Educating a workforce about the concept of business acumen—going beyond financial literacy and developing a true understanding of what it takes for an organization to make money—is the key to producing real, bottom-line results.
Today’s energy companies find themselves in an unprecedented position—forced to deal with an endless series of intertwined challenges that have made “business as usual” anything but.
A sluggish economy, rising fuel costs, an anticipated scarcity of future resources, skyrocketing operational expenses, increasing environmental demands from the government and public-interest groups, competitive threats, and security issues—combined with a growing customer demand for low-cost energy and few opportunities to raise base rates—have conspired to create quite the Gordian knot. Try hard to loosen the rope, yet everything remains tight.
Ultimately, the effects of these challenges are seen at the bottom line. For energy companies, where the industry average profit margin is less than 10%, according to Yahoo! Finance, even the slightest impact on the bottom line seems especially magnified. So it’s imperative for every employee to make the smartest business decisions possible.
All too often, they don’t and feel they can’t. That’s why energy company executives must do their part by making sure that employees are equipped with the proper knowledge to make good decisions. Training programs and educational offerings must be aligned with the organization’s strategic objectives.
That’s not an easy job. Managers must help employees understand the company’s goals and develop the skills and motivation to contribute to them. At the most basic level of alignment, they must make sure that every employee understands how the company makes money. That includes understanding what drives profitability, how assets are used, how cash is generated, and how day-to-day actions and decisions, including their own, affect success.
Developing business acumen is fundamental to business alignment. Consider Xcel Energy, the Minnesota-based provider of electricity and natural gas for more than five million customers in eight states. As is the case with other energy companies, Xcel’s constant challenge has been to meet customers’ growing needs while keeping a rein on the increasing costs of producing energy, reducing environmental impact, and adding value for customers, communities, and shareholders.
There are thousands of power companies in the U.S., but only 48 made the 2008 Fortune 500 list of America’s largest corporations. Xcel Energy, which enjoys a reputation throughout the power industry for innovation and sustainability, is ranked No. 260 (and 242 for the May 2009 report) and is among the top 30 in terms of profit as a percentage of revenue. So consider this: If it buys the same fuel and equipment as other power companies and pays its employees competitive wages and benefits, what’s the difference between Xcel (my client) and others of similar size and circumstance?
Unlike some other energy companies, Xcel Energy’s executives have made efforts to involve employees in the company’s financial results by giving them the tools—the educational fortification—they need to understand what the financial numbers mean and, more important, helping to link everyone’s decisions and actions to the bottom line.
Certainly there are other factors that contribute to Xcel Energy’s success, but it’s difficult to ignore the positive impact of an approach that develops the business acumen of all employees and managers so that they can contribute to the overall success.
An Educational Challenge
At many companies today, managers have not been educated about the big picture of their businesses. They have a narrow focus on their own departments and job functions and aren’t able to make the link between their actions and the company’s success. Multiplied by hundreds or even thousands of employees, this lack of understanding—the lack of true business acumen—means that too many decisions are being made and too many actions are being taken that don’t align with the company’s business objectives.
How can training help bridge this knowledge gap? For companies such as Xcel, implementing learning programs designed to develop a strong foundation of financial literacy and business acumen have made the communication of financial results to employees easier and more effective.
Defining Business Acumen
Put simply, business acumen is the understanding of what it takes for a business to make money. For a start, it involves financial literacy, which is an understanding of the numbers on financial statements, as well as an understanding of the strategies, decisions, and actions that impact these numbers.
Someone with financial literacy, for example, would be able to “read” the company’s income statement. This employee or manager would understand the terminology (revenue, cost of materials sold, gross margin, profit, etc.) and what the numbers represent (i.e., gross margin equals total revenue less the cost of material sold). With business acumen, the individual would be able to “interpret” this same income statement, taking into consideration how company strategies and initiatives have affected the numbers during specific periods of time.
Consider this simple comparison: In football, it’s necessary for players to know how the game is scored as well as how to play the game to change the score. In business, financial literacy is understanding the “score” (financial statements) and business acumen is understanding how to affect it (strategic actions and decisions).
Asking the Right Questions
When business acumen spreads through an organization, employees and managers begin to ask core questions beyond the numbers on the financial statements. These questions are directed not only at the organization, but also at themselves and their departments—questions about processes, products, systems, staffing, and more that can lead to necessary and innovative decisions and actions.
Business acumen helps everyone understand that it’s not enough to say, “How do we cut costs?” or “We need to increase sales.” Digging deeper, employees with higher levels of business acumen will ask questions that take into consideration the far-reaching effect of potential decisions and demonstrate a greater ability to make the connections between performance and results.
Some questions that can get to the root of operating ratios include these:
- Have power plant costs gone up? If so, why?
- How has the current credit crunch impacted revenue?
- Have we changed prices? How has that affected our margins?
- Are there any competitive issues affecting our performance?
- If our costs have gone up, can we better control the efficiency of our production or service delivery?
- How do environmental concerns affect the business?
When questions become more specific, right decisions are more likely.
Business Acumen for Managers
Managers at all levels need a high level of business acumen to do their jobs. Every day, they make decisions about employees, projects, processes, expenditures, customers, and much more—decisions that ultimately roll up into larger organizational results. Managers who make these decisions while looking through a departmental lens only, with a limited understanding of how these decisions affect overall financial results or how they are tied to the organization’s goals and objectives, are working in silos—disconnected pipes—that can ultimately damage the company.
Managers are often promoted to positions of responsibility because of their “technical” expertise. They were successful customer service representatives, electrical engineers, researchers, or IT professionals. They are now entrusted with decision-making, budgets, projects, and people. They often do not have financial literacy, nor have they developed a higher-level perspective about the business. Over time, especially if they move up the managerial ladder, they may develop these. They may not.
Organizations need managers who operate as part of the management team, taking accountability for their own results as well as the results of the entire company. Therefore, more and more organizations have built financial literacy and business acumen into managerial competency requirements and have integrated business acumen training into management curriculums.
Business Acumen for Employees
Although there is little debate about the need for managers to develop business acumen, organizations sometimes question the need for this understanding at employee levels. But frontline contributors—those who are most directly involved with production or customer service, for example—take actions every day that impact business results.
Consider the service representative who deals with an unhappy customer, or the maintenance person who notices a problem. The actions each of them takes might erode profit margin, lose a good customer, or allow safety issues to escalate. Without an understanding of how their actions impact the company’s results, they might not have the context to consider alternatives.
Many organizations have determined that financial literacy and business acumen aren’t just for managers anymore. They have decided to develop a company of people who understand the business; who know what return on assets and return on investment mean; who know how supplier costs affect results; who understand the importance of positive cash flow; and who see the connection between the company’s financial success and their own health benefits, 401(k) plans, and more. In other words, they need people who understand the “business” of the business. It isn’t about information, it’s about understanding.
In his book Good to Great: Why Some Companies Make the Leap…and Others Don’t, management consultant Jim Collins writes, “We found no evidence that the ‘good-to-great’ companies had more or better information than the comparison companies. None. Both sets of companies had virtually identical access to good information. The key, then, lies not in better information, but in turning information into information that cannot be ignored.”
With an increased level of business acumen, managers and employees can better interpret information, making the connection between their actions and the company’s results.
Another Modern Reality
Every publicly traded company’s results are well known at the end of each quarter. Analysts, investors, news media, employees—everyone has access to the financial results. With a significantly increased focus on accounting improprieties over the past few years, senior management has become highly conscious of the need to provide accurate and timely financial information. Employees, and their representatives, have become much more likely to wonder about these reports—“Are the numbers telling the whole story?”
CEOs of energy companies must ensure that managers and employees are able to understand the financial numbers and have confidence in them. That means effective business acumen education as well as ongoing and open communication from the top. It also requires accurate and transparent reporting by the company.
Former General Electric chairman and CEO Jack Welch said in his book, Jack: Straight from the Gut, “Getting every employee’s mind into the game is a huge part of what the CEO job is all about. . . . There’s nothing more important.”
As we have become a nation of specialists, armed with new information technology and enterprise-wide operating systems, it has become easier for managers and employees to become myopically immersed in their own jobs. This immersion can have the effect of obscuring their view of the big picture. They may not consider the cumulative effect of wasted assets. They may have little regard for the objectives and responsibilities of other team members, departments or divisions. They may lack the motivation to invest personal energy in critical project work.
Organizations that engage in developing business acumen provide a clearer vision and an overall context within which employees can work, while creating an environment that is more likely to break down internal barriers. There is less waste and less ambivalence. There is increased innovation. Employees are more engaged, they understand their role and its impact on business results, and they are more likely to believe that their efforts really matter. They are more likely to think like a CEO.
To be successful, CEOs must be able to “helicopter” above day-to-day issues and see the big picture. They must understand how the pieces of the business fit together to impact profitability and cash flow, and they must be able to assess the risks and rewards of potential decisions. The best business drivers study the numbers, ask themselves tough questions, analyze their mistakes, and take decisive action.
When managers and employees begin thinking like CEOs, they, too, look at the big picture, try to understand how all the pieces fit together, and assess risks and rewards. They figure out how the company makes money, how it stays in business, and how they contribute to its success. The benefits to an organization of engaging managers and employees in this kind of “big-picture” thinking are obvious. So how can a company develop the business acumen of its people?
How Xcel Energy Did It
The question on the minds of Xcel Energy’s executives was not whether understanding business acumen and financial literacy would effectively involve employees in the success of the company—they immediately recognized that employees with the ability to understand financial information and the proper background to act upon it can help build a stronger company. Instead, they needed to determine the most effective way to impart these skills to their employees.
Xcel knew herding employees into a classroom for a lengthy lecture would surely produce glazed eyes, boredom, and a lack of enthusiasm for the new information, so they decided to take a more engaging tack.
Xcel turned to my company, Paradigm Learning, and Zodiak: The Game of Business Finance and Strategy, our discovery learning–based business board game that teaches employees to think like CEOs.
Xcel managers and other employees spent a half day of play to become more literate about key financial terms and concepts. The second half of the day was spent in a customized session called “Connections,” during which participants made discoveries and applied their new knowledge to the company and their departmental responsibilities.
“This training simulation enables employees to connect their new-found business literacy information to Xcel Energy’s own financial concepts, measurements, and overall strategic efforts,” said Eric Zakovich, organizational development consultant for Xcel Energy. “Our rationale for using business games and simulations was simple: With so much for our employees to learn, it is critical that the teaching methods we use be effective, efficient, and relevant.”
—Raymond Green is cofounder and CEO of Paradigm Learning, a corporate training and communications company specializing in the design of business games, business simulations, and Discovery Maps.