DATA CONVERSION METHODS
There are a variety of techniques available to convert a measure to monetary value. These are listed in Table 4-3 in order of credibility. The success in converting data to monetary value is knowing which values are currently available. If values are not available, it is possible to develop them. The use of standard values is by far the most credible approach, because standard values have been accepted by the organization. Following those, however, are the operational techniques to convert a measure to money.
Many organizations have standard values for measures of turnover, productivity, and quality. Those organizations that are involved in Six Sigma or other quality initiatives have many measures and the monetary values of those measures. Look around the organization and talk with people to discover what is being measured in various functional areas of the organization. It may be possible to find a monetary value developed and accepted by the organization for a measure you are working with.
Figure 4-4. When to Convert a Measure to Monetary Value
Table 4-3. Techniques for Data Conversion
Standard values are defined as output to contribution, quality, and time. When considering output to contribution, the value is based on an additional output. For example, organizations that work on a for-profit basis consider the profit contribution, the profit from the sale, in monetizing an additional sale. Most organizations have a profit margin readily available.
The cost of quality is another standard value in organizations. Quality is a critical issue and its cost is an important measure in most manufacturing and service firms. Placing the monetary value on some measures of quality is quite easy. For example, waste, product returns, and complaints are often monitored in organizations and already have a monetary value placed on them. Other measures, such as errors, can be converted to monetary value by looking at the cost of the work. For example, when employees make mistakes and errors in the reporting, the cost of those mistakes—the value of those mistakes—is the cost incurred in reworking the report.
The third category of standard value is employees' time, probably the simplest and most basic approach to data conversion. If time is saved due to a program, the first question to consider is, “Whose time is it?” Then, to convert time to monetary value, take time saved multiplied by labor cost and add the percentage of additional value for employee benefits. This benefits factor can easily be obtained from the human resources department. A word of caution: When considering employee time as a benefit, the time savings is only realized when the amount of time saved is actually used for productive work. So, if a manager saves time by reducing the number of ineffective meetings the manager attends, the time saved should be applied to more work that is productive.
Historical Costs Calculation
When no standard values exist, historical costs can be utilized by considering what the incident has cost in the past. Using this technique often requires more time and effort than desired. In the end, however, it is possible to develop a credible value for a given measure. This monetary value can eventually become a standard value.
Internal and External Experts
When standard values are unavailable and developing the monetary values through historical costs is not feasible, the next option is to use internal or external experts. When using this approach, ask the expert to provide the cost for the value of one unit of improvement for the measure under investigation. Internal experts have knowledge of the situation and the respect of management. External experts are well published and have the respect of the larger community. In either case, these experts have their own methodologies to develop the values. Therefore, it is important for the experts to understand the intent and the measure with which to develop the monetary value.
Sometimes there are no standard values or resources available to develop a monetary value using historical costs. Additionally, there are times when there is no internal expert and it is not possible to locate an external expert who can provide the necessary information. When this is the case, go to external databases. The Internet can provide a wealth of information through online databases and research. External databases provide a variety of information, including the monetary value of many different business impact measures.
Linking With Other Measures
Another technique to convert a measure to monetary value is linking the value of that measure with other measures that have already been converted to monetary values. This approach involves identifying existing relationships showing a correlation between the measure under investigation and another measure to which a standard value has been applied. In some situations, the relationship between more than two measures is connected. Ultimately, this chain of measures is traced to a monetary value. For example, job engagement is linked to sales, productivity, safety, and employee retention. Credibility of data becomes an issue when the assumptions increase as the chain of measures develops further from the actual monetary value. Using this methodology based on the monetary value of other measures is often sufficient for converting measures when calculating the ROI of programs.
When the previous methods are unavailable or inappropriate, an estimation process is used that has been proven conservative and credible with executives in a variety of organizations. The estimates of monetary value can come from participants, supervisors, managers, and even the program staff. The process of using estimation to convert a measure to monetary value is quite simple. The data can be collected through focus groups, interviews, or questionnaires. The key is clearly defining the measure so that those who are asked to provide the estimate have a clear understanding of that measure.