Chapter 14

Converting Measures to Monetary Value

Patricia Pulliam Phillips

In This Chapter

This chapter explores techniques for converting measures to monetary value. Upon completion of this chapter, you will be able to

• explain the importance of converting a measure to money
• identify techniques available to convert a measure to money
• apply five steps to calculate the monetary value of benefits for a program.

 

The Importance of Converting a Measure to Money

The need to convert data to monetary amounts is not always clearly understood. A program can be shown to be a success just by providing business impact data, which show the amount of change directly attributable to the program. For example, a change in quality, cycle time, market share, or customer satisfaction could represent improvement that is linked directly to a program. Sometimes, this information is sufficient; however, many program sponsors require the actual monetary value, particularly when they want to compare program benefits to costs.

Value Equals Money

For some stakeholders, the most important value of any program is its monetary contribution. Executives, sponsors, clients, administrators, and other leaders are concerned with the allocation of financial resources and want to see evidence of program contribution in financial terms. Often, for these key stakeholders, outcomes stated in any other terms are insufficient.

Money Normalizes Program Benefits

For some programs, the impact of a program is more understandable when it is stated in terms of monetary value. Consider, for example, the impact of a major program to improve the creativity of an organization’s employees and, thereby enhance the innovation of the organization. Suppose this program involved all employees and had an impact on various measures. The easiest way to understand the value of such a program is to convert the individual outcomes of this new creativity to money. Totaling the monetary values of all the innovations can provide a sense of the total value of the program and allow stakeholders to make comparisons among the different outcomes.

Money Is Often the Reason for Programs

Sometimes, the monetary value of a particular issue provides the impetus for a program. For example, a company might be incurring fines due to compliance violations, so management holds a program to prevent further violations. Another example may be in the case of excessive accidents. When converted to monetary value, the magnitude of this problem becomes more evident, leading to new programs. The best way to get the attention of a potential sponsor for a program is to place the problem or opportunity in the context of money.

Monetary Value Is Vital to Organizational Operations

With global competitiveness and the drive to improve the efficiency of operations, awareness of the costs related to particular processes and activities is essential. In the 1990s, this emphasis gave rise to activity-based costing (ABC) and activity-based management. ABC is not a replacement for traditional general ledger accounting. Rather, it is a translator or medium between cost accumulations—that is, the specific expenditure account balances in the general ledger—and the end users who must apply cost data in decision making. In typical cost statements, the actual cost of a process or problem is not readily discernible. ABC converts inert cost data to relevant, actionable information. ABC has become increasingly useful for identifying improvement opportunities and measuring the benefits realized from performance initiatives (Cokins, 1996). Understanding the cost of a problem and the payoff of the corresponding solution is essential to properly managing a business.

Monetary Benefits Are Necessary to Calculate ROI

Return-on-investment (ROI) is a fundamental accounting term that compares the annual monetary benefits of a program or project to its costs. To develop the ROI, the benefits of a program must be converted to money before they can be compared to the program costs. Only by converting benefits to the same type of measure as program costs (which is money) can the two can be mathematically compared. The concept of ROI is discussed in detail in chapter 16, Calculating the Return-on-Investment.

Techniques to Convert a Measure to Money

Converting measures to money is not new. For centuries, monetary values have been placed on a variety of measures, including the benefits of public parks, the value of human life, improvements in productivity and quality, and the lifetime value of customers. The key to converting measures to money is to first understand the techniques available.

Standard Values

Perhaps the best news about converting data to monetary values is that it has already been done for most of the measures that matter in an organization. An estimated 80 percent of the measures that are important to an organization have been converted to monetary values (Phillips and Burkett 2008). That is, if it is important enough to drive a program or project, then someone has been concerned enough about it to convert it to a monetary value. Standard values are used to convert output data, quality measures, and employee time to money.

Converting Output Data to Monetary Value. When a program has produced a change in output, the value of the increased output can be determined from the organization’s accounting or operating records. Output measures include revenue and productivity measures. For organizations operating on a profit basis, this value is the marginal profit contribution of an additional unit of production or unit of service provided. For performance-driven programs versus revenue-generating programs, the value of increased output is reflected in the savings accumulated when additional output is realized without increasing input requirements.

Converting Quality to Monetary Value. Because quality is a critical issue, its cost is an important measure in most manufacturing and service firms. And because many programs are designed to improve quality, the program staff must place a value on improvement in relevant quality measures.

Converting Employee Time to Monetary Value. Reducing the use of employee time is a typical objective for many programs. Although there are various benefits to saving time, the most obvious value involved in employee time-savings is reducing the labor costs of performing the work. The monetary savings are found by multiplying the hours saved by the labor cost per hour. For example, after attending a time management program, participants estimated that they saved an average of 74 minutes per day, worth $31.25 per day or $7,500 per year. These values for the time savings were based on the participants’ average salary plus benefits.

Ensure that the time saved as a result of a program is being used productively. If not, the value of the time saved to the organization is nil.

Historical Costs

Sometimes, historical records contain the value of a measure or reveal the cost (or value) of a unit of improvement. This technique involves identifying the appropriate records and tabulating the cost components of the measure in question. For example, a large construction firm implemented a program to improve safety performance. The program improved several safety-related performance measures, ranging from OSHA fines to total workers’ compensation costs. Using one year of data from the company’s records, the staff calculated the average value of improvements in each safety measure.

Internal and External Experts

When historical costs are unavailable, another technique to convert a measure to money is using internal or external experts. Sometimes, a resident expert in an area can provide the monetary value for a measure. For example, labor relations experts may know the value of grievances by labor union members.

Databases

Google, Yahoo, Ask.com, Ebscohost and others are your friends when it comes to converting measures to money. There has never been such plethora of data with regard to data conversion, and the advantages the Internet, your local library, and local university offer are immense. For example, if you work in the hospitality industry and are interested in the cost of turnover of room service wait staff, go to Google, as we did for a client. There, we found a study conducted by Cornell University’s School of Hospitality Management (Hinkin and Tracey, 2000) that provided the needed information.

Statistical Calculations

Another technique used to convert data to money is the use of statistics, particularly through gathering survey data and conducting analyses to determine correlations between measures. This classic approach can be relatively simple, if the data are readily available. Otherwise, use another method to be more efficient because the cost of converting a measure using this technique can outweigh the cost of the evaluation, and even the cost of the program.

Estimates

Although some people hate to think of using estimates, the fact is that most data used in any type of research is based on estimates. Nevertheless, using estimates of participants, managers, and supervisors to convert a measure to money is somewhat more subjective than the previously described techniques. When using estimates, the key is to obtain input from the most credible source—the person or persons who know best about the measure under review. These sources of data are asked to provide three pieces of information:

• their estimated value for the measure
• the basis for their estimated value
• their confidence in their estimated value.

Figure 14-1 describes this process in an example.

Table 14-1 provides examples of how each of the above techniques has been applied.

Five Steps to Convert an Improvement in a Measure to Money

Once the value of a measure is known, the process to convert the improvement in the measure to monetary benefits requires a few simple steps:

1. Identify the unit of measure.
This is a Level 4 impact measure targeted for improvement by the program. The unit of measure is typically identified during the evaluation planning process and established as an objective.

2. Determine the value of the measure (V).
The value of the measure is the unit value. This value is determined using one of the techniques described previously. It could represent profit, cost savings, or cost avoidance.

3. Determine the change in performance in the measure due to the program (DP).
This is the improvement in the measure, or the Level 4 business impact results. Remember that this is the improvement caused by the program, accounting for other influencing factors, rather than the total improvement (see Chapter 13, Isolating the Effects of the Program).

4. Annualize the change in performance of the measure (ADP).
When reporting the monetary benefits of a program, it is customary to report them in terms of annual monetary benefits. So, if your measure is reported monthly, to annualize it you simply multiply improvement by 12. If reported weekly, the measure is multiplied by the number of weeks worked in one year. Forty-eight is the typical number used.

5. Calculate the annual monetary benefit (ADP 2 V).
To develop the total monetary benefits of a program, simply multiply the annual change in performance (step 4) by the value of one unit of the measure (step 2). The product represents the annual profit, cost savings, or cost avoidance contributed by the program. When calculating the ROI , this value is placed in the numerator of the ROI equation (see Chapter 16, Calculating the Return-on-Investment).

Figure 14-1. Example of Using Estimates

Converting Unexpected Absence to Monetary Value Using Supervisor Estimates

 

Unexpected absences caused problems in a local plant. The performance team instituted a new program to reduce these absences. Due to its cost, an ROI study was conducted to show the value of the program.

To calculate the ROI, the monetary value of improvement in unexpected absences had to be developed. Because there were no standard values, historical costs, or databases with an acceptable value, the supervisors who had to deal with these absences would be the best source to provide an estimate.

In a focus group of five supervisors in the plant, the evaluator asked each supervisor three questions. These questions were:

• What happens when an unexpected absence occurs in your work unit?

• Given what happens, how much do you think one absence per one day costs you?

• How confident are you that your estimate is correct?

As shown below, each estimate was adjusted for confidence. The adjusted per absence costs were totaled then averaged. The average cost of a single absence was calculated as $1,061.

 

Supervisor	Estimated Per Day Cost	% Confidence	Adjusted Per Absence
1	$1,000	70%	$700
2	$1,500	65%	$975
3	$2,300	50%	$1,150
4	$2,000	60%	$1,200
5	$1,600	80%	$1,280
			$5,305
Average adjusted per day cost of 1 absence			$1,061

 

Figure 14-2 explains the application of these five steps in a case study.

The five steps described above will help you identify the monetary benefits of a program. However, there will be some measures in which we decide not to convert to money—these measures are the intangible benefits.

Table 14-1. Examples of Application of Data Conversion Techniques

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Data Conversion Techniques	Examples
Standard Values • Output to Contribution • Cost of Quality • Employee Time	• Sales—profit margin • Donations—overhead margin • Unproductive man hours—hourly wage* • Repackaging—standard value based on time savings (hourly wage) • OSHA fines—fines associated with incident • Unit per person hour—profit of one additional product produced per person per hour at same cost
Historical Costs	• Sexual harassment grievances—litigation costs • Food spoilage—cost to replenish food inventory • Turnover of marine engineers—average replacement costs plus separation costs
Internal / External Experts	• Electric utility rate—internal economist • Life**—internal risk manager
External Databases	• Turnover mid-level manager—ERIC • Turnover restaurant wait staff—Google
Statistical Calculations	• Employee satisfaction—linked to customer satisfaction linked to profit • Customer complaints regarding baggage mishandling— percent complaints linked to percent who will not repurchase seat on airline linked to lost revenue
Estimations • Participant • Supervisors/Managers • Staff	• Unexpected absence—supervisor estimate (basis provided) x confidence adjustment • Unwanted network intrusions—participant estimate (basis provided) x confidence adjustment

 

*Hourly wage includes hourly salary plus benefits factor.

**Economists have developed two methods to value a human life: estimate the individual’s lost earnings for his or her remaining life, or consider people’s acceptance of higher-risk jobs and their related higher salaries as payment for a higher probability of death.

 

Intangible Benefits

Program results usually include both tangible and intangible measures. Intangible measures are those business measures not converted to monetary value. A four-part test helps in making this decision. Table 14-2 includes four questions to be answered when considering whether or not to convert a measure to money.

Figure 14-2. Case Application

Case Application: Grievance Reduction

 

A large electric utility implemented a new policy to reduce grievances. The value of the grievance, based on input from labor-relations experts within the organization was $6,500 per grievance. Six months after the policy was implemented, the human resources function found that grievances had gone down, on average, to 10 per month. Because they knew this reduction was not entirely due to the program, they took steps to isolate the effects of the policy on the grievance reduction. The results showed that a reduction of seven grievances per month was actually due to the policy implementation.

The annual monetary benefit of the policy implementation was calculated by multiplying the value of one grievance by the number of grievances reduced in one year. Below is the calculation:

• The unit of measure is one grievance.

• Value of a grievance is $6,500 as defined by the internal expert.

• Change in performance due to the policy is seven grievances per month.

• Annual improvement in grievances is 7 x 12 = 84 grievances per month.

• Annual monetary benefit is $6,500 x 84 = $546,000.

 

Source: Phillips and Phillips (2005).

Table 14-2. Questions to Answer When Considering Converting an Intangible Measure

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1. Is there a standard value?
If yes, the measure is converted to money. If no, then answer the next question.

2. Is there a technique to convert the measure?
Earlier in this chapter, a variety of techniques to convert measures to money were described. If one of these techniques will not work, then report the improvement in the measure as an intangible benefit. If one or more of the techniques will work, then answer the next question.

3. Can the chosen technique(s) be implemented using minimum resources?
You do not want to spend more on data conversion than the evaluation itself. Thus, if it will cost too much money or consume too many resources to convert the measure to money using the chosen technique, report the measure as intangible. If you can convert the measure to money using minimal resources, then answer the final question.

4. Can you convince your executive in two minutes or less that the value reported is credible?
Although high monetary benefits for a program are desirable, be sure to maintain the credibility of the calculation. Try to report acceptable and credible monetary benefits along with important intangible benefits rather than convert all measures to money just to show a large monetary contribution. Heeding this advice will enhance the credibility of your results and approach, as well as support the integrity of an ROI if calculated.

 

Guidelines for Converting Measures to Monetary Value

Converting measures to money is an important step in the measurement and evaluation process when you want to

• know financial benefits of programs
• normalize benefits so comparisons can be made
• give quantitative meaning to a benefit
• calculate the ROI in training investment.

By following the guidelines below, you should be confident as you move forward with converting measures to money:

• Plan ahead. If you are planning to report monetary value for improvement in your program, obtain agreement early as to your approach for obtaining the value of a measure.
• If you have standard values for measures, use them.
• Use the most credible source for data.
• If no improvement data are given, assume little or no results. This is the conservative approach that enhances the credibility of your results.
• When using estimates, adjust for error in the estimate by asking sources to provide you their level of confidence in their estimated values.
• Extreme measures and unsupported claims should be thrown out. If someone provides an estimated monetary value that is well beyond the norm, rather than skew your data, throw it out. If they do not provide a basis for their estimate, don’t guess at how they developed it—throw it out.
• For short-term programs, assume only first-year benefits.
• When in doubt, leave it out. The key is to follow conservative standards. If you are unsure of the credibility of a value or if it costs you too much to convert a measure to money, report the improvement as an intangible benefit.

Knowledge Check: Converting Program Benefits to Money

Now that you have read this chapter, try your hand at converting the benefits of a program to monetary value. Check your answers in the appendix.

Wines-by-the-Glass is a growing franchise of wine boutiques located throughout the United States. Although they sell bottles and relevant accessories, their niche is in selling fine wines by the glass. This wine bar concept has increased in popularity in large cities, where the median age is around 40 years old. With 250 stores and growing, the chain has exceeded expectations.

The slowing economy has had a slight impact on these stores, although not to the extent of other retail stores. Nevertheless, the general manager of the chain invited shop owners with the weakest sales to attend a two-day training on marketing techniques to help boost sales. Forty shop owners attended this training in Atlanta. Three business objectives were established:

• Increase sales to existing customers by 5 percent within six months of the training

• Increase the number of new wine club memberships by an average of five per month per store within six months of training

• Increase sales for accessories by 10 percent within six months of the training

Six months after the training, an evaluation was conducted to see how the training contributed to achieving the objectives. With regard to the wine club memberships, the evaluation team found that new wine club memberships increased on average seven per month for each of the 30 stores reporting data (that is, seven memberships per month per store). By asking the shop owners a series of questions, the evaluators found that only 40 percent of the sales was due to the training; the remaining 60 percent of sales were due to factors such as advertising, promotion, new stores opening in the general area, and an overall boost in economic conditions. The sale of a membership is $45 per month. The profit margin for the membership is 60 percent.

Following the five steps described in this chapter, what is the annual monetary benefit to Wines-by-the-Glass for increasing new wine club memberships through training?

1. Identify the unit of measure.

2. Determine the value of the measure (V).

3. Determine the change in performance in the measure due to the program (DDP).

4. Determine the annual change in performance (ADP).

5. Calculate the annual monetary benefit (ADP x V).

About the Author

Patricia Pulliam Phillips, PhD, is president and CEO of the ROI Institute, the leading source of ROI competency building, implementation support, networking, and research. She can be reached at [email protected].

References

Cokins, G. (1996). Activity-Based Cost Management: Making It Work—A Manager’s Guide to Implementing and Sustaining an Effective ABC System. New York: McGraw-Hill.

Hinkin, T. R. and J. B. Tracey. (June 1, 2000). “The Cost of Turnover.” Cornell Hotel & Restaurant Administration Quarterly, 14–21.

Phillips, P. P. and J. J. Phillips. (2005). Return on Investment Basics. Alexandria, VA: ASTD, p. 124.

Phillips, P. P. and H. Burkett. (2008). Data Conversion: Calculating the Monetary Benefits. San Francisco: Pfeiffer.

Additional Reading

Kee, J. E. (2004). Cost-Effectiveness and Cost-Benefit Analysis. In Wholey, J. S., H. P. Hatry, and K. E. Newcomer eds., Handbook of Practical Program Evaluation, 2nd ed. San Francisco: Jossey-Bass.

Kida, T. (2006). Don’t Believe Everything You Think: The 6 Basic Mistakes We Make in Thinking. Amherst, NY: Prometheus Books.

Koomey, J. G. (2008). Turning Numbers into Knowledge. Oakland, CA: Analytics Press.

Rucci, A. J., S. P. Kim, and R. T. Quinn. (January–February 1998). “The Employee-Customer-Profit Chain at Sears.” Harvard Business Review.