Models attempt to identify the assets that have value. How to manage those assets. And how to strategically turn these assets into money. This is a second, follow-up, post comparing financial models to competency models to evaluate risk.
As I mentioned in that post, typical financial models, and their build-outs, inherently, ignore important aspects of real-world behavior, models are truly as much an art as a science in their mathematical reasoning and interpretations.
While financial models look to identify financial strengths and weaknesses of organizations, competency models try to identify critical knowledge, ability, and skills needed to lead and run organizations.
Typical due diligence and valuation involves tangible and intangible research. Tangible assets are usually classified as physical assets like inventories, machinery, buildings, and land.
Intangible assets are usually classified as patents, licences, processes, and intellectual property, the knowledge of the firm. Unfortunately, most intangible asset reviews dismiss or don’t fully account for the vital role that talent and motivation have on taking knowledge from an idea to a good, a service, or a product. Having an idea is a start, executing on that idea is the hard work and that takes people, collaboration, and motivation.
I propose to expand the intangible to include talent skills and competencies. Some differences:
- Financial models try to predict financial risk.
- Competency models try to mitigate operational risk.
- Financial models try to identify return on investment.
- Competency models try to identify return on involvement.
Competency to Deliver Financially
Competency models look to identify the core competencies and observable behaviors relevant and necessary to succeed.
A competency model can identify the important knowledge, ability, and skills in a given job title, job family, job position, or business unit.
Competency models determine skills required not only for today’s needs, but the probable needs to succeed in tomorrow’s organization.
When we think about the time value of money, we can’t honestly assess risk without a look at the time value of competencies.
Further, competency models provide the information for an intentional change. Without intentional effort you can not take a consistent under-performer and coach them up to become a reliable performer.
Without an intentional effort you are relying on luck, luck is not much of a strategy.
Financial Models Ability
A competency model looks at the what is needed to succeed. People are born with innate characteristics, such as empathy, but people can learn behaviors. You can modify behaviors.
Where innate characteristics are set, you can teach behaviors. A competency model provides boundaries for successful performance and sustainable desired change. Sustained, of course, because you should look to count on reliable returns on your investments, not consistent.
Competency models provide not only the current best, but the future-state goal for organization to recruit, train, and retain.
Important to understand is the difference between a person’s innate character and their behaviors. Someone may not be an empathetic person, but they can learn empathetic behavioral qualities such as:
- using people’s names;
- treating others like they matter;
- senses others’ feelings and perspectives;
- picking up clues on how a team is performing; and
- asking sincere questions to understand another’s area of concern
On 1 side of the model are the knowledge, skills, and abilities and on the other side are the behaviors that have the most direct impact on successfully performing in the job. Competency modes give you the details financial models can not:
- How would you know if you are investing in or acquiring a company that will reliably deliver your financial projections?
- How can you tell if you have the right leadership to grow, not maintain, your organizations revenues?
- How do you identify the important behaviors you need to recruit your next manager or place your next board member.
Competency models are strategic initiatives and some firms look at their competency models as intellectual property that are their strategic and operational competitive advantage.
Senior Moments – Unacceptable
Senior management competencies in the hands of competitors provides competition with knowledge of organization plans, the development of senior managers, and the strategy of operations; they are all linked as strategic initiatives.
Many different methods of developing competency models are available, but most follow David McClelland’s dictate to determine what leads to superior performance and to identify top performers and find out what they do.
McClelland’s dictate can be broken down into two important principles:
- focus on highly successful people without making assumptions about their role
- pay attention to what they actually do3.
The outcome of all competency models remain the identification of behaviors required to successfully perform in a given role. Whether buying competency models and making basic modifications or developing your models from scratch the behaviors within the competency model need to be relevant to people’s jobs and people need to see that relevance.
Competency models address specific business needs. Your investments address specific business needs. Though financial models are necessary to dig into the underlying capital risks, competency models are a vital component to dig into the human capital risks.
As an investor or leader you may look for the multiples of two to five times the original investment. Without knowing the people or talent involved you really assume an unnecessary amount of risk to your time and to your investment.
In the next part I’ll present a high-level view of build/buy/modify competency model options.
Sources and resources:
- Video from The Hay Group with Dr. David McClelland
- Dr. David McClelland’s major works references and information
- The Art and Science of Competency Models: Pinpointing Critical Success Factors in Organizations by Anntoinette D. Lucia and Richard Lepsinger