Although ELTV is not perfect, we demonstrated in our last article that it does provide valuable insight when making decisions around resources. In this one, we will keep our promise and explore the possible limitations of ELTV and see if there is anything to be done to get a more accurate result.

Up close and personal – Why lifetime value calculations need tailoring?

To get a relatively objective result of ELTV, we first need to look at the variables that make ELTV up subjectively, as there is no one size fits all when it comes to ELTV formulas. Lifetime value models need to be constantly monitored and tailored to business situations, and more importantly, organisations should fully comprehend the intended application of the analysis. Last time, we mentioned employee experience: to measure ELTV as accurately as possible, we need to factor in, among others, the unique relationship between each employee and employer, differences in performance, and even salary increases over time. Segmentation could help with getting a clearer picture – in fact, Mike West deems multiplying the Human Capital ROI (HCROI) by the segment estimated annual cost and by the segment lifetime tenure the simplest method of calculating ELTV.

Another potentially limiting element of ELTV is its sole focus on tenure. It assumes that an employee’s value only stretches as far as their time with an organisation, without considering knowledge transfer or projects started by them that continue generating revenue. Not to mention reputation and word of mouth in our connected age: a former employee can very much influence how an organisation is perceived long after they have left.

Flipping the equation – The connection between Customer and Employee Lifetime Value

Previously we also said that a high ELTV was not just about a well-performing employee – it requires a great deal of input from organisations. To better understand this, we need to take a closer look at the origins of ELTV. Businesses put a lot of emphasis on customer satisfaction and spend a ton of resources on attracting and retaining customers to stay competitive. They measure Customer Lifetime Value (CLV), which is the long-term profitability of customers against the cost of customer acquisition and retention. So, it is straightforward: cultivating a healthy, long-term relationship with customers is crucial for a higher CLV. Now, since ELTV rests on the same theoretical concept as CLV, should fostering employee satisfaction not also come as second nature to businesses? (It should.) Where employers focus on improving the corporate culture and boosting employee experience with learning programmes, regular feedback, or even up-to-date technology (and this is a non-exhaustive list!), there is higher ELTV. Another way to look at it is through Employee Value Proposition (EVP), or everything employees gain from working for an organisation. Tackling the most prominent EVP elements as an employer (compensation, work-life balance, stability, location, and respect) will result in a more committed and trusting workforce. Ultimately, it all trickles down to fair treatment and promoting a sense of belonging.

Hit-and-miss

It is a vicious circle in a way: without first knowing which areas, initiatives, learning programmes are worth the investment, how can businesses go on about improving the employee experience? Plus, while with CLV, every dollar spent represents value, employers are still required to spend money, regardless of whether the employee brings value or not. Well, ELTV is more about testing probabilities and continuously improving models, and in industries or job roles, where ELTV is difficult to grasp, looking at potential contributions. And still, being a good employer never hurts.

 

Book an introduction meeting HERE or reach out to Vilte Szekely at vilte@nordconn.com

References
Billy O’Riordan (2021). Why Transformations Fail And How They Can Succeed With People Power
Duncan Cheatle (2020). Employee Lifetime Value: The Critical Metric You’re Probably Not Measuring
Mike West (2020). Estimating Employee Lifetime Value
Performance Improvement Council: Employee Lifetime Value: “The People Impact on Financial Success
AIHR. (2020). The Employee Value Proposition in a Nutshell