Competence 2024

The Value of Competence.
Investing in People: How to Quantify the Value of Competency

Development
J. Ford Brett / Managing Director - PetroSkills / [email protected]
Abstract
For all the emphasis placed on competency development, training budgets are almost always
the first cut during any kind of down turn. For competency management to become more than a
Human Resource Management fad, it will have to demonstrate quantified financial return. This
abstract outlines one approach to quantify the return on competency development investments.
It’s simple, but worth reiterating, that economic value is created when there is a positive net
present value (NPV) of an investment’s cash flow stream. Keeping track of the net cash flow
versus time is the only way to quantify the ultimate value of an investment – a positive NPV
means an investment is a winner. The only way to know if a potential investment is likely to be a
winner is by predicting, with some level of certainty, cash flow versus time. Investments in
production facilities, exploration concessions, well re completions, new computer systems, etc.
– in fact investments in any real business enterprise – are all normally subject to this kind of
scrutiny. Of course the certainty and precision of these investment predictions vary, but they are
still subject to the same form of analysis: understanding how business choices affect cash flow.
Investments in competency development should be subjected to a similar type of analysis or

they cannot really be considered management. Without such scrutiny, such activities cannot be
called competency management; instead, they would have to be called competency
administration or maybe even competency art. Unless competency management efforts are
specifically designed to add value to the organization, they will only succeed through luck.
The following key steps to Building a Competency Management Business Case are covered in
the pages to follow:
Step 1 Estimate the Value of Competency in Key Job Roles
Step 2 Quantify As-Is Competency Development Cash Flow Profiles
Step 3 Quantify Value of Improved Competency Development
Step 4 Implement Program Targeted at Identifying and Closing Most

Valuable Competency Gaps
®
Building a Competency Management

Business Case
Creating a business case for competency management is similar to creating a business case for anything – with one subtle
difference. Creating a business case for a real estate investment, a factory, a concession, or a petroleum production facility
requires an understanding of how physical assets are likely to impact cash flow. What will the plant cost? How much can it
make? What will its production be worth? To make a sound decision about investments in competency management we need to
understand how competency impacts cash flow. What will it cost to develop competency? How much better will we perform with
skills? What will the improved performance be worth? Basically, to make a sound decision about investments in competency
management, we need to build a business case that tests how managing competency development will add to the fundamental
value-generating activities of your organization. Very briefly, the four steps below outline how to create a competency
development business case.
Step 1 Estimate the Value of Competency in Key Job Roles

First, each of your organization’s value producing activities estimate the net annual value a competent
employee adds to the process. Several different approaches can be used to develop this estimate. One
way is to bound the value by quantifying the net cost of replacing the employee with a fully qualified
technical consultant (e.g. Suppose for $1200/day you could hire a top grade reservoir engineering
consultant. That would translate to a cost of about $300k/year. If the employee’s burdened cost was
$120k the net value to the organization would be $180k/year). A second way is to look at the historical
average value of value producing activities and then estimate the percentage of the value an employee
contributes (on average) to each iteration of the activity. (e.g. One simplistic example that illustrates the
technique: Suppose fully explored wells have an average risked value to the organization of $2M, and
that developing a prospect requires 5 man-years of qualified geophysicists and geologists. The average
value of a competent geoscientist is $400k/yr). In any event, to manage competency development you
must first develop an understanding of the value of competent employees.
Step 2 Quantify As-Is Competency Development Cash Flow Profiles

Second, to quantify how each of these activities yields positive economic return to your organization, you
will need to be able to plot the before improvement cash flow versus time for each core job role. Each role
will have its own typical cash flow profile. The full-cycle economics would follow a similar pattern to the
one shown in Figure 1.
Investment. Burdened salary while employee is “coming up to speed,” and the cost to hire, train, and mentor for the
average employee.
Time to Positive Net Benefit. Time required before the average employee more than covers his cost to the
organization.
Time to Mastery. Time before the average employee adds significant value to the organization.
Net Value of Competency. Total incremental value the average employee adds to the organization after being
fully up to speed.
Step 3 Quantify Value of Improved Competency Development

Third, develop an understanding of how improving competency development could increase key activity
value. Based on experience or reasoned estimates, quantify how improved competency development
would likely reduce the investment, shorten cycle time, or produce higher return of key job roles. Answer
the question: “If we focused our efforts on developing competency in a reliable way, how quickly could we
bring employees up to speed? How much would it cost?” Calculate, with reasonable certainty, how
knowledge management would improve each activity’s cash flow profile. Competency development
investments should be evaluated using these same full-cycle economic criteria. Investment, time lag, and
ultimate value should all be considered. For example, one should consider the impact that their
competency development efforts will have on each of the following:
Investment. How will an up-to-date online product reduce the cost of new sales associate training?
Time Lag. How can explicit definition of competency speed development of the skills and behaviors that add value?
Positive Return. How will faster dissemination of the latest technology make wells more productive?
Figure 2 shows an example of a baseline and improved cash flow profile, and how modest improvements in the way competencies
are developed can more than triple the Discounted Rate of Return on Investment of training a new hire.
The examples shown in Figures 1 and 2 are meant to be a representative case. Of course, real situations will be unique for each
company and job role. In an attempt to scope the sensitivity of the various factors, Figure 3 presents a ‘spider plot’ of the change in
NPV as the key factors change.
The spider plot shown in Figure 3 is specifically for the base case from Figure 2. But the main point in
this, and most other examples, is that while the cost of development is an important factor, the ultimate
value of the development (e.g. the quality of the training) and the time to competency are even more
important factors.
Step 4
Implement program targeted at identifying and closing most valuable competency gaps
With an understanding of current economics, and reasoned estimates of how better competency
development could improve the value of core value-producing processes, it is possible to create
estimates of the value of improved competency development. If the analysis in Step 3 shows that the
value of full competency is most important, then ensure that you’ve completely defined the set of
competencies that deliver that value, and implement a competency management approach to develop
those specific skills. If the analysis shows time to competency is most important, then develop an
approach to identify and close competency gaps in the least number of calendar days. The point is the
analysis approach suggested in steps 1 to 3 above can help focus your efforts on those activities that will
truly add value.
These steps described above will let you value competency management activities.
F I G U R E 4 : Screen print of the PetroSkills Competency Analysis Tool

One competency management approach involves using an individual skills inventory to identify needs.
The PetroSkills Competency Analysis Tool (CAT) shown in Figure 4 is a software application that makes
this easy. The user-friendly CAT facilitates the process of identifying and analyzing skill gaps, and assists
the user in developing a plan for filling those gaps. For more information, contact
[email protected].

Competence 2024

Uploaded by

Copyright:

Available Formats

Competence 2024

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Competence 2024

Uploaded by

Copyright:

Available Formats

The Value of Competence.

Investing in People: How to Quantify the Value of Competency

Investments in competency development should be subjected to a similar type of analysis or

Step 1 Estimate the Value of Competency in Key Job Roles

Step 2 Quantify As-Is Competency Development Cash Flow Profiles

Step 3 Quantify Value of Improved Competency Development

Step 4 Implement Program Targeted at Identifying and Closing Most

Building a Competency Management

Step 1 Estimate the Value of Competency in Key Job Roles

Step 2 Quantify As-Is Competency Development Cash Flow Profiles

Step 3 Quantify Value of Improved Competency Development

F I G U R E 4 : Screen print of the PetroSkills Competency Analysis Tool

You might also like