Measuring Competence

Measuring Competence
©Karl Erik Sveiby 1996, 2001

Professionals: Most Important Component of Competence
The term "professional" refers to the people who plan, produce, process or present the products or solutions client asks for. The term includes all those directly involved in client work, whether or not they are professionals in the field of competence that constitutes the company´s business idea. The "blue collar" workers in the manufacturing company are also included in this category.
The term excludes members of the company´s support functions, i.e. those who work in accounting, administration, reception, etc.. They are part of the internal structure, and should be accounted for under that heading. The problem of "grey areas" where employees perform a variety of duties, can be solved by including only that part of their time which is spent working for clients and charging the rest to internal structure.
Is not the financial controller a "professional" in his, or her field? Yes indeed, but the work of many employees (like financial controllers) consists largely of preserving, maintaining and developing the internal rather than the external structure. The work is absolutely essential to the long-term viability of the organization, but it is not involved directly with customers.
Outside experts, and suppliers are also involved in projects. These "Freelancers" constitute an essential production factor in many companies. However, as they are not formally employed by the company, they should not be counted as employees. The distinction between employed, and freelance personnel is, in some ways, arbitrary but it is consistent with labour laws and statistics in most countries, so it makes comparisons easier.Freelancers are an important element in the external networks that a knowledge company builds up, to support the process of knowledge conversion, and are therefore part of the company´s external structure. The importance of freelancers may become so great that the organization becomes "virtual", and it ceases to be possible to see where the competence of the organization ends and that of its suppliers begins.
Keep Time Records
Time is such an important variable in knowledge organizations, that it must be recorded. The time used can be classified into the categories suggested:
• Knowledge Conversion. Professionals convert knowledge into new knowledge, generally in an explicit form. Most knowledge conversion occurs in projects undertaken for existing customers. Time spent on projects for existing customers (= those who have previously commissioned at least one project) can be regarded as maintenance of the external structure. All activities relating to established customers, including quotations, lunches, telephone calls, letters and other contact maintenance activities, should be classed under this head, even if such time is booked under a separate account code.
• Grow/Renew External Structure: Activities designed to expand or renew the external structure are those that are otherwise known as marketing as well as those that increase the staff of Professionals. Recruitment activities are so crucial, that the costs including time spent are well worth monitoring. Marketing consists primarily in activities aimed at winning new customers. It naturally includes traditional activities like brochures and personal selling, but in knowledge organizations other extroverted activities are probably more important, such as drafting quotations for new customers, speaking at seminars, writing books, joining clubs and eating publicity lunches. The time spent on the first project for a new customer can also be included here. Customer categories worthy of separate classifications in the time recording are for example: customers who enhance the company´s image, customers who can give introductions to other desirable customers.
• Maintain Internal Structure. Most of the time recorded by the support staff belongs to this category. Plus most of the time of management and top management, unless in customer projects.
• R&D and Renewal of Internal Structure. Time spent on R&D projects, including those that are paid for by customers.
• Competence enhancement. Time spent on training and education.
Classification by Degree of Responsibility
Many non-manufacturing companies, especially knowledge companies, have an informal or formal hierarchy depending on the degree of responsibility for customers carried by the employees. In an advertising agency, for example, we can distinguish three levels:
• Those who work on only part of a project;
• Those with overall responsibility for a project (often called project managers);
• Those with overall responsibility for a given customer (like "account managers" in adman´s jargon).
The company often strives to develop and retain as many people as possible with overall customer responsibility, because they are important key people. Other skills besides expert skills may also be important enough to be worth keeping track of. Examples are what are jokingly called Finders, Minders and Grinders. The Finders are the ones who are good at making contacts and bringing in new customers, the Minders are the senior consultants, and the Grinders are the poor unfortunate juniors who do all the hard work.
The Danish consultancy firm PLS-Consult classifies its staff in a somewhat similar manner (see example below) into: Generators (customer managers who are able to generate new customers); Leaders (competent of managing major projects); Teachers (who are skilled at passing on their competence to others).
Classification by Area
You can survey the competence that the company possesses in different areas. An engineering consultancy, for example, might divide its competence between the power sector, physical communications, industrial construction, housing construction, etc. A software consultancy could set its categories according to how many are familiar with different types of system. This can be presented in diagrams. Again we are mostly interested in changes. Is the company gaining or losing competence in its core areas, for instance?
Growth
Number of Years in the Profession
A simple and useful measure of competence is the total number of years that professionals have worked in their profession. Although the man-years of individual Professionals are not strictly speaking addable, in large groups the discrepancies are smoothed out enough to make changes in the figure worth recording.The total number of years in the profession is a measure of the skill and experience of a company´s whole body of professionals, whereas professional experience per Professional is a measure of the average skill and experience of each of them. If you divide the sum total by the average number of Professionals in the company, you get a control figure for competence per Professional. These control figures can be displayed on a graph with 3-5 classes. By calculating the change in the indicator between two years we can also indicate how much the average competence is growing. Best is a chart covering several years but a table will do fine. (Example see chapter 1.9.5 and Figure 10 below).
Level of Education
The level of education of Professionals affects the assessment of the quality of their competence and thus the knowledge company´s ability to achieve future success.
It is interesting to keep a historical record of this information, both for internal use and for purposes of comparison with other companies in the same field of knowledge. The reason why formal education is of interest is because the main competence gained by students at academic levels is how to process vast amounts of information. Three general classes can be distinguished: Primary, Secondary and Tertiary. In organizations relying on a particular profession, like auditors, it is useful to distinguish how many are chartered. An average can be calculated and the change in the average indicates whether the company improves its average level.
Competence Index
The "Big Five" pigeon-hole their consultants on five to seven-point scales and also assess their performance against criteria. Quite a few companies, especially large multinationals, make annual performance assessments of their managers and support staff. Such assessments may form the foundation of a Competence Index. An index can be calculated as:
Level * Performance = Competence Index.
A simple Competence Index entirely based on demographics (of course not as good as a Competence Index based on assessments) can be calculated as:
Years in the Profession * Seniority * Level of Education.
You can then use statistical methods for analysing the Index. You can trace how the competence index develops in various fields, how it changes with time, affects personnel turnover, etc.
Competence Turnover
By comparing the competence of people who have left the company with those of new recruits, you can derive a quotient showing how personnel turnover affects the company´s competence as a whole. The control figure can be calculated as the competencies of those who have joined the company divided by the competencies of those who have left it. "Competence" may be any indicator, like education, marks or years of experience. Table 3 shows how competence turnover can be calculated in a company that employs 1500 people. The change in years of experience is divided into three components: how much has been gained by new expansion recruitment (as opposed to replacement), how much has been lost by departures, and how much has been gained or lost by replacing people who have left.
Competence Turnover
(assuming total staff = 15 000 experience years)
Experience Years 1995 % of Total
Years of experience gained with growth +150 + 1 %
Years of experience lost with leavers - 132 - 1 %
Years of experience gained with replacements + 330 + 2 %
Net increase in Competence + 348 + 2 %
The table shows how competence turnover can be calculated.
Renewal/Innovation
Competence-Enhancing Customers
Since Professionals spend most of their time working for customers, and since customers are the most important source of competence development, you get valuable information by measuring the proportion of customer assignments that contribute to competence development. It is usually surprisingly easy to compile a list by asking your own people what projects they feel they learned something from, which ones were of R&D type, and so on. (Example see Celemi).
Diversity
Gender diversity has been shown to enhance innovation. For example WM-data has found that with women systems and programming teams with a proportion of women tend to be more innovative. The South African mobile network operator MTN, uses racial diversity as an indicator of innovation. The indicator can be calculated (as by WM-data) percentage of women (or percentage of men in female dominated industries) of the total workforce.
Training and Education Costs
In knowledge companies, which depend so heavily on the knowledge and competence of their employees, competence development ought to be a heavy investment item. And so it is, but this fact is not normally apparent from the company´s financial statements, for most acquisition of knowledge takes place not in formal courses but through regular work on assignments for customers and R&D projects.
Although the visible cost of training is not always so high, it is still worth recording. A couple of possible control figures are training costs as a percentage of turnover or number of days devoted to education per Professional Training costs must of course also include the time spent, since it is generally the most expensive item.
Efficiency/Utilisation
Proportionof Professionals in the Company
A key indicator of efficiency is the proportion of professionals in the firm; the number of professionals, divided by the total number of employees. This measures how important the professionals are to the firm. It is useful in making comparisons between companies in the same business, provided that the number of professionals is calculated in the same way for all the companies compared. Note that the proportion of professionals varies from one type of business to another, and thus can be used only for comparisons within the same area of operations. (Examples see chapter 1.9.5 below and Figure 2 above). This quotient also enables the leverage effect of the professionals to be calculated, see below.
The LeverageEffect
How important are a company´s in-house professionals to its ability to generate revenue? This can be calculated from the following formula:

Note that this control figure takes account of all the people engaged on projects, whether formally employed or not. This tells you how much of your earning power is attributable to your own professionals. The leverage effect can be calculated at all levels.
Value Added per Employee
Value added per employee is a better measure of ability to produce than, say, turnover or profit per employee. It is better because turnover may be heavily influenced by commissions or by goods and services that just go straight through the company. It is also better than profit for purposes of comparison because profit figures are relatively easy to manipulate, at least in private limited companies. (Profits can be taken out as salaries, fringe benefits, pension insurance premiums, etc.)

Value added per employee is of course also sensitive to manipulated profit figures or perks disguised as costs. It is not as sensitive as profit, however, because the grand total of salaries, open fringe benefits, employers´ contributions and profit is quite a large sum, maybe $80,000-$200,000, compared to profit per employee which seldom exceeds $30,000-$60,000.
Ability to add value varies between types of business and between individuals, but in large groups the individual variations tend to even out so that the average for the group as a whole does not differ so much from other groups in the same market. So if one analyses a number of companies in the same line of business, one will find that value added per individual lies within the same order of magnitude. The differences are no greater than can be explained by the varying degrees of efficiency with which the managements run their respective businesses.
By measuring value added per employee and comparing the result with previous years and other companies in the same industry you can get a fairly good appreciation of how your company´s ability to produce and generate profits develops.
Value Added per Professional
In knowledge companies, value added per professional can be regarded as the "purest" measure of ability to produce economic value. It is the professionals, by definition, who bring in all the revenues. These revenues must then cover all the costs incurred in keeping an professional in the field (travel, office, secretary, management and administrative staff), and he himself of course also commands a market price in the form of salary, pension and other emoluments. What is left over must suffice to finance equipment and depreciation of the same as well as maintenance of knowledge capital (training).
WM-data uses the indicator as an efficiency target.
What is left over after those costs have been paid is the profit to be distributed as dividends to shareholders or used by the company for consolidation or investment. Value added per professional indicates the importance of the professionals to the company, and can be used for the same kinds of comparison as in the foregoing section. Since the proportion of professionals to the total number of employees may vary, the two measurements (value added per employee and per professional) can give rise to interesting comparisons between companies.
Profit per Professional or per Employee
Profit per employee is a useful term if you can correct for excess salaries, etc. It can be used to make comparisons between stockmarket-quoted knowledge companies because they are required to report their profits more honestly. The advantage is that the figures are easily available. In the long term, it is first and foremost the ability of the professionals to generate profits that determines the market value of a knowledge company. Profit per Professional may thus be a more interesting indicator to note, especially for outsiders who do not have access to the internal management information.
The profit-generating ability of professionals depends on the state of the market, on how efficiently the company is managed, and on how much of the value added is paid out direct to employees as salaries and benefits. The state of the market of their customers´customers is a very important factor for many knowledge organizations.
Architects, for example, get a very tough time when the construction and housing markets turn down. As a result the profit (and value added) per architect in architectural firms goes down too. In boom times they regain all they lost and more, only to sink again into the depression. Advertising agencies and software consultancies seem to have found it easier to keep up their levels of pay through fluctuations in the market.
Since professionals salaries are normally the biggest single cost item in a knowledge company´s budget, profits are very largely influenced by salary policies. In partnerships salaries of the partners are often used as profit regulators, especially in businesses like law firms and small consultancies, so this yardstick is valuable only if the profit figures can be purged of such items.
Stability
Average Age
Older people are more "stable" than younger, that is they tend to stay and not leave the company.
An organization with on average older professionals is likely to be more stable than a younger organization in the same industry. The average age is a good indicator of stability. It is also, just like turnover and seniority, an indicator of dynamics. A very high average age indicates a stable company with more wisdom than drive. The average age has a habit of creeping upwards, unless management is alert, so a steadily increasing average age over a long period of time is a warning sign. With the aid of a deliberate recruitment policy, it is possible to maintain a stable age structure, but keeping the age and the experience of the staff in balance is not easy.
Seniority
Seniority is defined as the number of years employed in the same organization. The seniority of professionals, can be used as an indicator of stability of competence. If computed for the category of administrators it can also be used as an indicator of the stability of the internal structure. (See also Rookie Ratio ).
Relative PayPosition
Most industries and professional bodies keep good statistics of levels of pay and the relative positions of individual companies. Relative pay position is usually expressed in terms like 97% or 103%; this has high information value because it measures relative cost levels compared to competition. It can also be assumed to influence the attitudes of professionals on the payroll. Relative pay position is also interesting because it gives an indication of whether employees are likely to look for work elsewhere.
Professionals Turnover Rate
Staff turnover is generally regarded as an indicator of stability. It is a good indicator because it is easy to calculate and to compare with other companies. A very low turnover (below 5%) suggests a stable but not dynamic situation. A very high turnover rate (above 20%) usually suggests that people are dissatisfied. Turnover should be kept in a "band" and sudden changes in the turnover rate is usually an indication that something has changed internally in the company.
Companies can actively use the turnover rate as a management tool to sustain a sufficient level of dynamics, (see example WM-data). The turnover rate can be made more or less sophisticated. It can be divided into external (people leaving the company) and internal turnover (job-rotation) or as here into the turnover rate for professionals and administrative staff.
The turnover rate is usually calculated as the number of leavers during a year divided by the number of people employed at beginning of the year. The turnover rate for professionals is an indicator of stability in the important group of revenue creating people.