Workonomics: Helping Retailers Value Human Capital high and low levels of productivity and...

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Workonomics: Helping RetailersValue Human Capital

workonomics 08/01 9/13/01 10:43 AM

Workonomics: Helping Retailers ValueHuman Capital

In 1977 a Forbes journalist accompanied the founderand CEO of a remarkably successful U.S. retail chainthrough a typical day. The writer’s ensuing articledescribed a grueling schedule of visits to one storeafter another and conversations with hundreds ofemployees. Listening to their problems, praising theirperformance, and offering his advice, the CEO wasdeveloping a companywide sense of cohesion thatwould become legendary. The journalist wrote thatthe company leader tended his people “like plants ina garden, nourishing with praise, advancement, andgood pay, transplanting constantly to improve themix, weeding where necessary.” The article’s subjectwas, of course, Sam Walton, chairman and CEO ofWal-Mart Stores.

Walton was ahead of his time in viewing his employeesnot as cost centers that ought to be rationalized but asassets who should be cultivated and managed. That’shardly a revolutionary insight today. To compete inthe current marketplace, senior executives know theymust attract and retain the best people. Their effortsto do so, however, expose a serious limitation in manycompanies: their management systems for measuringperformance are geared to the efficient use of capital,not people. In practice, company assessments rarelyconsider human capital.

To be sure, optimizing fixed and working capital iscritical for improving financial returns in capital-intensive businesses. Conventional reporting systemsand measurements—such as return on investment(ROI), which assesses the productivity of capitalinvestments—were developed for that purpose. But

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those systems and measures are less useful in retailbusinesses, where investments in human resources aretypically high. In fact, The Boston Consulting Grouphas found that in Europe’s largest retail chains, per-sonnel costs are often three to four times higher thancapital costs. (See Exhibit 1.)

A New Approach

To help executives make the most of their assets inpeople-intensive industries, BCG has developed an

Exhibit 1. Human Capital Can OutweighInvestment Capital

SOURCE: BCG analysis.NOTE: Capital costs equal the sum of weighted average cost of capitaltimes invested capital plus depreciation.

European Residual Value Average Ratio ofretailers income added cost personnel costs

per person per person per person to capital costs(in thousands of euros)

Sainsbury 5 33 28 3:1Tesco 5 26 21 2:1Safeway (U.K.) 4 27 23 2:1Laurus 3 24 21 4:1Asda Group 3 27 24 2:1Carrefour 2 27 25 2:1Royal Ahold 2 24 22 3:1Delhaize Group 2 21 19 4:1Douglas Group 2 34 32 4:1Hornbach Holding 1 33 32 2:1AVA 1 32 31 7:1Groupe Casino 0 20 20 2:1Karstadt Quelle –1 34 35 4:1SinnLeffers –2 34 36 3:1


approach called Workonomics. We have designedWorkonomics to answer the same questions about employees’ performance that conventionalmeasurement-and-control systems answer about capi-tal performance. This approach provides quantitative,personnel-oriented metrics that mirror classic controlsystems and bridge the gap between measures of capi-tal and assessment of human assets.

Workonomics links traditional measures of employ-ees’ productivity (for example, sales per employee,employee hours per store, and employee turnover)with the financial performance of each store andregion, and with various corporate functions. To com-plement ROI in people-intensive industries, forinstance, Workonomics calculates value added perperson (VAP) as a measure of average productivity.Subtracting the average cost per person (ACP) fromVAP and multiplying the difference by the number ofemployed people (P) produces the residual income,which is called either economic value added (EVA) orcash value added (CVA). (For fuller definitions, seethe glossary at the end of this article.)

An increase in EVA or CVA means higher shareholdervalue. Thus, employee productivity, or VAP, is directlyconnected to either EVA or CVA, the core financialmetric that is used in many companies. The purposeof Workonomics is not to replace old, capital-basedcontrol systems; rather, it is to make them more realis-tic by incorporating a measure of human capital andlinking that measure directly to shareholder value.

Workonomics also lets a retailer continuously monitorthe effectiveness of its current operating model forvarious regions, formats, and functions. Using theVAP calculations for comparable stores, managers can


identify high and low levels of productivity and deter-mine the potential for increasing value.

Drilling Down to Individual Stores

Companies can apply Workonomics at all levels oftheir operations. For example, on the level of thebranch store, a company might break down Work-onomics metrics to single out such value levers as thefluctuation rate (employee turnover) or the sicknessratio. The company could then conduct a sensitivityanalysis to determine which of those performancelevers are most likely to affect EVA or CVA if theychange. Thus, Workonomics identifies the levers thatare most directly related to shareholder value andprovides a significant advantage over the traditionalbalanced-scorecard approach.

Furthermore, a branch store’s value levers can be visually represented in a computer program. (SeeExhibit 2.) The “Workonomics Cockpit” shows howone store can be measured against all the other storesin a company’s chain. Each horizontal bar, or lever,compares the store’s performance in a specific cate-gory against the performance of other stores andrates it from worst, on the left, to best, on the right.The darker shading indicates a need for action, andthe lighter shading signals above-average value. Thewider the shaded area—light or dark—the greater the distance from average. Therefore, a wide lightlyshaded area is very good and a wide dark area verybad. The average falls at different points within thelevers, depending on the value being measured.

The levers in the upper section of the exhibit showthe key financial metric—CVA or EVA—as a productof the new, personnel-oriented metrics described


above: VAP, ACP, and P. The “essential value levers” inthe lower part of the exhibit are all of the componentmeasures for assessing VAP, ACP, and P. By double-clicking on most of those value levers, managers candrill down to more detailed metrics. (A doubledimage denotes that feature.)

Under the “fluctuation” lever, for example, attritionin the workforce might be quantified along threedimensions: whether the company wanted the em-ployee to leave; the employee’s position in the com-pany’s hierarchy (for example, branch store head,department head, or sales staff); and subsequentemployment (did the employee move to another in-dustry, go to a competitor, or transfer within the com-pany?). Not only would the fluctuation measure pro-vide early warning of problems with the sales staff atindividual stores—the telltale sign would be an in-crease in defections to competitors—it would alsomeasure the direct quantitative effect of the rate ofturnover on critical financial ratios.

To get a picture of back-office efficiency at a branchstore, managers can double-click the “sales per em-ployee” lever to reveal sales per sales employee andthe number of sales employees compared with thenumber of total employees at the branch store. Goingeven deeper, managers can also target the sales persales employee of a department or product group.

Thus, Workonomics establishes an analytic linkbetween productivity and the key financial ratio. Ifmanagers use these benchmarks to compare storeswith similar competitive positions, locations, and pur-chasing practices, they will gain a very clear picture ofthe average employee’s current productivity and thepotential for improvement in each store, department,or product group.


In effect, Workonomics shines a spotlight on thoseareas that require immediate action, and it gives thepersonnel department a strategic tool to use along-side the capital-based control measures of the financedepartment. Such close, rigorous tracking helps man-agers make better decisions for each store—for exam-ple, whether to add incentives or tighten costs;whether to invest in more service or reduce employ-ees’ hours; and whether to change employees’ pro-files or invest in their development.

Workonomics assessments of what employees con-tribute and how the productivity of one group com-pares with that of others are every bit as accurate ascomparisons of capital performance. Moreover, as a

Workonomics analysis of the recent success of oneU.K. chain, Tesco, demonstrates, increases in share-holder value can be traced directly to increases in pro-ductivity.

Tesco’s Revival

In the mid-1980s, retailers had such a poor image,especially among graduates of secondary school, thatit was difficult for Tesco to recruit the right people.Concerned about its long-term prospects, Tesco de-vised a centralized program for recruiting graduatesof secondary school and college. At the same time, tomake middle and upper management more produc-

CVA or EVA

CVA or EVAper employee

PVAP ACP

Sales peremployee

Margin afterdepreciation

Inventorydiscrepancies

Capital turnover

Fluctuation

Recruiting

Sickness ratio

Fixed salaries

Training costs

Recruitingcosts

Variablesalaries

Bestin class

Worstin class

Average

Value of studied store

Essential value levers

Below-average value Above-average value

VAP levers ACP levers P levers

Exhibit 2. Workonomics Cockpit

SOURCE: The Boston Consulting Group.

NOTE: CVA = cash value added; EVA = economic value added; VAP = value added per person; ACP = average cost per person; P = number of employed people.


tive, the company redefined jobs and responsibilities.As a result, Tesco reduced the number of manage-ment levels from six to three and eliminated 4,000managerial positions. Highly productive employeeswere brought onboard, and unproductive ones werelet go. The employees who survived the cut weregranted more flexibility, and motivation improved.

Using Workonomics to assess Tesco’s success, wedetermined that VAP increased 60 percent over thelast ten years as a result of the company’s efforts inhuman resources. In fact, of all the retail companieswe analyzed, Tesco achieved the second-highest resid-ual income per employee. (See Exhibit 1.) It’s notsurprising that Tesco is now considered one of theworld’s premier operators of supermarkets and hyper-markets. Thanks to its decision to nurture its peopleas valuable assets, Tesco employs the right number ofpeople, they have the right skills, they are in the rightplaces, and they are doing the right jobs. For theroughly 100 positions it advertises each year, the com-pany now receives some 5,000 applications from grad-uates of the best colleges and universities.

* * *

As Sam Walton told the Forbes journalist, “We like tolet folks know we’re interested in them and thatthey’re vital to us. ’Cause they are.” But it’s not justinterest that is urgently needed. To manage in a waythat employees as well as shareholders perceive as fair,logical, and financially sound, retailers must have arigorously quantitative system for monitoring andmanaging their operations. Workonomics providesthat system.

Retailers need to know whether their employees areas productive as their competitors’ employees. How


© The Boston Consulting Group, Inc. 2001. All rights reserved.

much value do their employees create? Exactly whereare their problems and what should they do aboutthem? To questions such as these that have long con-cerned only finance departments, Workonomics is thefirst system that delivers quantitative answers.

Rainer StrackAlexander Lintner

Matthias Bolz

Rainer Strack is a vice president in the Düsseldorf office of The Boston Consulting Group and a member of theCorporate Development and Consumer practices. AlexanderLintner is a vice president in BCG’s Munich office andhead of the firm’s Retail practice in Europe. Matthias Bolz is a consultant in BCG’s Stuttgart office.

You may contact the authors by e-mail at:

[email protected]

[email protected]

[email protected]

Workonomics belongs to a set of new value-management con-cepts that BCG calls The Real Asset Value Enhancer. RAVEmerges value management and balanced scorecards intoBalanced Value Management. Aside from Workonomics, themost advanced RAVE concept is Custonomics, which meas-ures the productivity of investments in customers. For furtherinformation about Workonomics, please visit our Web site atwww.workonomics.bcg.com.


A Workonomics Glossary

Value-Based Measures: The Capital View

Because these metrics refer to invested capital, we callthis the capital view.

Economic value added (EVA) measures earnings thatexceed the cost of capital. EVA is calculated by sub-tracting the weighted average cost of capital from thereturn on investment (ROI) and multiplying the dif-ference by the amount of invested capital.

Cash value added (CVA) is the equivalent of EVA on thecash flow side. EVA is defined by yields, and CVA isdefined by cash flow. Here ROI is analogous to cashflow return on investment (CFROI). EVA and CVAare also sometimes called residual income.

Workonomics Measures: The Human Resources View

Value added per person (VAP) measures the average pro-ductivity of employees. To obtain this measure, sub-tract all costs—including the cost of capital butexcluding personnel costs—from sales. Then dividethe difference by the number of employed people(P). VAP is analogous to ROI or CFROI in the capi-tal view.

Average cost per person (ACP) denotes the average per-sonnel cost per employee. ACP corresponds to thecost of capital in the capital view.

Number of employed people (P) denotes the full-timeequivalents employed by a company, branch store, orother entity. P corresponds to invested capital in thecapital view.


In the human resources view, EVA and CVA are calcu-lated by subtracting ACP from VAP and multiplyingthe difference by P. In this way, the company’s keyratio—either EVA or CVA—is broken down into threepersonnel-oriented metrics.


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