by Robb Gomez, with Eric Zakovich
Recently, there’s been a trend in the workplace toward managerial accountability with regard to corporate goals. Increasingly, even middle managers are expected to understand the company’s financial objectives, make strategic decisions in their own day-to-day work areas based on this information, and effectively communicate all of it to their employees.
Unfortunately, expectations don’t always match reality.
All too often, employees, supervisors, managers—and, yes, even some executives—function in a vacuum. They might understand their specific roles, and they might do them well, but they frequently cannot see the big picture or understand how their actions affect it. While they might have some basic financial knowledge (“companies should take in more money than they spend”) or perhaps a grasp of slightly more complex concepts such as calculating operating ratios, they typically do not possess the knowledge to improve those ratios, or even understand why those ratios have to improve and what has to occur throughout the organization to make that happen. And that knowledge gap has a significant impact on the bottom line.
Xcel Energy, the Minnesota-based provider of electricity and natural gas for more than 5 million customers in eight states, had its bottom line in mind when it set out to bridge its employees’ knowledge gap. If managers had the ability to understand the company’s financial information and the proper background to act upon it, executives believed the results would lead to a stronger company. And they were right.
For energy companies, where the industry average profit margin is slightly less than 10 percent, according to Yahoo! Finance, an improper assumption of that magnitude almost certainly will impair strategic and operational performance. “Why I should I try harder?” an employee might ask. “Aren’t things good enough?”
Employees with business acumen have those answers.
What is business acumen?
Business acumen is the understanding of what it takes for a company to make money and how to improve upon current performance. It is different from financial literacy, which is a basic understanding of a company’s financial situation and how the numbers on its income statement are derived.
If a company’s gross margin falls from 10 percent to 3 percent over a certain period of time, employees with business acumen are likely to ask what they and their teams can do to help. They’ll understand why the ratio needs to improve and they’ll ask the right questions: how operations, processes, products, systems, etc., can be altered in order to improve specific margins or ratios. The answers likely will lead to innovative solutions, and innovative solutions, of course, lead to competitive advantages.
Developing business acumen doesn’t require a master’s degree or experience running a company. It simply takes the ability to understand the critical financial and operational elements that can rapidly improve cash flow and profitability.
Helping employees and managers to make those connections is fast becoming a primary objective of executive management. Employees who make the connections understand how and why just a few pennies of each dollar of sales actually come down to the bottom line. From there, the connection is made that if more pennies come down to the bottom line then the company will have options, options that might include enhancing the retirement plan, increasing training or improving the health benefits for employees and their families—or, at a minimum, keeping the company solvent.
The importance of these connections should not be underestimated. Research shows that managers—and, by extension, their employees—otherwise will focus on the immediate, narrowly defined tasks upon which they’ve been told they personally will be measured. They may not consider a small amount of wasted assets to be a problem. They may have little empathy for the missions and responsibilities of other team members, other departments or other divisions of the company, and their energy levels and responsiveness to projects will be inconsistent.
Bolstering the bottom line at Xcel Energy
Xcel Energy’s constant challenge has been to meet customers’ growing demands while keeping a rein on the increasing costs of producing energy. Being a regulated utility, Xcel Energy operates in an environment where costs were rising without the ability to easily grow its rate base.
After analyzing expenses and revenues, Xcel Energy executives came to the conclusion that a significant way to bolster the bottom line is to reinforce the notion that every employee is a decision maker. “We realized our people needed to know more about the flow of money and about how any choice they make today can affect tomorrow’s financial results,” said Eric Zakovich, Xcel Energy’s organizational development consultant.
This was particularly vital for middle managers, who might oversee a department but yet not have all of the financial expertise necessary to be effective stewards of company resources.
“Many of our supervisors were the best engineers but maybe lacking in the understanding of how engineering impacts the organization,” Zakovich said. “We believed they needed a larger, more comprehensive view of our strategic initiatives and directions.”
In 2000, Xcel Energy initiated a training program centered around financial literacy and business acumen as part of a larger orientation curriculum for its managers and those in the company’s “leadership pipeline,” with the idea that the employees could take the information back to their offices and use it to affect the company’s bottom line on a daily basis. One of the principal tools Xcel Energy used in its training program was a simulation called “Zodiak: The Game of Business Finance and Strategy,” a board game that allows participants to manage a company for three years—in about five hours real time—and see what happens as a result of their decisions, from paying bills to serving customers. The game is designed to introduce financial concepts to all audiences, ultimately helping employees understand the parallels between the simulation and their actual jobs.
“Almost immediately, employees began to see the bigger picture,” Zakovich said. “They were able to go back to their departments and increase other staff members’ understanding of our situation. This really led to new levels of productivity and efficiency for us.”
Zakovich said managers now make “more conservative decisions” about how their budget dollars are spent. “Our managers’ ability to control costs and weigh the benefits of investment in our core business are critical to our financial well-being,” he said.
The timing for this initiative couldn’t be better, Zakovich said. “We’re going to have a lot of people entering [the industry] that do not have energy backgrounds, and we’ll need to get people to understand our business faster than they ever have before,” he said. “In the next 10 years, we may have 30 percent of our workforce retiring, so being able to get new employees to understand the strategies of the organization and how they can impact it are so important right now.”
For decades, “business acumen” was a term that rarely left the executive suite. Senior managers would hand down marching orders that would filter to employees. The hierarchical corporate structure fostered more of an “us and them” environment. Much of this occurred because senior managers did not think productivity and profitability improvement could be achieved through means other than new systems, new technology, new equipment or possibly a new corporate acquisition. Few companies ever realized their own people could be the solution.
But the light bulbs are finally starting to turn on as companies begin to expect employees to think like CEOs. Forward-thinking companies like Xcel Energy have already discovered the power of doing so.
Robb Gomez is the president of Paradigm Learning, an international corporate training and communications company that partnered with Xcel Energy on its business acumen program and other leadership training issues. Contact Gomez at firstname.lastname@example.org. Eric Zakovich, organizational development consultant for Xcel Energy, may be contacted at email@example.com.