recommended using a survey, combined with a scorecard, to assess and track employee engagement. This also would tell John where to allocate the business’s resources to enhance engagement.
Employee engagement starts at the top, with the senior management team. John could see that, without this, any program to assess, implement and improve engagement would fail. He and his senior leaders needed to have open, honest and transparent communication with employees at all levels. It was clear that with the coming shortage of qualified employees to fill the senior management positions, having an employee engagement effort would give his business an edge.
Creating an Organizational Strategy
Next, John’s advisor discussed how an organization’s structure defines the relationship and interaction between parts of the company and among levels. A company has two choices: a functional or divisional structure.
Most businesses operate in a functional structure. Various functions go into separate departments, and employees report to department managers who then report to someone above them. The advantages include a clear line of authority, and each employee focuses on a particular mission or job.
In a divisional structure, functions are spread across various branches. In other words, if there are different product lines, the division for each product line will have its own accounting, marketing, sales and other departments. The advantage of this structure is that each division has the personnel to carry out all necessary functions. The disadvantage is that employees in one division perform the same activities as employees in others. This results in significant inefficiency.
To visualize the structure, it helps to use an organizational chart. John admitted that he’d never done one. He hadn’t seen the need—because he thought all his people knew where they fit in the functional structure.
His advisor told John that the first chart was developed in 1855 by Daniel McCallum, the general superintendent of the New York and Erie Railroad. The railroad didn’t have a good sense of who was in charge of managing data from the railroad system to prevent train wrecks and delays on its complex system. The chart also allowed McCallum and his central office to receive information to calculate key metrics—such as cost per ton-mile and average load per car—to improve the operational efficiency of the railroad. An organizational chart also shows lines of authority and control between departments and levels of management, and who makes decisions, reports to whom, and how the organization divides operating functions. John could see the value in this.
Now he understood that the organizational structure must fit into his overall strategy or business plan. This would make it clear which departments were responsible for the actions the company intends to take to execute its mission and vision and achieve its long-term goals. John committed to mapping out the organizational structure and communicating it throughout the entire operation.
Developing Effective Job Descriptions
The advisor explained it was important that John’s company understand the experience and skill base required for each position. This also would help all employees clearly see how they fit into the business and what it expected of them. In addition, well-prepared job descriptions help identify the necessary skills, training and education required for a particular job. Then he mentioned some other benefits of a job description:
Assists in setting measurable performance goals based on specific requirements
Helps employees to know the job description for the next level up, incenting them to pursue lifetime learning initiatives and other career development activities to get there
Facilitates standardized compensation programs
Establishes a baseline of performance to encourage going the extra mile
Makes it clear when an employee is not adequately performing a job
Avoids the many negative legal ramifications when an organization doesn’t have them
Shows how the position promotes the company’s mission, vision and strategic initiatives
John knew that there were a number of gaps at his business—and that he didn’t have a current job description! It was time to have his human resources person review what the company had in place, update any that were out-of-date, and begin creating those that were missing. His advisor recommended that these should focus on expectations, results and accountability.
Promoting Cross Training
When the advisor mentioned implementing a cross-training program, John was skeptical. His advisor explained this involves training employees hired to perform one job on the skills required for others. Companies who cross train employees set up a systematic job rotation plan to train workers, so they become proficient in a variety of functions. In addition to enhancing the value of a business, he said there are many benefits for doing this:
Higher employee morale
Lower employee turnover
Higher job satisfaction
Greater opportunities for career growth
Reduced hiring and training costs, because employees can fill in during absences, vacations and peak demand periods
Implementing a cross-training program must be carefully planned and organized—rather than an all-of-a-sudden decision during a crisis. If he decided to pursue this, John understood he needed to make several strategic and cultural decisions first. This includes 1) who will be eligible, 2) if the program will be voluntary or mandatory, 3) if it will be companywide or limited to certain departments or particular job functions, and 4) how to administer it. Management and the affected employees must be involved in the planning and implementation phase, to obtain “buy-in,” prevent overload of job functions, and support of all those effected. In addition, the program could be directed toward specific job tasks or functions.
Using 360-Degree Employee Appraisals
The approach to performance appraisals had been relatively informal at John’s company. His advisor recommended considering 360-degree feedback. The basic idea is that all the members of an employee’s work circle provide comments on a person’s performance. For example, a supervisor will receive information from subordinates, colleagues, customers, suppliers and other stakeholders.
Employees may use the feedback to assess their strengths and weaknesses, and to plan specific paths for their professional development. Employers may use the results to make decisions on compensation and promotions. In addition, this process provides insight to support the skills and behaviors of the organization to accomplish the mission, vision, values and what’s required to exceed customer expectations.
John’s advisor cautioned that integrating a 360-Degree employee feedback initiative requires careful planning and discussion. This includes training, developing the methodology used to perform the assessment, creating action steps to administer and follow up—including what should be considered to achieve the goals and objectives. He recommended working with an expert on this.
John took a deep breath. It was clear there were many of ways his company had not actively worked to build employee engagement. His advisor reminded him that these represented opportunities not only to make his company a better place to work in the near term, but to increase its value over the long run.
Our next article will examine how John can add value by taking a strategic approach to marketing.
By Barry Goodman CPA CEPA CMAA CVGA
Managing Director, Birkdale Transition Partners
Copyright: Cannot be Reused without Author’s Permission
Birkdale Transition Partners LLC is the objective source for those seeking business sustainability, growth or considering a business transition. Our goal is to ensure business sustainability and to maximize the value of an enterprise before any transition or transaction. Business owners without a transition plan often are unable to sell or transfer their company at its highest value. We help them to balance a company transition with the owner’s personal goals. Then we work with them to avoid problems caused by the lack of planning and/or not recognizing what needs to be added, corrected or modified before then.
Birkdale is unique because it only offers an unbiased assessment and solutions for the company owner. We do not sell any other products or services, so are a fee-only firm. We work in partnership with the company’s current professional advisors and staff. Because we help companies increase their monetary value, owners view our assistance as an investment—with payback and payout occurring during and at the conclusion of an engagement.
For a no-obligation, confidential discussion of your situation, please contact Barry Goodman at 312-626-1820 or contact us.
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