Member Blogs

Today, we had an amazing day with our partners in Holland, IPR Plaza, TPA and i2c.  We took video and photos and will share more soon.

Now it's on to Dubai!

This is actually the third in a series of posts leading up to our upcoming session at Sibos. In the first posts in this series I talked about how the basic model of value creation is shifting from extraction to attraction and what this means for management in general and investment management in particular.

Remember how I talked about the shift in Boston from an industrial to a digital economy? This whole shift is caused by technology: computers, the internet and social technologies. This latest step, social technologies is a tipping point. Social technologies are not just Twitter and Facebook, but all also all the tools that empower customers, consumers, partners and employees to share, learn and control conversations. These tools give them unprecedented powers that will only grow. And they will fuel alternatives like crowd funding that can replace you completely.

What does that mean for investment managers? It means you have to look at companies differently. But it also means that you need to manage your own business differently. You can’t just think about extracting value, asking what do we get out of owning your stock? You have to think about attraction: why someone would want your money rather than someone else’s money?

This means that you have to ask yourselves questions like: What value do we bring to the system? How do we support a company’s ability to create value for its stakeholders? Remember, your financial capital isn’t as important to the creation of value was when companies needed massive amounts of money to build railroads and factories. They can start those with less financial and more intangible capital.

Think about Facebook. They got some venture capital but not the kind of numbers that you saw in the industrial era. Facebook was built on intangible capital, attracting smart people, partners and knowledge. They only used the public markets to partially cash out the founders. I actually think that Facebook could have and maybe should have skipped the capital markets and raised money from their users. Once they went to Wall St, they ensured that they would be an extractive business, focused on how they can take as much value out of the network without losing members—rather than how can we create the most value for everyone in the network? Their goals are not as well aligned with their users. Some day, someone will replace Facebook with a network where the users get a return on their contribution to the network, where the financial and management systems are aligned around attraction, not extraction.

Technology is behind the changes facing the global investment management industry. The power of this technology is in how it empowers employees, consumers, companies and investors to connect directly. To remain relevant in this market, you have to think about creating value, not just extracting it.

Most of what we do as managers and most of what is still taught in business schools is a toolset that was perfected in the industrial era for managing factories. It shows people how to manage from the top down and is built on the assumption that the boss has all the answers. Org charts are the prototypical view of the organization under this model.

We all know that the world has changed. That the industrial era is over. That top-down isn’t enough. There are lots of conversations about how to deal with this change. Companies doing network analyses. Looking for ways to create more inclusive management models. Working to understand the elusive phenomenon that is innovation.

But the mainstream is still ignoring one of the basic underlying shifts in the foundation of organizations. As we moved from the Industrial to the Social Economy, the core competitive (and collaborative assets) of organizations shifted from being mostly tangible to now being mostly intangible. Today 80% of the value and 100% of the competitive advantage of companies resides in intangible assets like people, knowledge, processes, networks, relationships, culture and business models.

It is a rare business person that has any tools beyond their own good instincts to deal with this shift. Accounting calls these things goodwill. Financiers call them “soft” assets. Business schools ignore the research that shows how absolute and final this shift is.

What business people and organizations need are a few of the same things that they have in their toolset if they were to manage an old-style factory: a way to identify intangibles, inventory them, model their operation, measure them and optimize their performance. It’s not that exotic. It’s common sense management. People need a similar toolset for intangibles.

It’s absolutely critical if individuals, organizations and economies are going to solve some of the exciting and potentially mind-bending opportunities out there: improving the health of our people, the quality of our environment and the strength of our economy. The solutions are all out there, inside our minds, waiting for the right environment to nurture the collaboration and innovation to find them.

That’s why I founded Smarter-Companies and created the ICounts Tools. To empower organizational leaders with tools to focus on what’s important: intangible capital. Join us on our mission to change management and empower people and organizations to build a better future.

Reposted from Jeffrey Deckman's WOW! bytes of wisdom blog powered by WOW! transformations a talent development consulting firm based in Boston, MA. 

EE = EBITDA is an obscure but interesting formula that, once I came to understand it, I realized uncovers an exciting new source of increased profits that any business can realize.

The “blow up” of this formula is:

Employee Engagement = Earnings Before Interest Taxes Depreciation Amortization

Before going any further I want to say that Employee Engagement (EE) is certainly not the only factor that impacts EBITDA but it does have a significant impact on your bottom line. It just also happens to be one of the easiest ways to increase profitability you will ever come across.

Why?

Because, of all the ways to increase profits such as increasing prices; decreasing costs and generating more sales increasing your levels of EE is almost completely within your control. This is because EE is largely determined by the leadership culture of your organization. And you get to control that.

In fact, a recent Melcrum Employment Engagement Survey of over 1600 HR professionals found that “The actions of senior leaders and direct managers are the most important drivers of employee engagement by a factor of between 400% and 700%.

So not only is this “silent profit driver” largely in your control but the financial impact of increasing the levels of EE in your organization is undeniably real.

In fact, I doubt you could find a single CEO of a Fortune 500 company who even questions whether increasing EE increases EBITDA.

The Numbers Behind the Science

In an effort to be as informative as possible as quickly as possible let me get right to the math.

A recent study done by the Gallup Group in October of 2011 involving thousands of participants revealed that, on average, 71% of people are “disengaged” from their work. Within this group 55% are considered “not engaged”. These people do their jobs but not much more. The other 16% are considered “actively disengaged”. These are people who are actually working against the best interests of the organization.

This leaves only 29% of the workforce who are considered “highly engaged”. These are the ones who put in extra time; think about their jobs during off hours and are energized. They are the ones who generate the most per capita profit.

This means that 7 out of 10 people in organizations are not engaged in their work. Imagine the lost productivity and profits that represents! And in today’s economy this can spell death to an organization.

The High Cost of Low Employee Engagement

Let’s look at how the level of EE in your organization affects your profitability.

The following EE vs. Productivity numbers are generally accepted throughout the industry, give or take a few percentage points:

   “Highly engaged” workers are 90% productive

   “Not engaged” workers are 60% productive

   “Actively disengaged” workers are 40% productive.

When you combine the EE and the productivity numbers the impact on profits becomes clear:

   29% are highly engaged and are 90% productive.

.29 * .90 * 100 = 26.1% productivity level

   55% are not engaged and are 60% productive.

.55 * .60 * 100 = 33% productivity level

   16% are actively disengaged and are 40% productive.

.16 * 40 *100 = 6.4% productivity level

This means that your overall productivity levels are:

26.1% + 33% + 6.4% = 65.5%

To make this real let’s assume a company spends $2 million on employee compensation. Under this scenario their ROI on that investment is:

2,000,000.00 * 65.5% = 1,310,000.00.

This represents a $690,000 “payment vs. performance” gap.

The Big Difference of a Small Adjustment

Now let’s look at the impact to your bottom line that will occur if you simply increase the highly engaged numbers by only 5% and decrease the actively disengaged numbers by the same amount. And if your company is like most, and if you decide to make EE a priority in your organization, moving your EE numbers 5% in this fashion is not unrealistic at all.

WARNING: These numbers are almost un-believable!

   34% are now highly engaged @ 90% productivity.

.34 * .90 * 100 = 30.6% productivity level

   55% are still not engaged and still 60% productive.

.55 * .60 * 100 = 33% productivity level

   11% are now actively disengaged and are 40% productive.

.11 * 40 *100 = 4.4% productivity level

New productivity levels = 30.6% + 33% + 4.4% = 68%

New Profitability Calculations: 2,000,000.00 * 68% = $1,360,000.00

This represents a $50,000 improvement in the “payment vs. performance” gap in only one year!

What is also important to realize is that as long as you keep your management teams fine-tuned and your culture healthy this $50,000.00 continues to flow to the bottom line year after year. Imagine the impact to your Retained Earnings and the value of your business that this will have in just a few short years.

All of a sudden investing in developing solid management teams with excellent leadership skills becomes one of the most important and easy ways to drive significant profits right to your bottom line.

In Closing

If you are like I was when I first started looking at these figures, your initial thinking may be that they can’t be right. But I can tell you that study after study from organizations ranging from the Harvard Business School to the McKinsey Group prove them out.

So while we have all been trained to increase profits by cutting costs; capturing more clients and negotiating for higher prices few of us have been taught how to activate one of the most significant profit drivers available to us: increased Employee Engagement.

And at a time when profits are very tight, competition is tough and the market is demanding it should be very comforting to realize that with just a few internal adjustments you can uncover a source of profits that will not only increase your bottom line but will also increase company morale.

During economic times such as these understanding the EE=EBITDA formula can be a real life saver.

 ***

Jeffrey Deckman is the founder of Capability Accelerators, a consulting firm that specializes in helping clients convert human capital into financial capital. If you have questions or comments he can be reached at:  www.capabilityaccelerators.com or  JDeckman@CapabilityAccelerators.com

I have been receiving notices of newly published content from the MIT, Center for Information Systems and Research (CISR). A new report on an apparent turnaround in organizational operation at the SEC caught my eye. Given my roots in knowledge management, promotion of collaborative methods and practices, and Smarter-Companies' focus on intangible capital it seems a natural fit for us to care about what the SEC is doing to safeguard investor assets.

Apparently, in 2009 a new Chairman of the SEC, Mary Shapiro, was appointed and took on the role of reforming the institutional practices that resulted in lax oversight of operators such as Bernie Madoff. By 2012, Shapiro was able to report successful institutional practices had been implemented to meet her goal, "...a transformation from paper-based, localized operations to a more collaborative environment with specialized expertise and the ability to quickly identify and address activities that threatened financial stability or investor well-being. The transformation required standardizing some core processes, introducing new organizational roles and responsibilities, implementing a modern technology base, and cultivating a new mindset about how to use and share data."

For the story and lessons learned, please read this study:

Working Paper 388: The US Securities and Exchange Commission: Working Smarter to Protect Investors and Ensure Efficient Markets; by Barb Wixom and Jeanne W Ross; Nov 30, 2012. Link: http://cisr.mit.edu/blog/documents/2012/11/30/mit_cisrwp388_sec_wixomross.pdf/. You will need to create an account to download the study but it is well worth the read and great to learn that entrenched enterprises can change for the better. Be sure to go to the end where the use of social networking tools to see securities and investor relationship are brought into visual focus for the reader.