Emma Lind – How to measure the unmeasurble
17-08-01
Abstract
The study is an experimental deductive study of the relations between investments in
certifications and the return on investment, i.e. the financial utility. The study is based
on Swedish firms.
This thesis is constituted on two parts this written document and a computer based
model. When constructing the computerized model I have had a co-worker, Rikard
Oxenstrand. He will, based on this model do further research regarding technology
issues when constructing a model like this and what impacts these technologies have.
His work will be presented at the department of computers- and systems (DSV). The
construction of the model have been a part of my study and I therefore call it my model
even though Rikard has had input and ideas regarding the construction of its structure.
My research question is regarding the possibility to find and prove a connection
between an organization’s competence, financial result and the customer value. The
purpose is to develop a model that tests the possibility to prove the connection and
relations between competence, financial result, and the customer value. I would like to
here point out that the certification in it self is the process and the connections between
different areas that is vital to this study and of greater importance than the certification
in itself. In order to fulfill the purpose, the study employs a research method that
combines positivistic theory, system theory, rational theory and quantitative theory. The
working process of this study has been accordingly of deductive experimental study.
The study’s theoretical foundation consists of theories from the fields of knowledge,
competence and human capital, with focus on competence, viewed from several
dimensions. In order to incorporate these dimensions in my model, I have been affected
and incorporated by both traditional theories within accounting and statistics but also
tried to incorporate these within the perspectives of the Balanced Scorecard theories. I
have also accounted for the theories that I have used and that have had an impact when
constructing my model. These models have also more or less constituted the boundaries
and limitations of the model. These theories have been shown to be very difficult to
adjust to this specific case and I am fully aware of the limitations within the presented
models, which has also been incorporated into mine. But I believe that by using other
models the internal validity have been increased or at least higher than it would have
been if these previous tested connections would not have been incorporated. The
empirical data was mainly collected from three different firms but my model also
includes secondary data collected from various reports. By using several sources I have
tested the reliability of the model and can conclude that the model have at least been
applicable on the cases tested within this thesis.
The result shows that relationships between competence, financial result, and customer
value are difficult to find, and it can be discussed if I have found such a relationship but
at least I do not believe that my theory regarding these relationships have been falsified.
I have tried to follow some provided steps in order to have an acceptable level of
construct validity, quality, and usefulness of the measures.
This thesis is the result of my learning within Business Economics and IT-systems,
which has also probably limited my thoughts to the boundaries of these fields. In order
for the reader of this thesis to understand my research I have tried to describe my
computer-based model in words, diagrams, and illustrations.
This foreword is over – so:
Emma Lind – How to measure the unmeasurble
17-08-01
Table of content
1
INTRODUCTION ............................................................................................................................ 5
1.1 BACKGROUND ................................................................................................................................ 5
1.1.1
Research question: ............................................................................................................... 8
1.2 PURPOSE OF THE STUDY.................................................................................................................. 8
1.3 DELIMITATIONS .............................................................................................................................. 8
1.4 DEFINITIONS AND CLARIFICATIONS ................................................................................................ 9
1.5 OUTLINE OF THE STUDY.................................................................................................................. 9
2
RESEARCH METHOD ................................................................................................................. 10
2.1 SCIENTIFIC APPROACH .................................................................................................................. 10
2.1.1
Positivism versus Hermeneutics ......................................................................................... 11
2.1.2
Management science and rational theory .......................................................................... 13
2.1.3
Scientific Paradigms .......................................................................................................... 14
2.1.4
Methodological point of view - System theoretic perspective ............................................ 15
2.2 STUDY APPROACH ........................................................................................................................ 18
2.2.1
Working process ................................................................................................................. 18
2.2.2
Qualitative versus Quantitative .......................................................................................... 18
2.3 DATA COLLECTION ...................................................................................................................... 19
2.4 CRITICAL EXAMINATION OF METHOD .......................................................................................... 19
2.4.1
Reliability ........................................................................................................................... 19
2.4.2
Construct Validity .............................................................................................................. 20
2.4.3
Internal Validity ................................................................................................................. 21
2.4.4
External Validity ................................................................................................................ 21
2.4.5
Parsimony .......................................................................................................................... 21
2.4.6
Sources of Errors ............................................................................................................... 21
2.5 THE IMPACT OF THE DELIMITATIONS............................................................................................ 22
2.6 DATA ANALYSES .......................................................................................................................... 22
2.6.1
Approach to Qualitative Analysis of Quantitative Data ..................................................... 22
2.7 ALTERNATIVE METHODS .............................................................................................................. 23
3
THEORETICAL FRAMEWORK ................................................................................................ 24
3.1 ASPECTS OF COMPETENCE AND RELATED CONCEPTS .................................................................... 24
3.1.1
Defining knowledge ............................................................................................................ 24
3.1.2
Aspects of knowledge ......................................................................................................... 25
3.1.3
Knowledge and Learning ................................................................................................... 26
3.2 COMPETENCE CLASSIFICATION ..................................................................................................... 26
3.2.1
Training .............................................................................................................................. 28
3.2.2
Formal Competence versus Functional Competence ......................................................... 28
3.3 HUMAN CAPITAL .......................................................................................................................... 29
3.3.1
Human Capital on the Balance Sheet ................................................................................. 30
3.4 BALANCED SCORECARD THEORIES ............................................................................................... 31
3.4.1
Related theories .................................................................................................................. 33
3.5 MEASURING COMPETENCE ........................................................................................................... 35
3.5.1
Calculating Competence .................................................................................................... 36
3.5.2
Cost-benefits of training ..................................................................................................... 36
3.5.3
Measurement banks ............................................................................................................ 37
3.5.4
The allocation of expenditure on training – time perspective ............................................ 38
3.5.5
The Balloon model ............................................................................................................. 38
3.6 UTILITY – EXPECTED MONETARY VALUE .................................................................................... 39
3.6.1
Risk analysis ....................................................................................................................... 40
3.7 ASPECTS OF SIMULATIONS ............................................................................................................ 41
3.8 SOFTWARE.................................................................................................................................... 41
3.8.1
Comparison ........................................................................................................................ 42
4
THE MODEL ................................................................................................................................. 43
4.1 CRITIQUE AGAINST THE CONSTRUCTION OF THE MODEL ............................................................... 44
4.1.1
Software tool ...................................................................................................................... 44
4.2 INNOVATION AND DEVELOPMENT PERSPECTIVE ........................................................................... 44
4.2.1
Influences from other perspectives ..................................................................................... 45
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Stockholm School of Business
Adviser: Johan Adolphson
A deductive experimental study - Emma Lind
4.3 INTERNAL PROCESSES PERSPECTIVE ............................................................................................. 45
4.3.1
Influences from other perspectives..................................................................................... 46
4.4 CUSTOMER PERSPECTIVE .............................................................................................................. 46
4.4.1
Influences from other perspectives..................................................................................... 47
4.5 FINANCIAL PERSPECTIVE .............................................................................................................. 47
4.5.1
Influences from other perspectives..................................................................................... 47
4.6 INPUT DATA.................................................................................................................................. 48
4.6.1
Company A ......................................................................................................................... 48
4.6.2
Company B ......................................................................................................................... 48
4.6.3
Company C ........................................................................................................................ 48
4.6.4
General assumptions .......................................................................................................... 49
4.6.5
Calculation assumptions .................................................................................................... 50
4.7 RISK ANALYSIS ............................................................................................................................. 50
5
FINDINGS ...................................................................................................................................... 53
5.1 OUTPUT DATA .............................................................................................................................. 53
5.1.1
Explanation of output data: ............................................................................................... 53
5.2 FINDINGS REGARDING THE ORIGINAL DATA ................................................................................. 53
5.2.1
Risk analysis....................................................................................................................... 54
5.3 FINDINGS WHEN SIMULATING VALUE CHANGES ........................................................................... 54
5.3.1
Turnover............................................................................................................................. 54
5.3.2
Salary increase................................................................................................................... 55
5.3.3
Value of logotype ............................................................................................................... 55
5.3.4
Interest Rate ....................................................................................................................... 55
5.3.5
Level of influence between the perspectives ....................................................................... 55
5.4 IDENTIFIED RELATIONS WITHIN THE MODEL ................................................................................. 56
5.4.1
Amount of certifications ..................................................................................................... 56
5.4.2
Turnover............................................................................................................................. 56
5.4.3
Salary and salary increase ................................................................................................. 57
5.4.4
The working area of the certified employee ....................................................................... 57
5.5 IDENTIFIED RELATIONS BETWEEN COMPETENCE, FINANCIAL RESULT, AND CUSTOMER VALUE ..... 57
5.5.1
Factors influencing the organizations competence ............................................................ 57
5.5.2
Factors influencing the financial result ............................................................................. 57
5.5.3
Factors influencing the customer value ............................................................................. 58
5.6 FACTORS NOT INCLUDED IN THE MODEL....................................................................................... 58
5.7 FAULTS AND DEFECTS FOUND IN THE MODEL ............................................................................... 58
5.7.1
How these where handled .................................................................................................. 58
5.8 CRITICAL SUCCESS FACTORS ........................................................................................................ 59
6
ANALYZE ...................................................................................................................................... 60
6.1 FINDINGS VERSUS PRESENTED METHODOLOGY AND RESEARCH ................................................... 60
6.1.1
The findings relation with the methodological point of view ............................................. 60
6.1.2
How the theories interacts and synthesize with the findings .............................................. 60
6.2 CRITICAL EXAMINATION OF THE RESULT ...................................................................................... 62
6.2.1
The reliability of the study ................................................................................................. 62
6.2.2
Validity of assumptions and proposition ............................................................................ 62
6.2.3
Internal Validity ................................................................................................................. 63
6.2.4
External Validity ................................................................................................................ 63
7
CONCLUDING DISCUSSION ..................................................................................................... 64
7.1.1
Factors explaining my findings .......................................................................................... 64
7.2 PERSONAL REFLECTIONS .............................................................................................................. 65
7.3 FURTHER RESEARCH..................................................................................................................... 65
REFERENCES ........................................................................................................................................ 66
ARTICLES ............................................................................................................................................... 66
BOOKS ................................................................................................................................................... 67
REPORTS ................................................................................................................................................ 68
ESSAYS .................................................................................................................................................. 69
COMPANY STATEMENTS......................................................................................................................... 69
INTERNET............................................................................................................................................... 69
DICTIONARIES........................................................................................................................................ 69
Master Thesis, 1998-1999
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Emma Lind – How to measure the unmeasurble
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INTERVIEWS ........................................................................................................................................... 69
Table of figures
Figure 1.1 The connection between competence and the financial result ......................... 7
Figure 2.1 Research cycle according to the positivistic paradigm ................................. 11
Figure 2.2 Paradigms within business economics ........................................................... 15
Figure 2.3 Diagram of a System’s parameters, boundary and environment ................... 16
Figure 2.4 Simplified cybernetic model of the MBO process ......................................... 17
Figure 2.5 The Logical Structure of the Quantitative Research Process ........................ 18
Figure 3.1 The knowledge of an organisation-exemplified ............................................ 26
Figure 3.2 Focus of tasks that need to be handled .......................................................... 28
Figure 3.3 Formal versus functional competence ........................................................... 29
Figure 3.4 To translate vision and strategy: four perspectives ........................................ 31
Figure 3.5 Casual connection of measurements .............................................................. 32
Figure 3.6 Skandia Business Navigator .......................................................................... 33
Figure 3.7 Example of influence diagram ....................................................................... 34
Figure 3.8 Decision flow diagram ................................................................................... 40
Figure 4.1. The model and the perspectives within the model ........................................ 43
Figure 4.2 Personnel turnover costs – costs of more attractive personnel ...................... 45
Figure 4.3 Financial costs................................................................................................ 47
Figure 4.4 Table of Input Data ........................................................................................ 48
Figure 4.5 The measurements distribution over time-periods......................................... 49
Figure 4.6 Risk- diagram, from the model ...................................................................... 51
Figure 4.7 Simplification of the risk analyse .................................................................. 52
Figure 5.1 Table of output data ....................................................................................... 53
Appendixes
Appendix 1
Appendix 2
Appendix 3
Appendix 4
Appendix 5
Page 4
Table of articles used in my research
List of assumptions
Certifications
List of simulation data
Risk analysis charts
Stockholm School of Business
Adviser: Johan Adolphson
A deductive experimental study - Emma Lind
1 Introduction
This master thesis constitutes the foundation to a report commissioned by Microsoft
AB. The object is to identify new ways of evaluating education and investments in
knowledge development (certifications1). This means that the study is constituted above
the individual level and more focused on the processes and the relations on a
management level.
1.1 Background
A cook, in order to succeed in the market, has to pull together all four types of capital:
energy and raw materials, equipment, technologies, information, knowledge, skills,
social context, and organization. If we equip two cooks with identical capitals of the
first two kinds: the same raw materials, the same pots and pans, the same cookbooks.
Yet, they could conceivably prepare two entirely different products: one a masterpiece,
valued and rewarded by the market, the other to no use at all. The difference lies in the
knowledge (as ability to coordinate cook’s action) and in the social infrastructure
capable of appreciating the product.2
This example shows that rational and fast operational changes require a platform of
formal qualifications.3 Perhaps is human capital and knowledge the most important
form of capital for rapidly developing organizations since it is the employees and not
the abstract organizations, who exist, who act and generate the results. 4 Wealthier
organizations have accumulated most of their capital in human and social resources and
infrastructures, while poorer organizations still maintain most of their capital in natural
resources and man-made assets. Simply stated5: the poor and unsustainable economies
dig for coal and build dams while the rich and sustainable ones educate people and build
virtual and self-sustainable organizations. A theoretical skill base can lead to a greater
understanding of how to operate in altogether new circumstances with greater ease. 6 In
other words human capital and knowledge is the ‘software’ and ‘brainware’ of an
organization, and without investing in competence development organizations will have
difficulties matching the power and influence of modern, technology- and knowledge
based service activities.7
Microsoft, Novell, Lotus Notes, and other software vendors have recently increased its
focus on product certifications. This has lead to a demand for a structured way of
measuring the competence that a certification leads to. Many of the reports in this area
are done with the aim to prove a return on investment, whereas my interest is more in
the process that in the end might conclude in a positive return on investment. Is it
possible to quantify this process on order to get a quantifiable result?
According to Skandia8 and Konradsgruppen9 there are two types of capital within an
organization; financial capital – deriving from the financial result, and human capital deriving from competence development. In a historic perspective is the financial risk
1
Appendix 3
Based on an example in Article no 6
3
Dawis & O Donell, (1997): Modeling complex problems, Management Accounting, article no. 2.
4
Gröjer & Johansson, (1996): Human costing and Accounting, p. 6 ff.
5
ibid.
6
Telia, (1994): Statement of Human Resources.
7
Zeleny, (1997): Autopsies and self-sustainability in economic systems, Human Systems Management, article no. 6.
8
Skandia (1994): Annual Report.
9
Arbetsgruppen Konrad, (1990): Den osynliga balansräkningen.
2
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Emma Lind – How to measure the unmeasurble
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capital, contributed by the shareholders, the most vital limited resource for industrial
organizations10. A knowledge intensive organization is not fully as material and capital
dependent. Instead are the personnel and their knowledge a more important production
factor and income generator. I.e. a knowledge intensive company is living of selling its
knowledge.11 In order for a service company to produce and sell its services it has to
have access to different types of capital.
1) Studies shows that companies that invest more in training are more profitable12.
Such companies are also more highly valued on the stock market, and their market
value is growing.
2) When managers are asked to estimate the share of a company’s success that is
dependent on the knowledge of the employees, a frequent answer is 80%13.
3) Knowledge intensive companies often have a high market value compared with the
substance of the company. This is most evident in the difference between a
company’s book value (based on identifying and valuing assets in accounting terms)
and its market value, which often is 10 or more times larger. 14 The average marketto-book ratio was higher by the end of 199615 for companies with high training
expenditures.
4) For example, Microsoft’s shares are bought for about ten times higher then their
accounted value. This means that 90 percent of the value lies in invisible assets.
These assets, software, brands, marketing channels, are all three are direct products
of human knowledge.16
I believe that much of this difference is human capital. A powerful external source when
evaluating a company is the stock market. Because stock prices are driven by available
information, stockholders don’t reward (they don’t by stock) investments such as
training that can’t be reported as a measure accurately across companies. The statistical
relationships reported17 don’t necessarily prove causation, but they may suggest a
relationship between a company’s training practices and measures of its financial
improvement. But at the same time have the stock market been quite positive for service
companies compared to industrial companies the last ten years18.
Concluding; I have now tried to show a connection between competence and the
financial result. A possible connection between an organization’s assembled
competence and organizations financial result is the foundation for this reasoning. This
logic is also to be found in the Balanced Scorecard model. In order to make this
connection even more distinct to the reader I would like to present some logical
reasoning from another author19:
1) The result is based on that the customers are supplied with a value in some form.
2) In order to create and supply this value the employees of an organization have to
solve a number of tasks.
3) The ability to solve these tasks is the organization’s competence.
10
Neil, (1997): Managing with systems thinking, Journal of market research society, article no 5.
Arbetsgruppen Konrad, (1990): Den osynliga balansräkningen p. 10-13.
12
Skryme & Amidon, (1998): New measures of success, Journal of Business Strategy, article no 7.
13
Edvinsson & Malone, (1997): Intellectual Capital.
14
Amidon & Skryme, (1998): New measures of success, Journal of Business Strategy, article no 7.
15
ibid.
16
Edvinsson & Malone, (1997): Intellectual Capital, foreword.
17
Neil, (1997): Managing with systems thinking, Journal of market research society, article no 5.
18
ibid.
19
Based on Anttila (1997).
11
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Stockholm School of Business
Adviser: Johan Adolphson
A deductive experimental study - Emma Lind
4) To develop this competence is to increase the ability to solve the tasks in order to
supply our customer an increased value, or alternative solve these tasks to a lower
cost.
5) The customer will reward this by paying a higher price, and provide the
organization with an increased income with unchanged prices and/or show a greater
customer loyalty.
Figure 1.1 The connection between competence and the financial result
Offer
Customer
Organization
Competence
Value
Financial
Result
Payment
Source: Based on Anttila (1997)
A connection between the financial result and competence development often indistinct,
and in areas such as training and competence development a connection to the balance
sheet has to my knowledge yet not been found20, (c.f. section 3.3.1). The indistinct
connection between competence and result is one reason why competence development
often does not get the financial aids needed for organizational development.21 Inversely:
If a connection would be distinct the competence development issues would probably
be more prioritized, been given resources, handled and be evaluated in a much more
efficiently than how it is presently handled. Therefore is it important to make the
connection between competence and the financial result more distinct to the personnel
and management.22
Numerous efforts have been made to provide a tool for converting these intangible
assets and transforming them into financial value. Since human capital investments
rarely appear as an investment on cooperate balanced sheets, little information on the
effectiveness of such investments are presented. Due to the inability to prove a
connection between investments in competence and the financial result, I believe that
the knowledge of measuring this kind of capital is limited. The absence of this
information also complicates for corporate decision-makers to make well-informed
choices about how much money to spend on training or what types of training to offer.
Since the personnel’s ability to solve those tasks they are confronted with, is an
important factor for the survival of an organization23. I conclude that the effectiveness
of the competence development is of central importance for the organizational
development, and in the end, its result. Some people are of the opinion that intangible
20
Flamholtz, (1994): Human Resource Accounting.
Anttila, (1997): Kompetensförsörjning – företagets viktigaste process, p. 19ff.
22
ibid.
23
Anttila, (1997): Kompetensförsörjning – företagets viktigaste process.
21
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assets such as human capital should be managed but not measured24, other people are of
the opinion that only the measurable is manageable. However, many of the leading
researchers within this area base their research on that human capital de facto can and
should be measured.25
In order to invest in training and education there is often a requirement 26 to demonstrate
return-on-investment, which is near impossible to do without methods of measurement.
I also believe that I have presented some facts that shows that companies profits from
treating training expenditures as an investment and measure them accordingly. I do not
intend to create neither an accounting model nor a finical model for the stock market.
But I think by showing the problems within these to areas I hope to show the relation
that the competence development the formula behind corporate success, which has been
identified as consisting of several key factors27, following the financial result.
According to reports28, books29, articles30, and essays31 within this area, two areas are
lacking in models and research. One is how to evaluate personnel’s competence i.e. the
organization’s competence capital in quantitative measurements. The other is the
possibility to simulate such measurements. This of course does also imply that these
areas might be very complicated to study or of not such great importance, and in the
worst case both. I though believe lack of research is more due to that it is a new area
then lack of importance. In order to improve these areas I believe that the process
connecting the investments in competence development and the financial result has to
be researched and if possible proven.
1.1.1 Research question:
 Is it possible to find and prove a connection between an organization’s competence,
financial result and the customer value? I.e. to prove the relations visualized in
figure 1.1.
1.2 Purpose of the study
To develop a model that tests the possibility to prove a connection between competence
development, financial result, and customer value.
1.3 Delimitations
(See also the section 2.5 regarding the impact of delimitations)
 I am basing my model on existing theories. The model will therefore be delimited,
to the boundaries of these models.
 The theories that I present are mostly originally developed for an overall strategic
implementation, whereas my focus will be more on the measurement process. I.e. I
delimitate my usage of the models presented in this thesis to its structure and its
correlations with measures within this structure.
24
For example: Anttila, (1987).
For example: Edvinsson & Malone (1997); Roos, Roos, Edvinsson, and Dragonetti (1997); Olve, Roy, and Wetter, (1997);
Kaplan & Norton (1996).
26
Bassi & McMurrer, (1998); Training investment can mean financial performance, Training and development, article no. 3.
27
Willyerd, (1997): Balancing your evaluation act, Training, article no.4.
28
Skandia, (1994-1997): Annual reports.
29
Olve & Westin, (1997): IT-mått.
30
For example: article no. 1, 3, 7, etc.
31
Berggren & Fors, (1997): IT-mått, (essay).
25
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Stockholm School of Business
Adviser: Johan Adolphson






A deductive experimental study - Emma Lind
There are several ways of measuring performance in an organization. I will only test
relationships and interactions that I have found in this area and that are presented
within my model.
I will only test and measure certification activities32and not other kinds of human
capital.
I my model, only the certifications that require that the employee attends a course or
studies for the examination, i.e. he or she does not posses enough skills and
competence (know-how) to write the tests without preparations.
I will only include quantitative measures; i.e. measures that are not quantifiable are
not included.
The primarily data collection is delimited to three different companies.
The computerized model constitutes a part of the research, thought I do not intend
within this thesis to discuss the technology issues when constructing a computerbased model.
1.4 Definitions and clarifications
Competence
The ability to solve a task.
Certifications
In this study competence mainly refers to the knowledge gained through education,
training and practical experience concluded in a certification. This specific knowledge
is useable in all computerized organizations. A formal standardized test that guaranties a
certain level of competence in the specified test area/product (c.f. appendix 3). By
certification is meant one single certification.
Utility
Expected payback in finical terms, can also be expressed as Expected Monetary Value
(EMV), i.e. expected monetary payback.
1.5 Outline of the study
I open the thesis by presenting my choice of method for this thesis. I will present my
scientific view and methodology used. In chapter 3, I describe the generic framework of
knowledge and valuation of knowledge. Then I account for theories and models that I
have used and that are related to my work and from which the model presented in
chapter four, is derived. After that the empirical findings are displayed and analyzed in
chapter five, with the theory in mind I present my own model based on the theories and
models accounted for in chapter three and four. In chapter six, I analyze the results from
my model and then my conclusions are revealed in chapter 7. In the end I will also
discuss the validity of this thesis. Finally, and I will disclose whether the results can be
acceptable and used in a broader perspective.
32
C.f. appendix 3
Master Thesis, 1998-1999
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2 Research Method
I assume that the reader of this thesis has a basic knowledge in science methodology
and in business economics. Therefore, have I not the intention to describe and define all
the fundamental principles of scientific methodology. I will only do so if it describes
and explains my way of thinking.
Method can be used as a tool for solving scientific problems. Everything used for
solving this problem can be regarded as method. Following is a discussion regarding my
choice of method for solving the previous defined problem.
2.1 Scientific approach
Social science is according to my apprehension a science that is somewhere in between
the traditional division of natural- and human science. This due to the fact that social
science incorporates parts from both natural science such as causal connections, and
understanding from human science33. How can a science include both? It is my opinion
that business economics includes parts that in some respects can be viewed in a pure
casual connection where both casual connections and experience will be the same time
after time. An example could be the logic that is found within mathematics34. You know
what the answer is going to be if some assumptions are granted. Areas among others
where this is applied are accounting and finance. If we for sure know the income and
the costs fore a given period, we also know the result.
Other casual connections can be harder to prove. The finance area is often striving
towards an explanative perspective. For example, if some facts are known for a stock at
the Stockholm stock exchange, the analyst uses explanation models to predict/foresee
courses in the future. These models are based and developed upon historical facts and
seeks casual connections of caution and effects. But also they often involve assumptions
and/or probabilities to achieve a better result.
What then has to be explained? The way I will use business economics in this report
will be based on different models and the connections between these. I also believe that
when there is a possibility to choose between different alternatives that the presented
alternative that is most cost-effective will be chosen. This leads to the assumption that
perfect rational individuals are acting on the market economy35. I am striving to present
a model that can present different outcomes and order people’s preferences, in order to
choose between these preferences in a rational way. I assume that the users of my model
are perfectly rational in their behavior when using my model. This is an important base
in describing my scientific view in this thesis.
Though, I would like to add to that explanations only hold under perfect conditions
within business economics. The reason is that people are such a big ingredient in
economical context and I will here therefore not go in to the individual perspective;
instead I want to make overall conclusions above the individual perspective.
33
34
35
Winograd & Flores, (1987): Understanding computers and cognition, p. 26 ff.
Rosengren & Arvidsson, (1983): Sociologisk metodik, p. 207.
Winograd & Flores, (1987): Understanding computers and cognition, p. 23 ff.
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Stockholm School of Business
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A deductive experimental study - Emma Lind
2.1.1 Positivism versus Hermeneutics
What can the above description be characterized as? I would like to use well-known
conceptions within scientific methodology. When doing so are conceptions like system
theory, and positivism useful here. This also leads to the view of individuals as parts
within a given system.
Perhaps I could agree upon that even though a casual connection model is used, there is
a possibility to have some idea of how the world is created. This is especially true if the
model is between the traditional boarder of nature science and hermeneutics. Ramirez36
tells us about an asymmetrical relationship between positivism and hermeneutics. A
person with a hermeneutic view can respect the existence of positivism, but a person
with a positivistic view has to deny the existence of hermeneutics, otherwise he/she
denies his own existence. My view is more towards the positive view but not fully, is
this possible?
Figure 2.1 Research cycle according to the positivistic paradigm
World of models
(theory)
World of facts
(Empiri)
Theories
Predictions
Deduction
Verification or
falsification
Induction
Facts
Facts
Source: Lundal & Skärvad37
Within a positive method, research is recognized38 through the observation of reality
and facts about the reality are collected. A collection of facts makes it possible to se
patterns and regularities in the reality. This can lead me to general conclusions, laws.
The science grows when more facts are collected and greater and more general
conclusions can be made. The differences between observations and prophecies are
identified – verification or falsification. A good theory will show a high consistency
between prediction and the real outcome. This is also how I plan to do my study. I have
collected facts trough previous research and developed a model based on existing
theories, I have then made some predictions which I will test, and then I will verify or
falsify the possibility test and prove connections between the organizational
competence, customer value, and the financial result.
I as the positivists seek causal connections and I also believe that human knowledge is
based on purposes, motives, or intentions. I might not fully agree with the positivistic
denial of all values, though I believe that human knowledge has to take preferences and
values into consideration.
In a historic perspective I am not the alone with being more positivistic than
hermeneutic, but not fully positivistic. Both Popper39 and Kuhn criticized the positivists
in different ways. Popper who criticized the logical positivists attempts to separate
36
Ramirez, (1992): Positivism eller Hermenutik, p. 5.
Lundal & Skärvad, (1992): Utredningsmetodik för samhällsvetare, p. 42
38
ibid.
39
Hollis, (1994): The Philosophy of Social Science, p. 71.
37
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between meaningless and meaningful statements how things are said to be (the criteria
of verification). And Kuhn40 who believes (as Popper), that the driving force in the
scientific development are scientific problems (anomalies), and not the collection of
observation data, and that testing of theory with existing theories and not observation
data, is the critical step when choosing theory.
2.1.1.1 Objectivity versus Subjectivity
There are several different views on what reality is and how knowledge is developed
from this reality. I would like to mention some of these apprehensions (that are very
many). “Outer reality”, which means to become a sensory impression of the reality that
surround us. “Subjective reality”, which refers to what is within us, such as feelings and
intellectual activity. Logical form, which means those statements regarding the reality,
should follow a certain structure in order to be called scientific. Objective, nonreachable reality41, means that we constantly revise our objective reality during our
observations, and this is how I, which means that what I later present and is not really
objective.
An objective scientific approach is sometimes called a positivistic approach, and a
subjective scientific approach called humanistic. What this is all about is the
apprehension of science. The humanistic or hermeneutic approach focuses on the
subjectivity in the apprehension of the reality. Here it is also important that the social
reality is divided from the physical, and that understanding and interpretation is more
important that explanation42.
Is it possible or desirable for a reader to transcend his or her own culture and the
intervening history in order to recover the correct interpretation? Within hermeneutics 43
there have been an ongoing debate between those who place the meaning within the text
ant those who see the meaning as grounded in a process of understanding in which the
text, its production, and its interpretation all play a vital part.44
For the objective school of hermeneutics,45 the text must have a meaning that exists
independently of the act of interpretation. The goal of a hermeneutic theory (a theory of
interpretation) is to develop methods by which we get rid of all our prejudices and
produce an objective analysis of what is really there. The ideal is to completely
‘decontextulize’ the text. The empiricism requires an absolute objectivity46. The subject
can’t be involved in the study object. The knowledge that is supposed to evolve from
the studied object has to be caught in well-defined conceptions. The possibility to
measure and casual connections are two important ingredients of the knowledge that
one wants to achieve. These thoughts are very similar to mine, which leaves me
between these two scientific approaches.
The opposing approach, most clearly formulated by Gadamer,47 takes the act of
interpretation as primary, understanding it as an interaction between the horizon
provided by the text and the horizon that the interpreter brings to it. Gadamer insists that
40
Hollis (1994): The Philosophy of Social Science, p. 84.
Asserted by Kant among others
42
Rosengren & Arvidsson, (1983): Sociologisk metodik, p.7.
43
Palmer, (1969) in Winograd & Flores, (1987): Understanding computer and cognition.
44
Winograd & Flores (1987): Understanding computer and cognition, p. 27ff.
45
Betti, (1955), and Hirsch (1967) in Winograd & Flores (1987): Understanding computer and cognition.
46
Ramirez, (1992): Positivism eller Hermenutik, p. 39.
47
Gadamer, (1975): Truth and Method, and Gadamer (1975): Philosophical Hermeneutics, in Winograd & Flores (1987):
Understanding computer and cognition.
41
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every reading or hearing of a text constitute an act of giving meaning to it through
interpretation.
The Positivistic approach view defines and views the world as a study object. This
prerequisite that the studied and spoken subject can take a neutral position in order to
describe it. When studying the human subject as a part of the world it has to be
objectified, in the same was as when we are standing in front of a camera in order to
become photographed48. We must also then kept to facts and avoid all different values
about how we wish that the world should be. Since I want to study human subjects in an
isolated system, I need to objectify the human subject.
Many measurements require further information in order to be considered as useful.
Objective measurements are therefore often combined and put into a relation in order to
reflect a position or a development. Two measurements created for different areas can
be put together and then measure something different. Given a common framework, a
sender and a receiver do not have to have the same opinion regarding the result. Though
it is important that the sender has not infected the measurement with his or her values.
This is also a reason why I have chosen an objective methodological view in this thesis.
Though, when the measurement is unadapted to a certain situation it is easier for
receivers with different interests to use the measured object.49
Within this thesis I am going to quantify and formalize existing theories and try to find
casual connections between them. Still, I feel that the positivistic theories don not fit
fully into my research. This leads me to the theories regarding decision making and
problem solving.
2.1.2 Management science and rational theory
A modern form of the rationalistic tradition is the discipline of management science, a
field concerned with mathematical analyses of decision making and with behavioral
analyses of human conduct. In this discipline, decision making is regarded as the central
task of management and is characterized as a process of information gathering and
processing. Rational behavior is seen as a consequence of choosing among alternatives
according to the evaluation of outcomes.50
In the literature on computers and decision-making51, a wide range of human activities
and concerns are subjected to this kind of analysis. Researchers in simulation,
operations research, and game theory apply sophisticated mathematical methods to
decisions52. This is often called the formalized approach53. These techniques are based
on the development of a formal model for the system that will be affected, a set of rules
that describe the behavior of the modeled system, and an objective means of assigning
valuations to the resulting affects. When calculations based on the model, rules, and
valuations are performed, alternatives can be compared and the most highly valued
(optional) one selected. This is also how my model is supposed to work. If my model
fails with presenting these alternatives, then my research question is falsified.
48
Ramirez, (1992), Positivism eller Hermenutik p. 7ff.
Olve & Westin, (1996): IT-mått, p. 8.
Simon, (1976): Administrative Behavior, p. 67.
51
Winograd &Flores (1987): Understanding computer and cognition, p. 30.
52
Henricks (1997): Dress Rehearsal, Entrepreneur Magazine, article no. 1.
53
Boguslaw, (1965), In The New Utopians, in Winograd &Flores (1987): Understanding computer and cognition.
49
50
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There have been critiques of this idealization54, often from people within management
science who object to the narrow assumptions of the formalist approach. This is critique
towards the assumption of full knowledge and rationality in applying optimization
techniques, and not an objection to the rationalistic approach. Systematic reasoning
rules can be applied for effective decision-making, and can be programmed into
computers. Rather than computing all of the consequences, the computer must operate
with “bounded rationality”55.
Consequently, my computerized model will operate with bounded rationality. As
pointed out earlier my user is an individual that acts with a rational behavior even
though the model operates with bounded rationality. If I succeed with implementing my
theories implicit with symbol structures in my model and the model can solve some
problems through information processing I have defined a problem 56. Next I will
account for what the leading paradigms are in today’s world of business economics.
2.1.3 Scientific Paradigms
A paradigm can be said to be every set of overall and basic apprehensions of the
reality’s nature, the reality’s structure, reality’s ideals, and ethical view 57. The paradigm
is also a language for describing the relation between basic philosophical apprehensions
(described under 2.1) and different methodologies practical use.
The philosopher Thomas Kuhn58 presented paradigm as a science theoretical
conception. When a conception of a scientific view, a paradigm, within a subject area
changes over time the new knowledge replaces the old predominate. This happens
through a revolutionary-like lapse, where the old paradigm that is defended, since it is
supposed to give guidance to how methodic and research should be formed. First, when
enough researchers question the old and somebody presents a new paradigm that is
proven more lasting can a change take place59. Kuhn was a natural scientist and his
ways of using paradigms are therefore dependent on this. Within social science it is
usual that old paradigms exist beside the new ones, and therefore are paradigm shifts
not something revolutionary within this methodology60.
The science theorist Törnebohm61 has developed another view to paradigms. This is an
evolutionary view and he thinks that knowledge development is accumulative. Old
paradigms are therefore not rejected. The following presented paradigms are to be
considered as a starting point for researchers within Business Economics today62. The
reason why these are to be considered as starting points are that these in a later stage in
a research process will account for different researchers’ methodology view.
54
Simon, (1976): Administrative Behavior, p.67.
ibid. pp. 79ff.
56
Newell & Simon, (1972): Human Problem Solving, pp. 72-73.
57
Arbnor & Bjerke, (1994): Företagsekonomisk metodlära, p. 38-39.
58
Hollis, (1994): The Philosophy of Social Science, p. 84 ff.
59
Arbnor & Bjerke, (1994): Företagsekonomisk metodlära, p. 29-31
60
ibid., p. 30
61
ibid.
62
Arbnor & Bjerke, (1994): Företagsekonomisk metodlära, p. 43-61
55
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2.1.4 Methodological point of view - System theoretic perspective
The six, here presented paradigms form the platform for the three methodological views
that are predominant within business economics and business administration today63.
The reason for this presentation is to show my view compared with this division.
Figure 2.2 Paradigms within business economics
Reality as
concrete
and by us
independent
structure
The reality as
concrete
deterministic
process
The reality
as mutual
dependent
fields of
information
The reality as
a world of
symbolic
discourse
The reality
as a social
construction
The reality as
a manifestation of
human internationality
Analytical view
System theoretic view
Agents view
Explaining knowledge
1
2
3
Source: Based on Arbnor & Bjerke, (1994)
Understanding knowledge
4
5
6
In this picture I have added a dotted rectangle in order to schematically show my
scientific view. I have earlier accounted for that I in this study will not include the
understanding knowledge. This leads to that my way of approaching the problem will
be close to the system theoretic methodological perspective.
A system can be defined as “a set of objects together with relationships between the
objects and between their attributes related to each other and to their environment so as
to form a whole”64. The main thought behind the system theoretic approach is that
whole is not the sum of its parts65 which is not fully how the positivists attains an
understanding about the reality. But at the same time the system theoretic perspective
implies that it is impossible to understand the whole without knowing the parts66, which
fits with the positivistic view. In detail the method of working is very similar to the
positivistic research method previous described. By breaking down the whole into
smaller parts and then examining each of these in detail, a complete and accurate
understanding of the subject can be obtained. Once having broken down the subject into
manageable components, the analyst then proceeds to put together (to synthesize) the
various pieces previously broken down (analyzed). In this way, I hope to better
understand the functioning of the whole. The system theoretical perspective also points
out the environment and its effect on the whole.
63
Arbnor & Bjerke, (1994): Företagsekonomisk metodlära, p. 65
Schoderbeck, Schoderbeck, and Kefalas, (1990): Management systems, p. 13.
65
Arbnor & Bjerke, (1994): Företagsekonomisk metodlära, p. 64-65.
66
Schoderbeck, Schoderbeck, and Kefalas, (1990): Management systems, p. 8.
64
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Figure 2.3 Diagram of a System’s parameters, boundary and environment
Source: Schoderbeck et al., (1990)
Individuals are viewed as a part of a system and the system principals determine their
actions. The individuals, the parts, are explained or understood through the terminology
and characteristics of the system and the whole. In order to isolate the system from all
other systems and from its environment, the parts and their interrelationships must be
defined. This is what I will do when describing my model in chapter five. Also, as a
system analyst, instead of analyzing the parts in detail, I prefer to focus on the processes
that link the parts together.
Complexity can be divided into detailed or dynamic complexity67. Detailed complexity
arises from the number of items that needs to be included. The main problems within
detailed complexity deals with breaking down the whole into small pieces. This can be
managed through developing computerized systems, often databases or spreadsheets
that can handle this situation very well. Dynamic complexity arises not only from the
number of factors, but also the way they relate to one another. Ashby’s law of requisite
variety indicates that, with increases in the complexity of a system, the variety of
uncertainties also increases. This leads to, in order to control a complex system, the
amount of variety in the control mechanism must equal that in the system itself. In my
model only a simple control system is possible, this implies that the variety within the
system (my model) must be simplified.
Some of the latest theories about the intellectual capital suggest that it is related to chaos
theory or complex adaptive, that is, living systems68. Wiener69 defines cybernetics as the
science of control and communication in the animal and the machine. It is quite evident
that Wiener intended cybernetics to be concerned with principals applicable not only to
engineering systems but also living systems. A cybernetic system is a living system.
The first, which is applicable to my system, deals with implicit control. The technique
that most closely deals with implicit controllers in people control system is
Management By Objectives, MBO70. Management by objectives calls for an
identification of the results in order to achieve an understanding of what must occur in
the system. Maybe it is not accurate to say that my system is a truly MBO system. Even
though I believe it can function well as a control principle in a MBO system.
67
Neil, (1997): Managing with systems thinking, Journal of market research society, article no 5.
Edvinson & Malone, (1997): Intellectual Capital, p. 13.
69
Wiener (1948): Cybernetics, or Control and Communication in the Animal and Machine.
70
Schoderbeck, Schoderbeck, and Kefalas, (1990): Management systems, p. 121 ff.
68
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Figure 2.4 Simplified cybernetic model of the MBO process
Source: Schoderbeck et al., (1990)
Most businesses operate in an environment of feedback loops. Feedback occurs when
our actions trigger a series of responses. The system approach 71 recognizes the
importance of feedback, which opens up the way to a better understanding. For
example, integrating feedback in a model enables the user to understand the structure of
the model.
As declared earlier, one of my intentions with this thesis is to identify casual
connections between measures deriving from different dimensions. System theory is
interesting here because it incorporates aspects as what impact the environment has on a
system and how different factors are put together to achieve a result, an output, and how
casual connections are found and constructed. System theory also deals with the
dilemma of complexity and how a system works when the complexity is somewhat
delimited. If organizations and their markets can be considered as systems,
management’s role can be seen as that of control, adjusting business operations so that
they respond appropriately to signals received from the environment in which they
operate. I will, in my model, try to find these signals and present them in a useful way.
There are two ways of approaching the work of developing information systems72. One
is focused on the measurement problem, the reality, and the other on the behavioral
problem, the individuals. My approach is focused on the measurement problem, which
incorporates problems such as to define the organization for the purpose of accounting
and account planning. Applied on my model problems such as, with how much
precision training cost should be measured, and how the value of employees may be
measured. I will not include measurements focused on the behavioral problem, with this
I do not say it is not an important issue, but not relevant here.
Concluding my scientific apprehension that I have accounted for so far is that is more
positivistic that humanistic, and though, not being totally positivistic, I feel that the
system theory fits my scientific approach among with what I have accounted for
previously in this chapter.
71
72
Neil, (1997): Managing with systems thinking, Journal of market research society, article no 5.
Gröjer & Johansson, (1996): Human Resource Costing and Accounting, p. 11.
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Study approach
2.2.1 Working process
I have chosen to conduct an experimental73 deductive study. It is difficult to do
experimental studies in business economics, though experimental studies are useable for
evaluating the effects of education programs74. My choice of study method implies that
my outset is existing theory, which I try to explain and predict by manipulating
variables, standardizing my environment and limit the amounts of complexity in order
to achieve control. In the figure below, the logical structure of a quantitative research
process is visualized. The process is iterative, in the sense that the induction leads to a
new theory. My study covers the process including the interpretation of the findings.
Thus, I am not conducting inductive research within this thesis. I have chose to conduct
the quantitative research with the use of a computer model.
Figure 2.5 The Logical Structure of the Quantitative Research Process
Theory
Deduction
Hypothesis
Operationalisation
Data Collection
Data Processing
Data Analysis
Interpretation
Induction
Findings
Source: Bryman, (1989)
2.2.2 Qualitative versus Quantitative
When working with human resources quantitative methods are more common. I have
chosen a quantitative perspective. This choice is due to my use of statistical formulas
and to not limit the possibility to do cost-analysis. One of the advantages with a
quantitative method is the possibility dealing with measures. A positivistic methodology
that seeks causes and effects of models and principles is also very close related to my
choice of method.
Many find qualitative data attractive. Qualitative data are often a source of wellgrounded, rich descriptions and explanations of the process occurring in local
contexts75. But there are also real problems with the output of qualitative studies. The
most serious and central difficulty in the use of qualitative data is that methods of
analysis are not well formulated.76 Qualitative data, which are made up by words are
harder to work with than quantitative numbers. Although there is no sense in converting
words to numbers, in that case, one could just as well have started by gathering
73
Lundal &Skärvad, (1992): Utredningsmetodik för samhällsvetare, pp. 78, 130.
ibid. p. 130.
75
Miles & Huberman, (1984): Qualitative Data Analysis, pp. 15-16.
76
Miles & Huberman, (1984): Qualitative Data Analysis. pp. 15-16
74
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numbers. Another way is to code the words into numbers.77 Critique to this work
method is presented by those who believes that the qualifications of an employee should
be measured both quantitative and qualitative, in order to focus on the right areas.78
In order to use data in my model it has to be measurable has therefore to be quantitative.
Though, in order to analyze the result, I will do qualitative conclusions based on the
result of the quantitative analyze of the data.
2.3 Data Collection
There are two techniques to be used when collecting data79. The techniques are to use
existing, already collected material, called secondary data, and to collect new data,
primary information. I have mostly used secondary data. Through literature I have tried
to find a base for what to measure, and how to do it. The data I am going to use for
testing my model will be primary data that I have collected from three different
companies. If possible, existing company specific data will be used, such as data from
the accounting system. This presumes that the company has modern IT-infrastructure
with a common database interface or standard.
Second, the model uses estimations of certain variables that should be modified to suit a
particular company. Due to the fact that these variables should be adapted to each
specific case, no extensive research have been done to identify these specific values.
Unless stated given variables and values are assumptions80. Third the model requires
user input of local variables that are not included in other system, such as the amount of
certifications, the number of certification areas, etc.
2.4 Critical Examination of Method
Verification of knowledge is of discussed within social science. This discussion is often
based on three conceptions: generalization, validity, and reliability.
2.4.1 Reliability
The reliability of a study could be describes as ‘the absence of stochastic errors’ in the
data81, i.e. how trustworthy a measured value is82. The concept of reliability refers to the
extent that; another researcher with the same results can replicate operations of a study.
Validity can not be achieved if the reliability of a study is lacking. Reliability can be
achieved through a standardization of the data collection process. When repeating a
measuring process and an equal result is achieved, a high reliability is confirmed.
When doing simulations the result is dependent on the reliability of the input data. The
common method bias concerns the problem of data deriving from one single source83. I
have attempted to mitigate this problem by collecting data from three different firms. I
have also when choosing measurements collected facts and figures from different
77
ibid.
Anttila, (1997): Kompetensförsörjning – företagets viktigaste process.
79
Arbnor & Bjerke, (1994): Företagsekonomisk metodlära.
80
See list of assumptions, appendix 2
81
Lundahl & Skärvad, (1992): Utredningsmetodik för samhällsvetare och ekonomer.
82
Bryman, (1989): Research methods and organizations studies.
83
ibid.
78
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software vendors in Sweden (Lotus Notes, Novell, and Microsoft). I have also studied
numerous reports from IDC84 in order to increase the reliability of the study.
2.4.2 Construct Validity
By construct validity is understood the study’s ability to measure what it is intended to
measure85. Meaning how valid the measure is in a given context. Validity can give the
quality of a surrogate measure, i.e. how well the surrogate measure describes the reality
that without its existence is difficult to measure. There are also different kinds of
validity. As noted in my model, section 4, it is not possible in every case to measure the
phenomenon directly – one has to use constructs and proxies.
Before starting to discuss quality, I want to define what is meant by quality. M Juran
defines quality as “suitability for aimed usability”86. Also expressed as, measurements
need a relationship with the final result in order to be useful.87 The preciseness, validity,
and administration of measurements are also of importance. There are four criteria that
are to be achieved for IT-measurements. The measurements should88:
 be easy to work with for the sender (easy to apply value to)
 be used for various kinds of businesses (easy to transport)
 be easy to read and overview (easy to interpret)
 give a understandable and unambiguous picture that enables a analyses that can be
considered
I have put values on the identified measurements and tried to compare these with data
collected from three firms. At these three firms I have collected measurements from
different departments. By doing this I hope to have increased the transportability of the
measurements. I have tried to present my measures in a way that makes them
interpretable for the reader of this thesis (c.f. chapter four), and have tried to give an
understandable picture of the intended relations of these measures in order to analyze
the possibility to find connections between these measures.
The following criterias are need to be achieved in order for the measurements to be
useful. The four criteria’s that has to be achieved are:89
1. They should be measurable
2. They should have an impact on the organization goal achievement
3. The should be able to be update on a regular basis
4. They should be possible to put into relation with other measurements.
I have only included data for my study that is measurable, and in my introduction to this
thesis I have tried to show that my focus have an impact on the goal achievement of
organizations. My model is constructed in such a way that it can be updated and new
cases can be tested. And finally, my aim with constructing this model is that the
measurements can be put into relation with other measurements within the model.
84
International Data Corporation
Yin, (1989): Case Study research. Sekaran, (1992): Research methods for business.
Näckå, (1995): På bättringsvägen…, p. 42.
87
Ibid. p. 32 ff.
88
Olve & Westin, (1996): IT-mått, p. 5.
89
Frankelius, (1991): Ökad lönsamhet med rätt information, p. 86.
85
86
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2.4.3 Internal Validity
With the study’s internal validity is meant the ability to infer valid causality if the
process of explaining the phenomenon (-a) studied90. I.e. internal validity deals with
how well the causal relationship is established and to what extent the studied conditions
explain the investigated phenomena.
Since the purpose of this study is to identify relationships between measures I strive
towards I high level of internal validity. In order to increase the internal validity I have
chosen to base my model on existing models that have a structure with established
casual relationships. By taking an advantage of the casual connections between
competence development, financial result and customer value (for example to be found
within the different perspectives of the Balance Scorecard model (c.f. section 3.4), I
hope to attain a synergy effect. The synergy effect that I aim at is in form of proving the
connections established in other models within my model, but in difference to the
presented models, only using quantitative data applied on a specific area, certifications.
In other words, by integrating the structures of these models, I hope that the measures
within my model will correlate through casual connections and then the research
question will be proven.
2.4.4 External Validity
The question raised by the external validity is ‘to which extent can the results be
generalized?’91. External validity is the same thing as generalization. When constructing
my model, it has been important that data easy can be updated and different factors can
be modified and/or changed. The aim of this thesis is to prove connections between
different areas, and is as such very general. In order to fulfill my aim I have chosen a
very specific area, certifications. Whether or not my findings will be applicable to other
areas outside training and competence development investments they will at least be
applicable to investments within certifications, and I therefore claim that the external
validity of this study is enough to not falsify the research question.
2.4.5 Parsimony
Parsimony deals with the simplicity of the described phenomena. The author should aim
to explain the theories and findings in a complete but comprehensive way. 92 My aim
with this study is not to simplify for the reader. This is a very complicated subject and
the parsimony will not be high. Though I will try to present and explain the theories
used in a complete and comprehensive way as possible.
2.4.6 Sources of Errors
Regardless of all measures, steps, and precautions I have made in order to minimize the
possibility of errors, there is still a risk of errors in the data. In attempt to identify
possible sources of errors for my study, I would like to mention the following:
 It is possible that the respondents did not give the answers that reflect the actual
situation, but rather a normative answer in order to give a more attractive picture of
their branch. For the same reason, it is possible that the respondents have not
90
91
92
Yin, (1989): Case Study research.
ibid.
Bryman, (1989): Research Method and Organizational studies.
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disclosed certain information. In order to prevent this I have tried to find several
respondents within every firm, to get a confirmation of the collected data.
Although I have talked to several persons at each firm and collected data from three
different firms, the risk of gathering non-representative data still exists as I
aggregate my data on a firm level, not on an individual level.

2.5 The Impact of the Delimitations
Since my primarily data is limited to it’s amount I have not being able to prove absence
of stochastic errors in my data. I have tried to avoid the risk that the trustworthiness of
my data fails by doing a risk analyze, presented later in this thesis. I have also tried to
compare my primarily collected data with secondary data in order to decrease the risk of
failing in reliability.
My usage of predefined models can influence the validity of the data since there is a
risk that they are not usable for what I intend to measure. There is also a risk that since I
have delimited my usage of data to primarily quantitative data and measures that I only
have quantified qualitative measures, or have I identified quantitative measures? In that
case it would also influence the validity of the measures and data.
The external validity, i.e. the ability to generalize my study can be somewhat limited
due to my usage of existing models such as the Balanced Scorecard I might have lost
some other possibilities in measuring knowledge capital. My opinion is that the
usefulness of using an existing model is worth this delimitation in width of the research
and I am fully aware of the models limitations.
The external validity might also be influenced by the fact that I will only measure
certification activities, which is a relatively small area. In order to not lose the ability to
generalize I have included three different software vendors and collected fact and
figures from all three of them.
The external validity might also have been influenced by the fact that I do not intend to
discuss technology issues, which can increase the difficulty to repeat this research or
develop it based on my model. Here I would like to point out that I do not believe that it
is the technological issues that makes this model work, instead I think it is the found
connections that are tested with the technology and I think the same result could be
achieved tested with another technology.
2.6
Data Analyses
2.6.1 Approach to Qualitative Analysis of Quantitative Data
My method to overcome the difficulties of analyzing quantitative data is largely based
on the recommendations of Miles and Huberman (1984)93 and Eisenhardt (1989)94. The
first prescribe that one keeps words and numbers together throughout the analysis by
coding the words. I have only gathered the kind of data that can be coded into numbers,
therefore and they are all kept together and presented in chapter four.
93
94
Miles & Huberman, (1984): Qualitative Data Analysis.
Eisenhardt, (1989): Building theory for Case Study Research.
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Eisenhardt argues that arranging data in tabular displays and graphs yields good
opportunities for pattern matching. Thereafter patterns between the cases should be
sought, which can be done in three ways:
1. Select categories or dimensions, and then search for similarities and differences. The
selection of dimensions could be done by reference to existing literature.
2. Arrange the cases pair-wise and then search for similarities and differences. The
cases should be rearranged in new pairs if deemed necessary.
3. Divide data by data source. Later on, when the data analysis from the various
sources is compared, the evidence will enable the researcher to make conclusions
through similarities or deeper probing into conflicting evidence.
In my study, I have chosen to mainly employ the third method, but I will also try to
employ the first method.
2.7 Alternative Methods
I am in this study dealing with topics such as knowledge, humans, and management
theories. These topics are often regard as subjective and often depend on the perception
of the individual. In this study I have tried to objectify these subjects in order to make
them measurable. Another approach could have been to prove the relationships with
only logical reasoning based on interviews (qualitative data). I believe that the findings
of such a study would not fully include the impact of the relationships between the
different perspectives of the model. It would more prove the existence of such
relationships. To draw broader conclusions would therefore be more difficult and I have
therefore not chosen this approach.
Most research within this area is qualitative. This means that sometimes it is hard to
find existing models that deal with only with quantitative data. The Balanced scorecard
is a management philosophy95 and maybe another theory would have been more
suitable for measuring. An alternative method would have been testing the relations
within a Balanced Scorecard in form of a case study, after further reading I have
excluded this possibility since case studies are not suitable for drawing conclusions
about casual relationships96.
95
96
Morgan, (1998): Balanced Scorecard, www.zilker.net/business/pci/com/apr98/scorecard.html, article no. 21.
Sekaran, (1992): Research methods for business.
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3 Theoretical Framework
“He who loves practice without theory is like the sailor who boards ship without a
rudder and compass and never knows where he may be cast.”
Leonardo da Vinci (1452-1519)
My theoretical framework is divided in to different parts. The first deals with theories
regarding knowledge, competence and human capital. The focus is on competence,
viewed from several dimensions described in this chapter. I have chosen theories that I
feel are important for the input to my model, i.e. the result of certifications. I have also
tried to include theories that are important when evaluating the result of the model, the
output. The second part describes the theoretical framework from which my model has
derived. I have tried to look beyond the traditional management theories and
incorporated both traditional theories within accounting and statistics but also tried to
incorporate these within the perspectives of the Balanced Scorecard theories.
3.1 Aspects of competence and related concepts
The first part of this chapter serves as an introduction to how the concepts of
knowledge, competence, and human capital are seen by the various research schools. As
such, the chapter also strives to answer the question of why measuring competence, as a
topic is interesting, as well as to present the theoretical lens I employ in my study. This
lens includes various frameworks that apply more specifically to the valuation of
competence. Through the literature review that I did prior and during the construction of
my model, I came to the conclusion that more than one field of research was needed for
my framework. Thus, the theories that I present in this chapter belongs to fields such as:



Knowledge
Competence
Human capital
3.1.1 Defining knowledge
If it is true that the basic economic resource is and will be knowledge 97 (cf. the
introduction to this thesis). Then it follows that knowledge also has a strategic
importance for a firm or corporation, and then also need to be measured, as opposed to
only being important for operational concerns, e.g. production. I believe that any study
which aims at assessing knowledge, the use of knowledge, or the adoption of
knowledge requires a definition of the concept. Although I will avoid an in-depth
philosophical discussion of knowledge, I believe that an understanding of the concept of
knowledge, nevertheless, requires a presentation of knowledge.
3.1.1.1 Semantic Definitions
When looking up the word ‘knowledge’ in reference literature I find, among others, the
following definitions:
1. Knowledge98 is:
i)
the fact or condition of
- knowing something with familiarity gained experience or association
- being aware of something
97
98
Zeleny, (1997): Autopsies and self-sustainability in economic systems, Human Systems Management, article no. 6.
Webster’s New Collegiate Dictionary (1977)
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ii)
iii)
iv)
v)
A deductive experimental study - Emma Lind
apprehending truth or fact
having information or being learned
acquaintance with or understanding of science, art, or technique;
the range of one’s information or understanding
the sum of what is known
the body of truth, information, and principles acquired by mankind.
2. Knowledge99 can also be described as:
i)
awareness or familiarity gained by experience (of a person, fact, or thing)
ii)
a person’s range or information;
iii)
a theoretical or practical understanding of a subject, language, etc.;
iv)
the sum of what is known;
v)
true, justified belief, certain understanding, as opposed to opinion.
These references seem to suggest that the concept of knowledge contain both facts and
experiences. I.e. knowledge applies not only to facts gathered by study, investigation,
observation, or experience but also to ideas acquired by facts or accepted on good
grounds as truths.100
3.1.2 Aspects of knowledge
An economic view on knowledge is ‘why do individuals know more than they can
express?’101 The answer lies within the nature of knowledge; knowledge can be divided
into an explicit component and a tacit component. Simply put, explicit knowledge is
anything that can be codified into words or pictures, etc. Tacit knowledge is made up of
those things that we know, but really cannot explain how or why we know them, or
even what exactly it is we know.102 Although the explicit and tacit are not alternative
modes of knowing, it is the codifiability that is the difference103. In this thesis I will
only research explicit knowledge. Tacit knowledge is of great importance but since it
incorporates a great deal of subjectivity it is very difficult to objectify in order to
measure.
Knowledge of a firm is relatively observable, and therefore differs from the firm’s
learning104. Operating rules, manufacturing technologies, and customer data banks, are
tangible representations of the knowledge of a firm and the knowledge of a firm can be
categorized into information and know-how105. By information is meant “knowledge,
which can be transmitted without loss of integrity once the syntactical rules for
deciphering it are known”106.
In other words, information is intended to be structured in such a way, that once you
know how to read or interpret the information, the risks of misunderstanding should be
non-existent or at least minimal. Know-how, on the other hand is a much more vague
concept. Know-how could be defined as107 “… the accumulated practical skill or
expertise that allows one to so something smoothly and efficiently”. Concluding,
99
The Concise Oxford Dictionary (1990)
Webster’s New Dictionary of Synonyms (1978), p. 481.
101
Polanyi (1962): Personal Knowledge.
102
Ibid.
103
Spender , (1996): Making Knowledge the basis of a Dynamic Theory of the firm.
104
Kogut & Zander, (1992): Knowledge of the firm, Combinative capabilities, and Replication of Technology.
105
Kogut & Zander, (1993): Knowledge of a firm and the evolutionary theory of the multinational cooperation.
106
ibid. p. 386.
107
Von Hippel (1998) in Kogut & Zander, (1992): Knowledge of the firm, Combinative capabilities, and Replication of Technology.
100
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information implies knowing what something means, while know-how obviously
implies knowing how to do something. In an attempt to model the knowledge as
information and know-how in an organization, the following figure is presented108:
Figure 3.1 The knowledge of an organisation-exemplified
Individual
Group
Organization
Network
Information

facts

who knows what



profits
accounting data
formal & informal
structure



prices
whom to contact
who has what
Know-how

skill of how to
communicate
problem solving

recipes of
organizing

higher-order
organizing
principles of how
to coordinate
knowledge


how to cooperate
how to sell and
buy

Source: Based on Kogut & Zander, (1992)
Within the concept of certifications includes both information and know-how, though I
aim at the know-how since the tasks measured belongs to the concept of know-how, and
not the wisdom of what it is. I believe, and have assumed so when constructing my
model, that a certification increases both the ability to generate new applications from
existing knowledge and. I also think that a certification enables organizations to
increase the value of the transformation of inputs to outputs.
3.1.3 Knowledge and Learning
Although knowledge and learning can be seen as intimately related 109, and although I
argue that learning can be seen as an phenomenon required to achieve performance – or
maybe even the process whereby performance is achieved – it is not the explicit focus
of this study. Rather I argue that the concept of learning is very complex and involve
seemingly unlimited quantities of for instance psychological factors. Therefore, in my
opinion, a discussion of aspects of learning would merit a thesis of its own. Due to this,
and due to my belief that it is important and valid aspects of learning are incorporated
within the following sections of our theory reviews, I will not further discuss literature
on learning in this study.
3.2 Competence classification
Competence is a closely related concept to knowledge, especially when discussing
knowledge in an economic setting (organizations, work-life, etc.). Competence can be
distinguished from knowledge by that competence has to be considered in relation to
some goal or demand110. Competence is primarily associated with individuals111, but has
in recent years, as noted also in the introduction, become an extensively topic in terms
of organizations and corporations as well.
Competence is relative and has to be related to those situations, which is someone’s task
to handle.112 When these situations are changed must also the competence change in
108
Kogut & Zander (1992): Knowledge of the firm, Combinative capabilities, and Replication of Technology.
Wikström & Normann (1994): Knowledge and Value.
110
Wikström & Normann (1994): Knowledge and Value.
111
ibid.
112
Anttila, (1997): Kompetensförsörjning – företagets viktigaste process, p. 13ff.
109
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relation to the new situation, and preferable before these new situations occur. The
difference between a demand of competence and lacking of competence is often a
question of time, and lack of competence costs money.113
Perhaps is the biggest accounting problem related to the cost of developing competence
is the problem of arriving at a definition, what is competence development?114 There are
many ways to define competence. But if the chosen definition is going to be practically
used and give a concrete contribution to the competence development, it has to be
measurable, include the possibility to analyze, and to develop the measured competence
based on the analysis result.115 I.e. the chosen definition has to be so simple, that it can
be communicated and measured. It should also be easy to identify focus areas that need
to be prioritized.
In one dictionary116 competence is defined as enough skillfulness and authority. My
interpretation of this definition reflects two diverse ways of applying the competence
concept.
1) The informal skillfulness (functional competence), and
2) The authority that provides the foundation for professions (formal competence);
Doctors, lawyers etc. and levels of authority within different professions.
But competence can also be defined as117:
1) Individual competence is a person’s ability to solve tasks in a rational way and to
meet outer requirements in a specific (present or future) situation. Competence is a
combination of knowledge, experience, will, and motivation (Based on Docherty,
1996).
2) An organization’s competence is not the same as the aggregated competence of the
employees. It is possible the to the organization connected competence through
combination effects is below or above the individual employee’s competence.
Companies can also use external competence through networks, consultants, or
within the technique used. The correlation between the company’s strategies
(business-, competition-, production strategies), chose of organizational solutions
and techniques are important contributions to the company competence. (Definition
based on Ekstedt, 1988)
3) In business economic perspective is the competence of a company (and the
individual) according to the following: Competence is a degree in comparison with
the competitor. This means that an individual’s or a company’s competence is
decreased if the competitors competence knowledge and skills including the ability
to use them increases faster or decreases more slowly. (Definition based on Persson,
1995).
4) Another more common definition is, competence is the ability to handle the
different requirements that are required in a certain situation in a certain
organization.118
113
ibid.
Gröjer & Johansson, (1996): Human resource costing and accounting, p. 34-35.
Anttila, (1997): Kompetensförsörjning – företagets viktigaste process.
116
Svenska Akademins Ordlista (1969)
117
Axelsson, (1996): Kompetens för konkurrenskraft.
118
Kompetens beredningen, (1991): Delrapport SOU 1991:56.
114
115
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My definition in conjunction with others119 is competence is the ability to solve a task.
A consequence of defining competence as the ability to solve a certain task is that the
competence requirements will be based on those situations the employee needs to
handle. It is the tasks that have to be identified and brought into focus. In my case are
these tasks the tasks that are to be solved by a certified employee and will be listed
when describing my model in chapter 4.
Figure 3.2 Focus of tasks that need to be handled
Competence Requirements
Task 1
Task 2
Task 3
Task 4
Task 5
etc.
Source: Based on Anttila, M (1997)
3.2.1 Training
Training is here a related concept and can be defined as the act of learning new
information, behaviors, skills, or actions that can be used to perform job-specific tasks
or improve performance. 120 The difference between training and education is the
process of learning information that enhances general knowledge.121
3.2.2 Formal Competence versus Functional Competence
The formal competence is absolute, either your authorized or not, and is developed in
defined steps. There are norms for how a formal competence should be developed in
different contexts. Within an organization, the individual competence is developed
through education, training, documented experience and/or a degree in some form. The
employee keeps their formal competence until he/she via education or training increases
the authority, i.e. increases the formal competence.122
The functional competence is gradually developed. It does not contain “either nor” but
constitutes a gradually increasing (sometimes decreasing) ability to deal with a problem
or a situation. Each time a person is confronted with a problem that need to be solved, a
situation, or a certain task; the ability is increased, often called learning by doing. After
awhile this person recognizes and can handle different variants of similar problems and
situations. A structure of experience, tried solutions, and knowledge of what works in
different situations and what does not, is created.123
The formal competence is relatively easy to measure. It is seldom difficult to find out
how many employees that are certified to carry out a certain task. A certification is
formal competence, what I intend to measure is the value of the ability to solve certain
119
Anttila, (1997), Holmer & Karlsson et al. (1991), and Jernhall & Sahlqust, (1996).
IDC report, (1997): Time To Profit From Training.
121
Anttila, (1997): Kompetensförsörjning – företagets viktigaste process.
122
Anttila, (1997): Kompetensförsörjning – företagets viktigaste process.
123
ibid
120
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tasks, which is functional competence derived from the formal competence in
conjunction with experience.
An important question to be raised regarding formal competence is whether an
employee, equipped with a formal competence to solve a specific task have the same
competence as an employee that has had the formal competence for a couple of years.
Or the opposite, what is a several year old engineering degree worth? This leads to the
conclusion that it is possible to have formal competence without having the functional
and also the inverse, the functional competence without having the formal. Competence
is relative and a perishable, so when constructing my model I have made an assumption
that a certification is valid and valuable for three years. Of course is experience here an
important factor.
“My competence to document projects, write reports and, do presentation material etc.
was decreased when I was forced to install Windows 95 and Microsoft office on my
computer. This decrease in competence was temporary and is probably much higher
now. The programs are better and I can also communicate electronically with customers
and colleagues in an more efficient way since they are using the same programs.”124
Figure 3.3 Formal versus functional competence
Formal competence:
 Is ‘absolute’, either you have competence or
you don’t
 Is increased by steps. The competence is
preserved and kept until it is increased via
education
 Can normally not decrease, if not a big
mistake is made
 Can be achieved without functional
competence
 Is necessary and important
Functional competence:
 Is a relative ability to carry out a certain task
 Is increased by steps when confronted with
new sorts of problems
 Can be decreased if the circumstances for
learning from the task is changed
 Difficult to measure
 Can be achieved without formal competence
 Is totally determining
Source: Based on Anttila, M. (1997)
3.3 Human Capital
Competence development increases the human capital.125 Human capital refers to the
continued investment in people’s skills, knowledge, education, health and nutrition,
abilities, motivation and effort.126 Human capital is defined as follows127.”The
knowledge and ability a person possesses may lead to the future production of useful
items in the form of goods and services may then be sees as the value of the person in
the economic sense, that is, his human capital”.
Research has been made in this area since 1960, in order to develop new methods of
human capital accounting and valuation of knowledge. This movement is often called
Human Resource Accounting (HRA). They believe that talent, experience, and
knowledge kept by people should be accounted for as assets. HRA calls these assets for
Human Capital. Another school that has influenced HRA is the “human resource
school”. They believe that people belong to organizations valuable assets, and should be
124
ibid.
Zeleny, (1997): Autopsies and self-sustainability in economic systems, Human Systems Management, article no. 6.
126
ibid.
127
Kaplan & Norton, (1996), in Epstein & Manzoni (1997): Translating strategy into action, article no. 27, p. 30-31.
125
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accounted for as such.128 I.e. the personnel are an asset and should be included in the
balance sheet.
American Accounting Association’s (AAA) Committee on Human Resource
Accounting defines HRA as129 ”the process of identifying and measuring data about
human resources and communicating this information to interested parties”. Continuing:
”It involves measuring the costs incurred by business firms and other organizations to
recruit, select, hire, train and develop human assets. It also involves measuring the
economic value of people to organizations”.130
3.3.1 Human Capital on the Balance Sheet
There are different views and opinions regarding how the personnel and their
knowledge should be represented on the balance sheet. Henriksen et al. 131, who belongs
to the traditional school, presents three characteristics, which all need to be met, for
classifying something as an asset. Following these characteristics of an asset, can the
personnel not be accounted for as an asset, due to that an organization or another
individual can not own a human being. This leads to the conclusion that when following
the traditional existing accounting standards it is not possible to account for the
personnel as an asset. Also, traditional examination and evaluation measurements, with
their historical financial orientation, are based on financial data, doesn’t work as
intended on knowledge intensive companies as for example industrial organizations.
This is because knowledge intensive companies often have smaller financial assets.
This has lead to that organizations such as the American SEC132, is trying to find new
standards and forms for reporting human capital. The American Accounting Committee
has declared that they believe that the importance of non-monetary measurements is as
important as monetary measurements and that non–monetary measurements can be used
as a substitute and to presume monetary measurements133.
Although, I would like to point out here that presenting theses kinds of assets on the
balance sheet is very complicated due to that the balance sheet could give the wrong
signals. For example, investments in education and knowledge development that fast
can give a positive influence on the size of the knowledge capital, is often accounted for
as cost, instead of an asset on the balance sheet. At the same time, a personnel-leave can
lead to a positive effect on the result, when the individual capital at the same time has
decreased.134 Many organizations’ competence development and training investments
also vary from year to year. The effect for these initiatives is not only intended for a
particular year’s operation and tasks. Instead the aim is rather to maintain and increase
the competitive knowledge in a longer-term perspective. Therefore the model have to
not only offset the costs of these initiatives in the profit the year that they occur, but also
identify the profit as they are utilized. External, legally used methods may imply that it
is actually profitable to live off former investments in training and competence
development. Developing an internal accounting method for handling remaining values
of training initiatives etc. can help to solve this problem.
128
Flamholz, (1989): Human Resource Accounting, p. .20ff.
Gröjer & Johansen (1984): Human costing and Accounting, p. 19ff.
130
Flamholz, (1984): Human Resource Accounting, p.20ff.
131
Henriksen & Van Breda, (1992): Accounting theory, p. 455-456.
132
Hellbom, (1997): Dags för dubbel bokföring, Dagens Industri.
133
Flamholz, (1989): Human Resource Accounting, p. 171ff
134
ibid, p. 24
129
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3.4 Balanced Scorecard theories
In general, companies take either an asset-based approach to knowledge management or
one that links knowledge to its applications and business benefits. The former starts
with the identification of intellectual assets and then focuses management attention on
increasing their value135. The second uses variants of a balanced scorecard, where
financial measures are balanced against customer, process, and innovation measures.
Among the best-developed methods in use136 are the balanced scorecard approach,
Skandia’s Navigator, Stern Stewart’s Economic Value Added, and M’pherson’s
Inclusive Valuation Methodology.
The Balanced Scorecard method is devised by Robert S. Kaplan and David P. Norton
and first described in a seminal Harvard Business Review article in 1992. The Balanced
Scorecard tries to highlight tradeoffs between measures by translating the strategy into
quantifiable indicators including both financial and operational measures.137 The
operational measures drive future financial performance. Since the performance
measures are derived from strategy, it is important to link used measures to the strategic
management of the organization.138
Much of the training in which organizations invest is geared toward future financial
performance. For example, lower financial results in the target area may represent
success because training is often an investment in the long-term performance of people
that pays off in the future. This implies that to measure results with financial tools that
look backward can be misleading. Instead it is better to use performance indicators that
look focuses on the future performance.
The Balance Scorecard (BSC) theory provides four perspectives. In contrast to
traditional, financially based measurement systems, the BSC focuses on an
organization’s development by setting objectives and measuring performance from four
different perspectives. 139 Together, these four perspectives shall provide a balanced
view of the present and future performance of an organization.
Figure 3.4 To translate vision and strategy: four perspectives
Financial
Perspective
Customer
Perspective
Vision &
strategy
Internal
Perspective
Innovation &
Development
Source: Based on Kaplan & Norton, (1992)140
135
Zeleny, (1997): Autopsies and self-sustainability in economic systems, Human Systems Management, article no. 6.
ibid
137
Kaplan & Norton, (1996), in Epstein & Manzoni (1997): Translating strategy into action, Management Accounting, article no.
27, p. 116.
138
Olve, Roy, & Wetter, (1997): Balanced Scorecard i svensk praktik.
139
Kaplan & Norton, (1996): Using the Balanced Scorecard as a Strategic Management system, Harvard Business Review, article
no. 26.
140
Kaplan &Norton, (1992): Balanced Scorecard- Measures that drive performance, Harvard Business Review, article no. 24
136
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


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The Innovation and Development Perspective focuses on the organization’s people
and infrastructure. Adequate investments in these areas are critical to long term
success. The development of a true learning organization supports development of
the internal perspective.
The Internal Perspective focuses on the performance of the internal processes,
which drive the business. Improvement in internal processes is a key indicator of
financial success in the future. However, in order to translate superior processes into
financial success, organizations must first please their customers.
The Customer Perspective considers the organization through the eyes of a
customer, so that the organization retains a careful focus on customer needs and
satisfaction.
The Financial Perspective measures the results that the organization produces.
By incorporating the structure of the Balanced Scorecard I hope to achieve a synergy
effect regarding the casual connection of measurements, i.e. the casual connection
between investments in certifications and the financial result. By measuring competence
I hope to prove that it is possible to calculate what kind of investments are needed to
reach an equilibrium point of invested capital and the utility from these investments.
Figure 3.5 Casual connection of measurements
Innovation &
development
Personnel’s
Competence
Internal
Customer
Financial
Processquality
On-time
delivery
Customer
loyalty
ROCE
Processcycletime
Source: Based on Kaplan & Norton, (1996)141
This figure shows an example of how the different measurements influence each other.
Assume that return on capital employed (ROCE) has increased. This increase is the
result of many actions and decisions within the company. In this example, the increase
is a result of sales increase to existing customers due to an increased loyalty from these
customers. The increased loyalty is a result of on-time delivery. This improvement in
delivery was based on a decrease in production time with remaining product quality.
This is a result of extensive education of the personnel, which has increased the
production knowledge.
A Human Resource perspective is not originally included in the Balanced Scorecard.
Instead it is included in the innovation and development perspective. Though even
Kaplan & Norton have started to talk about the need for a Human Resource perspective
within their model. “The traditional financial measures worked well for the industrial
area, but they are out of step with the skills and competencies companies are trying to
measure today”142. Skandia143 has changed the BSC model to include a human resource
141
Kaplan & Norton, (1996), in Epstein & Manzoni (1997): Translating strategy into action, Management Accounting, article no.
27, p. 30-31 ff.
142
Kaplan &Norton, (1992): Balanced Scorecard- Measures that drive performance, Harvard Business Review, article no. 24
143
Skandia (1997): Annual Report.
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perspective in order to motivate employees to learn more, to think in new ways. They
also tries to incorporate this knowledge capital in the structural capital in order keep this
knowledge within the company when somebody leaves the company.144 According to a
bachelor report from 1996145, Skandia has had problems describing their competence
capital in relevant measures since the existing measurements do not express the real
competence needed to solve the complex tasks deriving in the daily work. This implies
that measuring competence is a very complex and difficult thing to do.
3.4.1 Related theories
When applying management theories in the reality, it is often difficult to receive a
useable result without handling the measurement problem. Management theories try to
identify and explain the formula behind corporate success and various names are used
for the same phenomena146. Here I present five theories that deal with the same
phenomena and can be viewed as alternative or complimentary theories to the Balanced
Scorecard theory. I have not used these, except for influence diagrams but since they are
closely related to the Balanced Scorecard concept I think they should be presented here.
3.4.1.1 Skandia Navigator
The Skandia Navigator incorporates measures in several dimensions and is used as a
model to improve the business development and to ensure that management’s actions
and behaviors are consistent with renewal and development as well as financial
performance.147
Figure 3.6 Skandia Business Navigator
Source: Skandia’s Annual Report 1996
3.4.1.2 Economic Value Added
EVA is a method of evaluating corporate performance and provides a measure most
directly linked to return on capital employed. In simple terms, EVA equals operating
profit minus the cost of capital. Part of the arithmetic of EVA includes adjusting the
balance sheet. Adjustments may include adding back research and development costs
and appropriate parts of marketing expenditure as well.
144
Engberg & Hägglund. (1996): Mot förändrad styrning, (essay).
ibid
146
Chandler, (1962): Strategy and Structure.
147
Dawis & O Donell, (1997): Modeling complex problems, Management Accounting, article no. 2.
145
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3.4.1.3 Inclusive Valuation Methodology
The Inclusive Value Methodology brings together information and monetary value by
blending aspects of measurement theory and combinatorial mathematics148. In outline it
has two levels of valuation that combine financial measures and intangible measures.
The first level involves applying attributes of value to the various intangibles in a
business. The second level of valuation deals with combining monetary and intangible
values into a coherent framework.
3.4.1.4 Justifying Knowledge Management
A pragmatic approach to justifying investment in knowledge management comes from
the analysis of various cases by Carla O’Dell 149 of the American Productivity and
Quality center. She asserts that there are three key questions for an organization to ask
itself: What knowledge do we have that is valuable? If we were to use it in a different
way, how would it add value to the organization? And, can I articulate the value
proposition?
3.4.1.5 Influence diagrams
An influence diagram shows how one factor influences another. An arrow shows the
direction of influence and indicates whether the influence works positively or
negatively. Sometimes there is a delay before the influence is felt. In this diagram, an
increase in workforce training leads to an immediate increase in costs but via a delayed
increase in morale and reduction in staff turnover, a delayed reduction in costs. I have
been influenced by this theory when mapping the links between activities, performance
drivers, and objectives. If the links are complex it is often worth while to create a
computer model of the map or if there are delays in feedback loops. 150 I have then
created a computer model, since my relations are somewhat complex. Running a
computer model will often lead to new insights. Sometimes you can measure the driver
itself, but often this is not possible and one or two proxies can be measured instead.
Careful examination of the influence diagram will indicate what should be measured to
give an ambiguous message about these drivers.
Figure 3.7 Example of influence diagram151
Recruitment
Cost
Indicates
delay
Training
Staff turnover
Moral
Source: Dawis & O Donell, (1997), article no. 2.
148
Dawis & O Donell, (1997): Modeling complex problems, Management Accounting, article no. 2.
ibid
150
ibid
151
Dawis & O Donell, (1997): Modeling complex problems, Management Accounting, article no. 2.
149
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3.5
Measuring Competence
Measurement is a critical component of any management system, and there are three
main reasons why managers want to embark on measuring their intangible and
knowledge assets:152
1.
It provides a basis for company valuation
2.
It stimulates management focus on what’s important.
3.
It justifies investing in knowledge management activities.
Perhaps is the trickiest issue that of identifying the right measures, measures that not
only have relevance within the firm, but also provide some yardstick for comparability
with the world outside. Very important is that whatever measures are chosen, they must
be put into a proper measurement system.153
Qualifications such as knowledge, product knowledge, and social competence are
difficult to measure, some believes it is not possible to measure in quantitative
measures154. There are several difficulties, first, the possibility to include all
qualifications and conditions when mapping the competence is almost non-existent.
Second, is a great risk that the measuring process will be so complex that one never
attempts to measure competence again. Third, employees can use different
qualifications and conditions within their competence to solve problems and tasks it is
therefore important that the measuring process is limited to measuring the ability to
solve existing tasks and not include the formal qualifications for solving these tasks.
When measuring education and training there is a difference between focusing on a cost
strategy and focusing on a customer- and product strategy.155 The measurements within
the cost strategy measure the effectiveness of the education, and the measurements for
customer- and product strategies measures education and development of human
resources. I intend to focus on the effectiveness of education and training and its impact
on the financial result and the customer value. This implies that I have chosen a cost
strategy for my measurement system when conducting this study.
I will try to use monetary measures on estimated values since it is a relatively easy way
to present quantitative measures. Some researchers believes it is important to
distinguish between costs and income (cost savings) that involve the actual payments,
i.e. there is a possibility that they never actually be paid or received in cash.156 For
example, the payment for a training course represents an actual payment, whereas the
saving in working hours which is the aim of the course will not actually generate
money. Instead it will reduce the number of employees or increase the sales of the
goods or services produced. This implies that money only can be used when it
represents real amounts and qualities.157 This criticizes my choice of money as
measurement but when working with quantitative measurements a reduction of
parameters to a common measure is needed.158 If I did not have money for comparing
different inputs and outputs, how will I know that my solution has made an impact?
152
Ibid.
Amidon & Skryme, (1998): New Measures of success, Journal of Business Strategy, article no. 7.
154
Anttila, (1997): Kompetensförsörjning – företagets viktigaste process.
155
Bredberg & Kusofsky, (1997): Med nya mått mätt, (essay).
156
Casio, (1991): Costing human resources.
157
Neil, (1997): Managing with systems thinking, Journal of market research society, article no 5.
158
Neil, (1997): Managing with systems thinking, Journal of market research society, article no 5.
153
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It is important to include measures from all perspectives since capital is the reproducible
that can become a viable input for the next production cycle. Capital is a
multidimensional concept, including different and complimentary components of
capitals. This capital portfolio consists of at least four components159: natural resources,
man-produced assets, human knowledge, and social organization. I have tried to
incorporate this multidimensional aspect by making the capital of each perspective a
vital input into the next perspective.
3.5.1
Calculating Competence
By defining proficiency in terms of training, an index of proficiency development may
be constructed160.
Competence Development = Competence on those recruited
Competence of those leaving
This formula balances training and occupational proficiency, in terms of a scale
appropriate to the organization. If the index is larger than 1, it implies the proficiency in
the organization is increasing, while a result less than 1 indicates that proficiency is
declining. An index of this kind has to be taken for what it is, an extremely superficial
measure of reality.161 Nevertheless, there may be something to learn from comparisons
between various years and various units. If nothing else, proficiency development will
no doubt be discussed if, for example, it should fall from 1.2 to 0.5 from one year to
another. Have high-school qualified engineers replaced all graduate engineers? Is this a
good or a bad thing?
If an objective measurement can be made of work performance, for example in quantity
produced, this calculation be done. In my case and I believe is equivalent with many
other cases in many other cases no this kind of objective measurement cannot be made
due to the non-existence of data regarding the existing competence level within the area
of certifications. Instead, one must often use the subjective assessments of, for example,
based on managers’ estimations. In this case performance figures must be corrected for
the lack of reliability in the assessments. How much should then the performance
measure be corrected, a role of thumb is 0.6162. I have done this through an algorithm
calculating the on the possibility of different outcomes.
Other calculations are formulas to calculate the break-even point of profitability for a
particular competence development activity. This method can be used for assessing both
the affect of training and also the life of this effect. This is also not possible in my case
since I have not required any data regarding those employees who are not certified.
3.5.2
Cost-benefits of training
A cost-benefit model can be used to determine the relative economic returns of
alternative training strategies.163 In such a model the costs for training are classified
either as fixed or variable. Fixed costs are costs that do not vary with numbers of
159
Ibid. p. 23.
Anttila, (1997): Kompetensförsörjning – företagets viktigaste process.
161
ibid.
162
Gröjer & Johansson, (1996): Human Resource Costing and Accounting, p. 34-35.
163
Casio, (1991), Costing human resources.
160
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trainees, training time, or training program development. Variable costs are costs that
change as the number of trainees, training time, and training program development vary.
For example, if regular production equipment (which is a fixed cost for production) is
used for training, the losses in production are considered a variable cost. The alternative
to certification programs is unstructured training i.e. on the job training. Many164 have
present models for calculating the cost of competence development which all includes
the following parameters165:
Participants’ time
Instructor/teacher time
Cost of premises
Cost of materials
Course fees
Cost for travel, board and lodging
Administrative costs
Production can be valued as the cost of labor, the higher the efficiency of the
employees, the fewer employees will be needed and vice versa. The cost of labor may
be valued at wages plus the employer’s contribution, together with other costs
associated with the job.166 Also, in order to evaluate a competent production worker, the
competencies required in each situation must be specified. The sum of the required
competencies in each situation determines the total evaluation.167
Each variable under training costs and training returns should be quantified.168 For those
that are expressed in non-monetary indexes (for example time), monetary equivalents
should be calculated whenever possible. The financial impact of employee attitudes also
can be estimated. These figures then can be used for the analyses and evaluation stage.
The general approach to cost-benefit comparison of alternative training strategies is to
analyze the training variables, to convert them to monetary equivalents, and then to
compare costs. If desired, individual variables such as “time taken to reach
competency” also can be compared and reported as separate indexes of effectiveness.
3.5.3
Measurement banks
A measurement bank is a collection of measurements that can be used for saving
measures.169 One of the advantages of using measurement banks is the possibility for
benchmarking between other organizations and within the organization. My model will
be able to use as a measurement bank. Though it is not included in this thesis, my
measures are incorporated form different models and based on figures provided in IDC
reports. The measures can be used in a measurement bank, and if the model will be in
use over time applied on different organizations a measurement bank will be
established.
164
Casio, (1991): Carnevale & Schultz (1990), Johanson & Johrén (1993), and Paul (1994).
Gröjer & Johansson, (1996): Human Resource Costing and Accounting, p. 34-35.
Casio, (1991): Costing human resources.
167
ibid.
168
ibid.
169
Bredberg & Kusofsky, (1997): Med nya mått mätt, (essay), p. 17.
165
166
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3.5.4
The allocation of expenditure on training – time perspective
How long is the economic life of the expenditure? Some of the internal courses run by
enterprises probably have a short-term life (less that three years). However determining
what is a short-term and long-term training appears to be a very intricate process. The
easiest approach is to assume that all courses either have an economic life of less than
three years or more than three years. In the former case, all courses are charged to
expenses and in the latter case all training expenses are set up as assets. Although it is
possible to adopt any approach that falls between these two forms, they will make the
accounting far more complicated.
The problem associated with investing in training is that most courses are carried out
during the “wrong” phase of the business cycle, i.e. during business booms, when the
enterprise “can afford them”, but when the cost of labor is high at that time170. Setting
up the cost of training as an asset reduces this problem. For this reason, I have chosen
an economic life of three years.
3.5.5
The Balloon model
Here is an example of Balloon model171, applied on an investment in training. The
balloon model is used in my model, within each perspective, in order to calculate costs
and benefits. One of the big advantages within the balloon model is that is relates
measurements, such as the influence diagram presented under 3.5.2.4. Another
advantage is that it incorporates the possibility to quantify different aspects that usually
are presented in qualitative explanations. There is of course a risk with this, i.e. that the
measures become unreal and unusable for comparisons.
1.
2.
3.
1.
2.
3.
4.
5.
4.
1.
2.
3.
4.
170
171
Formulating the problem
Investment in certifications or not.
Alternatives
Carry on as usual or alternative investing in another training/education solution.
Consequences
Resources are required to run the course.
The employees completing the certification program will be more attractive for
other companies.
More efficient staff, an increase in productivity due to improved applicable
knowledge.
Improved quality –A positive effect on quality.
New working routines – Another positive affect put forward was that this course
also resulted in new working routines.
Quantifying
The cost of teachers/consultants and the value of the participants’ working time, i.e.
loss of production SEK 36,000. An estimated cost for certifying one person is $3
728 inclusive education, tests, time-loss, and a wage increase of 11,7%.
A wage increase is perhaps necessary. 11,7%.
With a view to quantifying the positive effects the training course had and on the
production operation. They gave us the following description.
More efficient personnel. Support costs decreased with $285 per month and the
monthly cost for server shutdowns where $866 less per month.
Quality is measured as less server downtime (hours).
Gröjer & Johansson, (1996): Human Resource Costing and Accounting.
Enestam, Johanson, and Nilsson, (1995): Sätt pris på förändringen.
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5. New working routines.
5. Valuation
1. Freed time. As before, a value is placed on this factor in terms of wages and
employer’s contributions.
2. 0,5% yield improvement. There had been an intensive process of quality
improvement
3. Less production stops, due to less downtime.
6. Summary
Since the training has a life more than a year it is useful to consider it an investment.
The question is what is the life of this investment. To arrive at that figure a value
must be placed on two factors: How long will the employees involved bee likely to
stay? The investment was after all made in them. For how long can the technology
in question be used?
7. Sensitive analysis
Levels for the evaluation:172
1. The participant’s reactions to the training
2. The knowledge the individual gained from the training program.
3. The behavioral change in the job as a consequence of the training.
4. The result at the level of the organization in the form of, for example lower costs
higher productivity or improved quality.
In my model are stages three to six are most vital. I have tried to identify consequences
of certifications, within the four perspectives of the Balanced Scorecard. These have
then been quantified into monetary measures and then simulated in order to carry out a
valuation of the consequences. These consequences include the tasks that need to be
executed for a certified employee, i.e. his or her competence.
3.6 Utility – Expected Monetary Value
In order to create a useful model for analyses I have studied some different methods.
When choosing among different alternatives there are several methods that can be used
for evaluating different alternatives and making a decision. Each method has its
advantages and disadvantages. The Expected Monetary Value (EMV) method calculates
the expected value of each decision using ordinary statistical mathematics.173 EMV is
the most commonly used method due to its mathematical simplicity. It is also the
objectively best method to use. The EMV however does not take into account the cost
of risk. The cost of risk is often a subjective cost and is dependent on the personality of
the decision-maker.
Almost every decision model uses a decision flow diagram to illustrate the problem. 174
A decision flow diagram has three general components; decisions (), events () and
branches (). An often used example is the option of either (a) getting SEK 1,000,000
or (b) be a part of a lottery in which there are 10% chance of SEK 5,000,000, 89%
chance of SEK 1,000,000 and 1% chance of getting SEK 0. This could be illustrated in
the following decision flow diagram:
172
173
174
Carnevale & Schultz (1990): Return on Investment: Accounting for Training.
Raiffa, (1970): Decision analysis p. 70.
Ibid. p. 10.
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Figure 3.8 Decision flow diagram
SEK 1,000,000
(a)
10 %
(b)
89 %
SEK 5,000,000
SEK 1,000,000
1%
SEK 0
Source: own
The decision-tree expands exponentially with the number of decisions or events. If we
were given the above choice two times instead of one there would be 4 2 =16 instead of
4 possible combinations. With 5 times there would be 45=1024 possible combinations
which would be very time consuming to draw.
Several empirical studies have shown that most people prefer alternative (a), in the
above example even though the expected value is higher in alternative (b). In extreme
cases the EMV could chose an alternative which is very likely to lead to bankruptcy and
has a very small chance of giving a an enormous profit.
The value of alternative (a): SEK 1,000,000.
The value of alternative (b): 5,000,000*0.1+1,000,000*0.89+0*0.1=SEK 1,390,000
The EMV of alternative (b) is higher than (a) and should be chosen.
An alternative method is the Certainty Monetary Equivalent (CME)175 method that has
evolved from the EMV-method. Instead of calculating the statistical monetary value, the
decision-maker subjectively decides what accepted minimum value is instead of
gambling. The CME is sometimes calculated using the slight digression formula:
CME=EMV-X* standard deviation. (X) stands for the decision-makers risk-aversion.
The higher (X) the higher risk-aversion and cost of risk. The CME method takes the
cost of risk into account but is more time consuming and the result depends greatly on
the decision-maker’s personality. Based on this I have used the EMV method prior to
the CME method in order to calculate the risk.
Since the model includes factors based on assumptions a more detailed analyze than one
based on the mean values (EMV) is suitable for analyzing relationships. Instead a model
that provides an overview over the risk of the whether or not the investments are
negative or positive and in which interval between these the investments are, is
preferred. In order to incorporate these aspects into my model I have included a risk
analyze based on EMV.
3.6.1
Risk analysis
Utility calculations have one disadvantage; they do not account for the cost of risk. The
cost of risk is a subjective measurement since different decision-maker is more or less
175
Raiffa, (1970): Decision analysis, p. .52.
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risk aversive176. For a decision-maker that is totally indifferent to risk the cost equals
zero. Very few people are totally indifferent to risk and are often willing to pay money
to avoid risk. A typical example are insurance companies who take others risk for a fee
that is larger than the expected negative utility. In a strict utility calculation it is never
justified to invest in insurance unless the insurance company has calculated the risk
wrong. Risk analysis is used to determine the probability and outcome of an unfortunate
choice in order to insure that the company may survive even if things are incorrectly
estimated.
3.7
Aspects of simulations
When there are assumed correlations between different measurements the effects
between different actions can be simulated. These correlations could be proven in
previous experiences or be presumptions that one build the actions on. I have chosen the
later of these two. With in the Balanced Scorecard theories it is interesting to balance
the different measurements to se how they affect each other.177 For example how
customer satisfaction and profitability can be combined in order to find a foundation of
how to identify optimal combinations of the different perspectives.
When working with simulation, a system that can store information is preferable. This
because of improvement of the correctness of the simulations, when there is a
possibility to store new facts, there is a higher possibility that the simulation will be
more accurate, compared with the actual result. A simulation is only as good as the
assumptions used in the model178. A formula in a simulation may assume it will take
three months to train workers, when actually it may take six months, then there is a need
for saving new information.
We have used Microsoft Excel for our simulations. When developing a more complex
application including future prognoses or trends, or for statistical prognosis techniques
like OLAP (On Line Analytical Processing) can be used. 179 This technique makes the
data available in a multidimensional format that looks like a regular Excel sheet but
with more than two dimensions. These applications can then be used for statistical
prognoses that show trends over a longer period of time.
3.8 Software
There are four general types of software applicable to evaluating the value of an
investment in human capital, each with its own strengths and weaknesses.

Spreadsheet
The most commonly used tool for economic models are the spreadsheet programs
like Microsoft Excel and Lotus 1-2-3180. In a spreadsheet program the user can store
variables and functions in two-dimensional grids (spreadsheets). These are usable
for structuring models with many connections between the variables. Within the
software the user also has a wide array of built-in statistical and mathematical
functions that easily can be applied to various data. The software also includes
functionality for reusing functions with new underlying data. Simulating different
176
Aczel, (1993): Complete business statistics.
Olve et al, (1997): Balanced Scorecard i svensk praktik, p. 216.
178
Henricks, (1997): Dress Rehersal, Entrepreneur Magazine, article no. 1
179
Olve et al, (1997): Balanced Scorecard i svensk praktik, p. 190.
180
Thomsen (1998): It’s an Uncertain World, Intelligent enterprise (Volume 1 Issue 3).
177
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values can also be done manually by changing the underlying data or functions. The
effects of the changes are displayed immediately which is good for fast analyzes of
the dependencies between the data. The drawback is that it is hard to calculate
complex problems with many possible outcomes with different probability.181

Decision support software
Decision support or decision analysis software is basically a program that supports
the user to construct and analyze decision trees. This is applicable on in dept
analysis of a single problem. It can also be used for simulating problems that are to
complex to calculate. But it lacks the spreadsheet’s capabilities to easily build up
dependencies between different data. It also more complex to reuse in similar
situations with different underlying data.

Accounting software
Accounting software generally only store physical transactions and values. Internal
accounting systems can be used to track the costs and treat them as an investment.
But in the case of certifications which are only valuable the first three years and
hence according to general accounting practice should be written of as costs and
there for not usable. Accounting software is good for handling historical data, which
can be used as input in analyzing software applications.

Data warehouse and data mining
A data warehouse is generally an extensive large database consistent of summarized
and specially adapted data from several other databases. The main advantage with
data warehouse is that it brings all essential data to a single place that can be
accessed with the use of a single application. This enables the analyzer to find
connections between department using different working environments.182 The data
analyze is regularly done using some kind of data mining software. Data-mining
software is a program that can visualize the information within the database in
different ways (spreadsheets, two or three dimensional graphs etc).183 Advanced
applications can also store and manipulate data locally. This gives the analyzer the
opportunity to simulate and use forecasting mechanisms. Since the model is more or
less directly connected to the data the model can be reused easily for different time
periods.
3.8.1 Comparison
All applications besides accounting software are built for in dept analyzes, what as parts
them is the handling of information. Data mining software is good for handling
historically based data. Decision support software is preferable for analyzing possible
future outcomes, while spreadsheets are somewhere in between. Considering the time
and cost the spreadsheet is probably the fastest and cheapest software to develop a
model in. Spreadsheet programs are today a standard in office computers and most
decision-makers know how to handle the basic functions. Decision support software is
not so common but can probably be used by most mathematically educated decisionmakers. Data mining requires a data warehouse, which is costly to develop. The data
mining software also requires a lot of statistical and database knowledge from the
user.184
Thomsen (1998): It’s an Uncertain World, Intelligent enterprise (Volume 1 Issue 3).
Flanagan & Safdie(1998): Building a Decision Support Architecture for Data Warehousing, www.techguide.com.
183
Brooks, (1997): Sophisticated Graphic Visualization and Development Tools Tailored for Business Applications, Visual DBMS
and Internet Systems (August).
184
Buede, (1998): Decision Analysis Software Survey: Aiding Insight IV, OR/MS Today.
181
182
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4
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The model
Figure 4.1. The model and the perspectives within the model
Certification investments - utility
Internal processes
Innovation &Development
•
•
•
•
•
•
•
Improved
functionality
Access to preview
information and
beta-releases from
program vendors
Customer
Less server downtime
Increased productivity
Less support
New Routines
•
•
Financial
Increased quality
Vendor’s Logotype
increases the value of
the service
Cost of certification:
• Participants’ time
• Course fee incl.
travel, material etc.
• Administrative costs
• Salary increase
More attractive
personnel
New functions help the internal
processes
Well functioning internal
processes
A good internal workingenvironment increases the
drive to develop
More efficient internal
processes reduces
financial costs
Satisfied
customers returns
- increased sales
Good financials gives more flexibility to
develop and educate
Better prepared for future upgrades
Source: own
My model incorporates the balloon model (c.f. section 3.5.5), in each perspective of the
balanced scorecard. The measures above the positive side are positive and the measures
underneath are negative. By using two predefined models, I hope to incorporate a
correlation between the calculations in the different perspectives. The balloon model
consists of a positive and a negative side, and the outcome between these is the financial
utility. The result will be a model that evaluates IT-certifications in a
company/department.
There are four perspectives in this model, which can also be found in the balanced
scorecard model.
1.
The Innovation and development perspective
2.
The Internal processes perspective
3.
The customer perspective
4.
The financial perspective
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The four perspectives are connected through relations between the different
perspectives. These influences are illustrated with arrows underneath and can also be
find in the following text. In order to successfully incorporate these relationships I have
added a time dimension to every perspective. For instance, the outcome of the internal
process perspective during one period could be a significant input variable in the
calculation of the customer perspective during a later period. The time perspective is
three years, presented in six-month periods.
4.1 Critique against the construction of the model
By incorporating predefined models I will also be delimited by these models. If I would
have constructed the model without basing it on any predefined models I believe I
would have lost more than I have gained by incorporating these structures. Also it
would be an essay of its own just building the structure and defining boundaries and
then I would be delimited by those boundaries.
I would also here once again like to point out that this model is constructed above the
individual level. I am aware of that the people becoming certified influences the result
and I do not think that this aspect is of no importance though it is very hard to include
such an aspect with the delimitations and purpose I have set for this study.
4.1.1 Software tool
It was a rather difficult decision to choose software tool since the model is based on a
(in computer terms) rather small amount of uncertain data. For uncertain data a decision
support program would be best. But the model also includes connections between the
data applied on six different cases and since spreadsheet applications is well suited for
correlations between data and recycling a combination of these both was chosen. The
model is developed in the spreadsheet program Excel. In order to handle the uncertainty
a decision-tree simulation engine in Visual Basic for Applications was build.
4.2
Innovation and development perspective
The innovation and development perspective is the most difficult perspective to
quantify since the perspective has long time goals that often are undetermined and
changing. In my effort to quantify these I have identified three possible outcomes that
are quantifiable. Two are positive i.e. generates an income and one is negative generates
a cost.
1.
New functionality and/or services within the IT-architecture
A certified employee can develop new functions and services, based on the competence
acquired during the certification process. These new functions or services can be in
areas such as; installation, configuration, integration/interoperability, monitoring and
optimization, troubleshooting, Internet/Intranet activities, Running applications,
hardware installation, and maintenance. If the certification incorporates new
technologies, I have estimated this possibility to 1%. If the company already has
certified personnel within this area, the estimated possibility is 0.5 %.

Estimated cost for new functionality/solution
SEK 200,000

Estimated profit from new functionality/solution
SEK 300,000
2.
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Access to preview information and beta-releases from program vendors
Stockholm School of Business
Adviser: Johan Adolphson
A deductive experimental study - Emma Lind
Increase in effective implementation of new products, technologies, and/or solutions. A
certification includes benefits such as access to preview information, beta versions, and
developer conferences, communities, and seminars. Access to information in advance
decreases the cost of future updates and upgrades, due to that future products and
features that can be incorporated or prepared and planned for in advance. This
information also facilities the daily maintenance when installing and configuring the
system.

Estimated value for network technicians: SEK 1,000/year

Estimated value for consultants: SEK 10,000/year
3.
Increased personnel turnover
A certified employee will become more attractive on the labor market, which increases
the risk of personnel turnover, estimated to 5% increase pro year. In order to quantify
these costs I have done a subordinate calculation which focuses on the recruitment and
acclimatization costs.
Figure 4.2 Personnel turnover costs – costs of more attractive personnel
Discussing about job requirements
10 hours
SEK 200
SEK 2,000
Trade union contacts
1 hour
SEK 200
SEK 200
Advertising
SEK 15,000
Interviews, references, selection
10 hours
SEK 200
SEK 2,000
Internal administration
4 hours
SEK 200
SEK 800
Company health care
2 hours
SEK 300
SEK 600
Job equipment
SEK 1,500
Introduction
16 hours
SEK 200
SEK 3,200
Acclimatization
40 hours
SEK 200
SEK 8,000
Loss of production
56 hours
SEK 200
SEK 11,200
Loss of quality (10% of effective
working hours/year for one year)
Total
150 hours
SEK 200
SEK 30,000
SEK 74,500
Source: Based on Gröjer & Johanson, (1996)
4.2.1 Influences from other perspectives
 Internal processes perspective: A satisfying internal working environment
increases the drive to develop. (5%)
 Financial perspective: Stable finances leads to more flexibility to develop and
educate. (10%)
4.3 Internal processes perspective
Within the internal processes perspective have I focused on the following five
possible changes.
1. Increases system up-time - Less server downtime
A more competent staff decreases the amount of faults and errors during
construction and configuration of the IT-architecture. The ability to find and
Master Thesis, 1998-1999
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Emma Lind – How to measure the unmeasurble
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eliminate errors is also increased. Studies185 have showed that the server downtime
usually is lower when certified personnel administrate the servers.
 Decrease in server downtime186: 0.3h/per incident
 Average amount of incidents per month187: 2
 Downtime cost188: SEK 1,500/h
 Decrease in monthly cost for server downtime (per month): SEK 6,950
2. Less support
The competence evolved from a certification program incorporates knowledge about
configurations, which leads to a decrease in configuration errors. This reduces the
support time, support costs, and support personnel.
 Decrease in support cost for pro-certification companies189: SEK 2,300/month
 Increase in handled support calls per certified IS-employee190: 40%
 Each IS-employee supports approximately 50 PCs191.
 Each IS-employee supports approximately 4 servers192.
3. New working routines - more efficient solutions- increased productivity
A certification program increases the competence of how to eliminate unnecessary
steps during a computer- or server configuration, which result in new and/or more
efficient working routines. Increased specialized knowledge decreases the time
spent on reading manuals and/or consulting colleges for advice. This increases the
overall productivity due to more time spent on work related tasks.
 Estimated saving: 5 min/day
4.3.1 Influences from other perspectives
 Innovation and development perspective: New functionality supports the
internal processes. (10%)
4.4 Customer perspective
1. Improved quality
A higher level of system up time and fewer mistakes in the configuration and
maintenance processes result in an overall improved system quality. Improved
quality increases the customer satisfaction and the customers are more satisfied with
the solutions.
 Estimated value for consultants: Increased charged fee with SEK 10 per hour.
 Estimated value for network technicians: Increased value corresponds to 5% of
salary.
2. Vendor logotype increases the value of the service
When certified employees develop different solutions there is usually a possibility to
use the logotype of the product vendor, which increases the value of the service
IDC Report (1998): Opportunity knocks…
ibid.
187
ibid.
188
IDC Report (1995): Benefits and Producing Gains …
189
ibid.
190
IDC Report (1995): Benefits and Producing Gains …
191
ibid.
192
IDC Report (1998): Opportunity knocks…
185
186
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Stockholm School of Business
Adviser: Johan Adolphson
A deductive experimental study - Emma Lind
carried out to the customer. The ability to use the Software vendors’ logotype on
developed services, business cards, homepage, and other official presentation and
marketing material increases the perceived customer value. Also, a certified
consultant mean higher quality to the customer, which leads to that a higher fee, can
be charged.
 Estimated value for network technicians: SEK 0/year
 Estimated value for consultants: SEK 1,000/year
4.4.1 Influences from other perspectives
 Internal processes perspective: Well functioning internal processes leads to
fewer errors. (10%)
4.5 Financial perspective
I have divided the financial costs of a certification into three parts:
1. Direct cost for course fees, test fees and study material.
2. Direct salary cost for the wage-increase that usually follows after a certification.
3. The third part consists three the indirect costs; lost work time, travel expenses
and administrative costs.
Figure 4.3 Financial costs
Financial Costs
Direct costs
C1 Training, testing
and study
materials
N Additional salary
Indirect costs
N Lost work time
C1 Travel expenses
C2 Administrative
costs
Total costs
1
SEK 278,967
SEK 63,840
SEK 112,000
SEK 18,209
SEK 6,415
2
-
3
-
4
-
5
-
6
-
SEK 63,840 SEK 63,840 SEK 63,840 SEK 63,840 SEK 63,840
-
-
-
-
-
SEK 479,431 SEK 63,840 SEK 63,840 SEK 63,840 SEK 63,840 SEK 63,840
Source: own
The comments C1, C2, and N reefers to the calculation assumptions, presented
under section 4.6.5.
 Travel expenses: SEK 1,000
 Course fee193: SEK 14,000
 The test fee194: SEK 1,100
 Average numbers of tests before passing195: 1.2
4.5.1 Influences from other perspectives
 Innovation and development: Better prepared for future upgrades. (10%)
 Internal processes perspective: More efficient internal processes reduce the financial
costs. (10%)
 Customer perspective: Satisfied customers return – increases sales. (20%)
193
194
195
Ingram Micro AB, LeyLock AB, Scribona AB, and NetCenter
Ingram Micro AB, LeyLock AB, Scribona AB, and NetCenter
NetCenter, 99 01 28
Master Thesis, 1998-1999
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Emma Lind – How to measure the unmeasurble
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4.6 Input data
These are the data that I have used for testing the model. It is both company specific
data, assumptions based on reports, and data I have required when interviewing
company A, company B, and Company C.
4.6.1 Company A
Company A is one of the leading providers in the telecom business and they focus on
communications solutions that combine telecom and datacom technologies. Within this
company I have acquired facts and figures from a consulting team, a help desk manager
and a helpdesk group, a union representative, manager for internal training department,
and an IT-manager. The consulting department has about 1,300 employees and a few of
these are certified. Both departments are located in Stockholm.
4.6.2 Company B
Company B is one of the largest European IT services and management consulting
companies and one of the largest in the world. In the Nordic countries, the company has
4,300 employees in some 40 locations, with sales amounting to SEK 3,2 billion in 1997.
The consulting unit work with generalized IT consulting, specialized IT solutions for
business sectors, and expertise in information technology. I have required figures from a
team manager and an education manager.
4.6.3 Company C
Company C is one of the leading computer service companies with more than 6,000
employees in over 50 locations. Their turnaround was 1997, SEK 7, 950 million. The
company includes about 35 sub-units. I have interviewed two different persons from
two different sub-units. Here I have acquired facts and figures from a consulting teammanager and two accounting managers.
Figure 4.4 Table of Input Data
Assumptions
Company A
Company B
Average salary
Salary increase
Network
technician
SEK 20,000
2%
Network Consultants Network
technician
technician
SEK 25,000 SEK 19,000 20,000
2%
8%
8%
-
Travel expenses
SEK 1, 000
SEK 1,000
Admin. costs
course fee
SEK 500
SEK 14, 000
Turnover
Test fee
5%
SEK 1,100
20
# certified
employees
10
Certification areas
(amount)
0,3
Downtime decrease
(hrs))
Downtime cost/hour SEK 1500
2
Downtimes/month
SEK 2300
Support cost
decrease/month
SEK 1, 000
Value of preview
info/yr.
Value of
logotype/yr.
Consultants
SEK 0
SEK 0
SEK 500
SEK 14, 000 SEK 14,000 SEK 14,000
5%
SEK 1,100
0%
0%
SEK 1,000 SEK 1,000
-
Consultants
Company C
Network
technician
25, 000
2%
Consultants
SEK 22,635
6%
SEK 0
SEK 14, 000
0
SEK 100
SEK 14, 000 SEK 14,000
-
5%
SEK 1,100
2%
SEK 1,000
1%
SEK 1,000
20
15/30
3/5
-
125/70
15/420 St
7/50
10
3
4
-
8
4
6
-
-
-
-
-
-
-
-
2%
-
-
-
-
-
-
SEK 10, 000
-
SEK 7,000
-
SEK 15, 000
SEK 1,000
-
SEK 0
-
SEK 10, 000
SEK 22,500
-
SEK 2,000
Source: own
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Stockholm School of Business
Adviser: Johan Adolphson
A deductive experimental study - Emma Lind
4.6.4 General assumptions
For a complete list of assumptions c.f. appendix 2












One dollar equals 8.00 Swedish crowns (SEK).
Accounted interest rate: 8%
Average salary for a network technician196: SEK 20,000/ month
Social welfare ca 33% and employer fee ca 7% = 40%
Recruitment costs: SEK 15,000
The monthly cost of an employee: SEK 29,200
The annual cost of an employee (12x(20,000 + 9,200)) + 15,000 = SEK 365,400
An employee works 1,800 h/year.
Certifications can be written off over a period of tree years.
Payback period for the certifications197:9 months
Total saving for companies pro certifications:198: SEK 110,500/yr. ($13,812)
Cost per hour per employee: SEK 200/h
4.6.4.1 Time assumptions and time perspective
The time perspective is three years dived into six months periods. The percentage tiles
shown below represent the possibility that the event will occur during that six-month
period. For example, 25% that new functionality will be developed during the fist six
month after the certification take place, the second period it is 50%, and the third 15%,
the forth 10% and then we think that the last year this chance is null. % of total utility
from previous period of specific perspective.
Figure 4.5 The measurements distribution over time-periods
1
Innovation & Development
25%
New functionality
50%
Personnel turnover
0%
Internal (influence)
0%
Financial (influence)
2
3
4
5
6
50%
15%
10%
0%
0%
30%
20%
0%
0%
0%
5%
5%
5%
5%
5%
10%
10%
10%
10%
10%
Improved working environment increases the
drive to develop new solutions and functions.
Stable finances increases the flexibility
Internal
New routines
10%
30%
30%
15%
10%
5%
0%
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
0%
0%
0%
0%
0%
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
20%
20%
20%
20%
20%
Innovation and
development
(connection)
Customer
Internal (influence)
Financial
Cost of certification
Innovation &
Development (influence)
Internal (influence)
100%
Customer (influence)
New and improved working routines based on
improved competence such as eliminating
unnecessary steps when configuring the ITsystem.
New innovations and new functionality supports
the internal processes.
Well functioning internal processes means fewer
errors and more satisfied personnel.
Returning customers increases sales
Source: Based on Gröjer & Johansson, (1996)
196
197
198
Interview with Kent Wanberg, HTF, 98 10 08
IDC Report (1995): Benefits and Producing Gains …
IDC Report (1998): Opportunity knocks…
Master Thesis, 1998-1999
Page 49
Emma Lind – How to measure the unmeasurble
17-08-01
4.6.5
Calculation assumptions
I have assumed that the utility from the certifications for a company is reduced when the
number of certification exceeds one certification.
Reduction when the number of certifications exceed one.
n = number of certifications
d = reduction multiplier
f (n, d )  1  d 1  d 2 ...d n1
In the same way as the utility from the certification is reduced is also the costs reduced
when more than one employee attends the certification program. The following costs
are calculated using a reduction multiplier (d) of 0.99 (C1):

Training, testing and study materials

Travel expenses

Less downtime
I have found that the following costs decrease even more with the number of certificates
and they are therefore calculated with a reduction multiplier (d) of 0.95: (C2)

Administrative costs

Less support
There is an overall insecurity regarding risk analysis. This insecurity is regarding the
validity of the model, i.e. how well does the assumptions represent the real value. For
example, the risk for that the result is less than 75% of the estimated value, is 25%. The
risk that the result is higher than 25% above the expected value is 25%. This means that
the risk calculation has a tolerance of 25%. This amount can be simulated in the model,
this is important when doing a risk analyses since some uncertainty of the estimated
values has to be taken into account.
4.7 Risk analysis
Many of the calculations within the perspectives are dependent on certain activities that
may or may not occur. To increase the usefulness of the model we have used the mean
value (see section about statistical theory) to calculate the total effect. This increases the
flexibility and performance within the model. In order to avoid the risk of that the
outcome of the calculations differences from predicted mean value we have developed a
risk analysis model that calculates the possible outcomes.
I have primarily used the Expected Monetary Value (EMV) method when calculating
on expected values. EMV does not take into account the cost of risk (See section3.6.1).
We have therefore developed an algorithm to handle the cost of risk. The algorithm has
three levels of precision and is based on the classic decision flow diagram.
The first level calculates all possible outcomes and the probability of each outcome. For
example, if I have twelve employees that attend a certification program and four of the
courses are new. If I then assume that there is probability of 0.5% that each of the
employees develop new functionality within the system, which result in a revenue of
SEK 1.000.000. This probability is doubled (1%) for the employees that attends a new
course. After a completed certification program there is a risk of 5% that the employee
Page 50
Stockholm School of Business
Adviser: Johan Adolphson
A deductive experimental study - Emma Lind
will leave the company. I have calculated that the average cost of a personnel leave is
SEK 74.500.
If we use the first level in our algorithm to analyze the risk of this example, the program
will then evaluate the 531.441 possible combinations and sort them into the 91 possible
outcomes. Since the problem have so many branches it is not useful to display the
whole decision flow diagram. Instead the result is ordered and divided (or merged) into
100 parts that each have a probability of 1%. These parts can be illustrated in the
following diagram.
Figure 4.6 Risk- diagram, from the model
1 200 000,00 kr
1 000 000,00 kr
800 000,00 kr
600 000,00 kr
400 000,00 kr
200 000,00 kr
0,00 kr
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
-200 000,00 kr
-400 000,00 kr
Source: own
In order to make the diagram interpretable we have excluded the top- and bottom
percentile in order to make the significant values readable. The bottom and top
percentile shows values that greatly differ from the other values. If the top value had
been included, the scale would have to include a value that is more than ten times higher
than the current highest value.
What does this example tell us? It shows that certification is a very unpredictable
investment taken account only two of the innovation and development perspectives
variables. There’s more than 40% probability of losing at least on employee. And the
probability of a new functionality is less than 10%. Taken only these facts it would not
be a good investment unless the company is in great need of new system functionality.
The second level splits the problem into smaller parts and then uses the smaller parts in
a level 1 computation. This is a faster method for handling complex situations with
many billion possible combinations.
The third level uses random values to simulate a number of possible combinations. The
number can be adjusted in the model. A high value leads to a higher precision of the
output data but take a longer time to compute. Due to the fact that only a limited
number of combinations chosen randomly is tested, it is possible to simulate much more
complex problems (for example the above test using 10 new courses and 20 employees
which has more than 205 billion combinations). Using 10, 000 simulations the sample
size is 100 times greater than the presented values, which makes the deviation
insignificant.
Master Thesis, 1998-1999
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Emma Lind – How to measure the unmeasurble
17-08-01
When doing simulations through the whole model we first simulated the possibility for
new solutions and then the turnover. Thereafter all incomes (separately but only the
present value) and salary increase, which is modified by the simulated turnover. At last
the certification costs were added, which is fixed value and therefore not simulated. All
this together makes a rather complicated decision tree with many billion combinations.
Since the incomes are primarily based on assumptions and estimates we have in the
accomplished risk analysis included the fact that I can have over or underestimated the
actual outcome. But instead of making a complete reliability analysis of every single
assumption and adding a probability model to the risk model, we have made a
simplification. The primary reason for doing a simplification was that we had not access
enough computing power to calculate such a complicated structure in reasonable time.
The simplification model divides the outcome in three parts: correct, underestimated
and overestimated outcome. As shown in the below chart.
Figure 4.7 Simplification of the risk analyse
Curve simplification
2,5
2
1,5
Value
1
Simplification
0,5
0
1
11
21
31
41
51
61
71
81
91
-0,5
Source: own
In order to get the right values in the categories we have transformed the input data to
comparable number (i.e. divided them by their mean value). Then the standard deviation
was calculated and run through an inverse of the normal cumulative distribution to get
the value for each probability (1-100%). The above curve is a representation of the
values expressed with an average of 1. Then we took the mean value of the lowest and
highest 25% and used it to simulate under and over estimations. The simplification is
shown in the chart as the “stairway”-curve.
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Stockholm School of Business
Adviser: Johan Adolphson
A deductive experimental study - Emma Lind
5 Findings
Before presenting the findings I would like to point out that the findings within
perspectives of the model are highly integrated. This increases the complexity of
dividing the findings into groups of competence, financial result, and customer value.
Instead the aggregated changes can be more easily observed which leads to an overview
of the relations.
5.1
Output data
Figure 5.1 Table of output data
# Cert.
Assumptions –
Network
technician
Assumptions Consultants
Company A Network
technician
Company A Consultants
Company B –
Consultants
Company C Consultants
End result/
Utility (SEK)
I&D
(SEK)
791 773
Payback
time
(months)
- 491 112
7,2
253 593
803 788
- 679 565
14,2
38 827
- 54 969
1 326 558
566 154
- 1 378 495
15,0
30 617
- 254 481
151 656
124 749
472 762
- 1 003 648
0,0
- 21 207
11 513 435
4 402 095
1 813 937
8 311 382
- 3 013 979
6,3
87 223
337 869
367 840
103 822
315 675
- 449 467
12,3
48 267
20
1 912 067
11 409
20
776 546
398 730
15
459 248
12
132
7
I
(SEK)
1 599 996
C
(SEK)
F
(SEK)
Utility/
certification
95 603
Source: own
5.1.1 Explanation of output data:
 Utility – end result
This shows the present value of the investment, i.e. if there is a return on investment
or not. The utility is aggregated from of the four perspectives. This is used for
simulating how correlations between the perspectives evolve over time.

The perspectives; I &D, I, C and F
The figures within the perspectives show the present value of each perspective.

Payback time
The payback time shows the amount of months before the investment is positive, i.e.
before there is a positive return on investments.

Utility/certification
This is the utility per certification. Shows how profitable each certification is, which
is the same as the present value per certification.
5.2 Findings regarding the original data
 The amount of certifications effects the overall result. It also effects the uncertainty
of the outcome, which in the end influences the reliability of the data. This means
that with a higher amount of certifications the reliability of the outcome will be
higher.
Master Thesis, 1998-1999
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Emma Lind – How to measure the unmeasurble
17-08-01

Much of the output data is based on estimations. For example, Company A has very
low values, which leads to that according to the calculations is there no return on
investments.

Company B, has a positive return on investments. This is due to that they have a
higher number of certifications, and they value preview information and the
vendors’ logotype much higher than the other two companies.

The output data based on my assumptions are significant higher than the output data
from the companies. My assumptions are mainly based on IDC reports. I know that
the results within these reports are based on research, but how this research is done
is to me unknown. They are also mainly based on conditions within USA. The
values of certification can be viewed and valued differently by Swedish firms.
5.2.1 Risk analysis
The risk analysis charts can be found in appendix 5. According to the charts only the
assumptions for network technicians and Company B consultants are without risk (< 1%
probability of a negative return on investment). Company B has a higher amount of
certifications than the other companies, which is shown in the risk analysis through the
rather flat curve. The probability of a negative return on investments for Company A’s
consultants is 90%, which is very high. The rest have a probability of 3-11% of a
negative return on investments, which can be considered as low.
The risk analysis charts are made with a precision of 30, 000 samples, and are simulated
through the whole model. The complexity of these calculations is primary due to the
number of certifications. The risk chart for Company A’s consultants is the least
complex one, (7 certified) and is based on a decision tree with 107,5 billion ends. The
most complex, company B consultants (125 certified) have a decision tree with
1,52 *1081 ends.
5.3 Findings when simulating value changes
C.f. appendix 4, for simulation data
5.3.1 Turnover
The turnover increase is added to the existing turnover, this means that if the turnover
was 5% and is increased with 5%, then the new turnover is 10%. When the personnel
turnover is increased with 5%, the most significant difference is between network
technicians, Company A, and the assumptions for network technicians. This difference
is due to a non-linear relation of server downtime. I.e. due to the lower amount of
certifications that are influenced by the turnover increase compared with the assumption
figures is Company A more vulnerable to a higher level of turnover.
When the turnover is increased with 10%, the difference for assumptions within the
internal perspective will be strongly exaggerated due to a very low original value, i.e.
the value and the percentage difference looks worse than it actually is. A high turnover
increase decreases the total utility by 20% - 40%.
Page 54
Stockholm School of Business
Adviser: Johan Adolphson
A deductive experimental study - Emma Lind
5.3.2 Salary increase
A salary increased of SEK 5,000 mostly effects those companies with a higher level of
salary increase. When salary is increased with 5% after a certification, all companies,
except Company B, will have a negative payback time. This means that all categories,
except Company B consultants and the categories based on assumptions, have a
negative return on investments after such an increase.
5.3.3 Value of logotype
A 10% increase does not make any greater difference to the overall utility, if increased
with 100%, a more distinct difference can be seen. For instance total utility and the
utility per certification for Company B consultants increased with 34%. Company A did
not see any value in the usage of the vendors’ logotype and is therefore not affected by
increases in the value of logotype.
5.3.4 Interest Rate
If the interest rate is increased with 5% the following observations can be made. All
companies except Company A’s consultants are negatively influenced by such an
increase. They are not negatively influenced, since their return on investment is
negative and the value of the loss is therefore decreased if the interest rate is increased.
Payback time is not influence by the interest rate, and is therefore the same independent
on changes of the interest rate. The overall utility decreases for the other firms are
between –8% and -10%.
5.3.5 Level of influence between the perspectives
The increase is 20% in each time-period of six months, since the perspectives influences
each other the total increase is not exactly 20%. The payback time is almost indifferent
due to that the effect on each six-month period is low, which leads to a low aggregated
effect.
5.3.5.1 Innovation & Development Perspective – 20 percent increase
 Company C’s consultants increases their end-result with 26% and the increase
within the perspective was only 20%, this is due to a 6% influence from the internal
perspective. The reason for this not influencing the other categories is that is it
dependent on the relative difference and how high the normal level is.

The overall value is higher for consultants than for technicians, i.e. since the
consultants work more with innovation and development the influence is higher.
5.3.5.2 Internal Perspective - 20 percent increase
 Here is the relation the opposite; i.e. the increase influences the technicians more
than the consultants. Since the technicians work more with the internal processes,
and are influenced more by server-downtime and the support costs which are
included in the internal perspective.

The difference between the companies in utility per certification is rather low in
actual figures (SEK).
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5.3.5.3 Customer Perspective - 20 percent increase
 If the customer values are changed with a 20% increase, the I & D is increases with
18%, this is due to the influence from the financial perspective.

Company B consultants are valued high by their customers if they are certified. This
leads to a greater increase within the customer perspective for Company B
consultants.

Except for company B are all firms equal in increase and there is also no visualized
difference between consultants and network technicians.
5.3.5.4 Financial perspective - 20 percent increase
 If the finical perspective is increased with 20%, the costs are increased with 20%,
expect the indirect personnel turnover costs.

There are positive influences within the finical perspective from the other
perspectives, though this is not more than this 20% increase which leads to an
overall negative end result.

An increase in the financial perspective influences the different categories
indifferently. This difference is dependent on the salary increase level after a
certification, which is increased 20% in each time perspective. I.e. the salary
increase influences the overall utility amount within the financial perspective of the
overall utility.
5.4
Identified relations within the model
5.4.1 Amount of certifications
The amount of certifications affects the calculations differently; the amount also
influences the level of insecurity of the model. This can be seen especially in when
comparing the outcomes of Company A and Company B. When simulating Company
B’s values, the effects are similar and a pattern of correlations between the different
areas can be seen. When simulating Company A’s values, which has a lower amount of
certified employees it is more difficult to find a pattern, the return on investment (the
utility) is also negative.
5.4.2 Turnover
A higher personnel turnover decreases the utility of the certifications. The most
dependent variable regarding how the turnover effects the utility is the salary level.
Company A and Company C has a higher level of salary increase, which leads to a
positive influence on their financial result when the personnel turnover is increased,
since when a person leaves after a certification this increase does not have to be paid.
Another interesting effect when simulating the turnover is that when there is a negative
return on investment, a higher turnover increases the utility.
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5.4.3 Salary and salary increase
Many of the calculations within the model are based on the salary level. This means that
when changing the salary level all calculations including a time factor are influenced. If
the salary increase were fix it would not be influenced by a salary increase.
5.4.4 The working area of the certified employee
It seems to be easier to estimate a value on subjective factors such as the value of
prerelease information for certified consultants then for network technicians. The
difference between consultants and network technicians is based on that the company
has to value the services that the consultant does for the customer. Therefore, it is easier
for them to put a price/value on what is extra value for the customer, compared with if it
is an internal customer.
5.5
Identified relations between competence, financial result, and
customer value
5.5.1 Factors influencing the organizations competence
The organizational competence (Human Capital) is in my case only represented of the
competence derived from certifications. The connection between competence
development i.e. certifications and the financial result can be seen based on two
different factors within the model.
1) A larger investment increases the possibility to find patterns between increased
competence and the financial result since small differences does not affect the
outcome to the same extent. This means that a higher amount of certifications
affects the total utility positively.
2) An increased level of competence due to a certification prepares the organization for
future changing conditions such as upgrades of the IT-infrastructure.
5.5.2 Factors influencing the financial result
1) The salary is the most determining factor of the costs. A high salary or a high salary
increase can eliminate a possible return on the investment.
2) The majority of the companies had a positive payback time, which implies that these
investments have a positive return on investment. Except for Company A
consultants, the found payback time did not differ with more than 50% of the
estimated payback time. This implies that the overall findings are similar with those
presented in the IDC studies.
3) The costs are compared with estimated values of the affects of an investment (for
example the value of logotype) are relatively easy to identify. Therefore there is a
risk that the costs affect the total utility relatively more than the data based on
assumptions.
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5.5.3 Factors influencing the customer value
1) When the customer of the developed competence is clearly defined, as in the case of
consultants, the added customer value has been much easier to estimate and thereby
prove its existence. Since it is the customer that in the end of each moth pays the
employees salaries it is important do define the customer of the tasks solved by that
the certified employee.
2) Proved by the salary increases after a certification, a certified employee is valued
higher than a non-certified. This implies that the companies expect an increase in
perceived customer value of the competence investments, leading to an increase in
sales.
5.6 Factors not included in the model
Investments in education are usually apprehended as something positive among the
personnel, which might increase the working moral. I have not been able to identify
such values, and they are therefore not included in my model. A development in skills
and knowledge can also increase the possibility to feel successful, which also have a
positive effect on the working moral and employee retention. This is though very hard
to measure and therefore is not measured within the model.
5.7 Faults and defects found in the model
1) Rounding off the turnover figures effects the calculations
2) Data was not collected in all intended areas
3) Not enough data to make statistically proved conclusions
5.7.1 How these where handled
1) The effects of the rounded off turnover figures are relatively small and since many
of the figures are more or less based on estimations I do not feel that any actions
have to be made to correct these possible errors. I do feel that pointing out this
possible effect is enough.
2) Since I have not been able to find data in all areas I have based these on
assumptions. The areas afflicted by this are downtime and support costs. In order to
handle this effect I have split up the certifications in two areas, network technician
and consultants. For data regarding the consultants these data does not have an
impact and I can therefore compare results that does not include these assumption
replacements.
3) Due limited amount of data it has not been possibility to statistically prove the
validity and reliability of the data. In order to decrease the risk of that the
assumptions are too indifferent with the reality to make any conclusions I (we) have
done a risk analyze of the data.
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5.8 Critical success factors
 The amount of certifications, the companies with a larger amount of certifications is
relatively few in Sweden, and according to my analysis are those with a higher
amount of certifications are more profitable.

Keeping the certified personnel, it is critical for securing a positive return on
investment to secure a low personnel turnover after certification.

The salary increase has to be kept within a level of a positive return on investment.

If the data is found not valid the findings can not be regarded for testing the
relationships.

For those companies who has certified employees who as consultants, and are put a
price on, for them it has been easier to estimate the value of the certifications then
for those who works internally in maintenance smaller departments.
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6 Analyze
Based on the relationships presented within my model (see figure 4.1), I would here like
to analyze the model’s ability to test the connections between competence development,
the financial result based on the relationships between organization’s competence,
financial result and the customer value. Secondly, the result will be discussed based on
my methodological approach and the study’s theoretical framework and I will also
reflect upon it in the broader context of competence and human capital. Finally, I will
round off this study by introducing, in line with my research question and purpose,
some practical implications of my study regarding the internal validity, external
validity, construct validity and the reliability.
6.1 Findings versus presented methodology and research
Accordingly with my study approach presented under section 2.2, I would like to relate
back to my theoretical framework and the presented theories.
6.1.1 The findings relation with the methodological point of view
According to the system theoretic perspective is an understanding about the whole
achieved by studying the parts. I have build up a system though a very small one (the
model), and thereafter analyzed its parts and the connections between these parts in
order to get a greater understanding about a greater more complicated problem. I have
found some critical success factors that are on a more aggregated level, which I would
not have found if not studying the small factors of the model. Also, in order to get my
system to function I have had to delimit the complexity of the model.
After presenting my findings my, conclusion under chapter two that this model can
function as apart of an MBO system is very much related to my final conclusion. I have
not proved any connections though I have presented a tool for testing connections and
do simulations with them, this all together can be a part of a MBO-system.
6.1.2 How the theories interacts and synthesize with the findings
The patterns I have found support but do not prove the propositions specified by the
theoretical foundation of my study. However, the fact that the founded relationships are
weaker merits further discussion. Based on my definition of competence as the ability to
solve a task I would like to one more time like to point out the importance of defining
these tasks when measuring competence. This is also shown in the difference of the
findings between network technicians and consultants.
Many of the research articles that I have used pointed out a connection between
investments in human capital and the financial result without exemplifying them. Many
of the theories in this area are relatively new and do not present any critique to the
presented methods. This has increased the difficulty to validate their findings in order to
incorporate these into my theoretical framework. In the beginning of this thesis I present
my opinion regarding difficulties with management theory. My previous experience
when working with measuring and management theories that is it very easy to get a
result very far from the reality. Most of my articles do not discuss this difficulty. I do
feel that studying these measurement and management models I feel that my overall
experience from this work is that these are difficult to adjust to a specific case. I also
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believe that this conclusion would have been made even if a strategic implementation
had been made.
The theoretical framework regarding measurement and calculating theories much
discusses the connection between investments in competence development and the
financial result. By incorporating different theories in my theoretical framework for
constructing my model I have established a higher certainty that these connection will
be incorporated in my model. By doing this and based once again on my findings I think
I have shown that the investments in certifications have an impact on the financial
result. Many of the theories are management theories. The usage of these theories has
made the construction of my model possible, even though I have not worked with a
strategic implementation. Instead I have tried to achieve a synergy effect by
incorporating existing models within my model. It can be discussed whether or not I
have succeeded but at least are all measures within my model are related and influenced
when changing the input data of the model.
The balloon model suggests an estimation of the effect of different variables, I have
found that to prove these estimations within the limits of a study such as this is very
difficult. This conclusion is based on the difficulty to verify the validity of the
estimations. In my theoretical framework I have tried to increase the validity by include
theories of risk analyze of the output data. By doing this I also I have increased the
possibility to draw conclusions from my data even though the amount of the collected
data is limited.
First, analyzing the theories regarding the input to my model, knowledge, competence
and human capital. I would like to be able to draw the conclusion that certifications lead
to a higher level of competence which lead to a higher level of human capital which
then would imply that a relation with the financial result is found and that knowledge is
a part of all this. But I am aware of that that is a very drastic conclusion and that maybe
I can not say that I have proved this though I would like to say that I have made a
foundation possible to build on for proving this connection. I have made a step in the
direction at least towards the purpose of this study.
Human capital is a great risk since it always can walk out through the door and can not
work more that ten hours a day. My result and based on the critical success factors
presented in previous chapter I conclude that with a too big part of human capital is the
company very vulnerable. Other kinds of capital have the advantage that it can be used
24 hours a day and used in the right way it can be used to construct an infrastructure in
order to make global business for example as knowledge banks on the Internet.
Is it possible to measure competence? Researchers with the opinion that competence
should not be managed with measures would probably get hiccups by the thought of
simulating these kinds of data. I though believe that simulations is a very useful tool in a
decision process and can be used for decision making together with other kinds of data
and information tools.
I do not argue against that the human factor behind the presented figures is present and
influence the result of a study like this. For example is this shown by the critical success
factors such as turnover and salary. This also a show that people act with rational
behavior, i.e. the possibility to a higher salary is more worth than being loyal to the
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employer. Since each case is so different and influenced by human behavior does it
mean that it can not be measured on an aggregated level?
In my findings is one of the presented success factors regarding the possibility to value
the investment and price factors on employees. I would once again like to bring up the
discussion regarding if it is possible to measure competence. Is it unethical and not
possible to measure these factors due to that there are humans behind the measures and
that these measures are highly influenced if not based on human behavior. A
comparison can be made to the discussion regarding human capital on the balanced
sheet. The questioning and problematic is similar; does the presented measures reflect
the reality and does the measures give the right signals? I think if you keep the measures
on an aggregated level as in this study there is nothing unethical but of course the
measures ability to present the reality can be questioned.
This is a very complicated and difficult discussion. My opinion is obvious clear since I
have tried to put measures on these kinds of things within this study. I wanted to bring
up the problem and make the reader aware of the differences existing within this area.
The importance of studies like this lies in the complimentary part it constitutes to the
traditional theories. These often look backwards and often have difficulties in proving
the values of these of investments in knowledge and competence. These are seen as a
cost on the balance sheet, even though that the increased competence is an investment
that sooner or later can be reimbursed. Competence should be viewed as something that
creates a value in a longer time perspective and can and should also then be measured.
6.2
Critical examination of the result
6.2.1 The reliability of the study
The reliability of the model is primarily dependent on the estimations behind the
calculations. A model is a simplification of reality and is therefore almost never 100%
accurate. In order to ensure a satisfactory level of reliability I have based my
estimations on both secondary data, such as studies and primary data collected from
different companies.
When comparing the data I have found that the result is usually within five percent of
the estimated result. Estimations such as salary increase have been based on the
company policies, which is much easier to accurately estimate. Concluding; it is a
complex and a difficult process to with experiments verify data assumptions. To
increase the reliability a data bank can be created if the user does not rely on the
assumptions. The selection of data for testing the model is relatively small and does not
have can not be used for statistically proven statements.
6.2.2 Validity of assumptions and proposition
In my introduction, I assumed that investments in competence development such as
training imply a higher return on investment. Having performed the analysis I can now
conclude that it is very difficult to find support for the validity of this assumption.
Given the limited scope and sample of my study, I can not rule out the possibility that
my assumption is not valid in the case of investments in certifications. The fact that I
have found supporting data in all three areas, indicates that it is possible to test these
relationships, though not proven, indicates a level of the construct validity that does not
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falsify my theory. By following the recommendations regarding the validity and quality
of the measurements I argue that the construct validity is at least minimum acceptable.
6.2.3 Internal Validity
I believe I have found some kind of relationship whether or not this is a true relationship
or a quasi-relationship I am not sure of. I believe it is a true relationship but I am unable
to prove that it is not a quasi-relationship.
I have been striving towards a high level of internal validity, which I have not achieved.
I was hoping that by integrating structures of different model that my internal validity
would be high. Comparing with the balanced scorecard theories and to these related
theories, the clear connections the researcher is supposed to find easily have in my case
not been that easily identified. An explanation to this is that these theories are created to
use within an organization whereas I have applied them to a certain area. I though
question based on my experience after this study if these theories have been applied on
specific cases and worked with. Another thing that I have reflected on is that this work
is much similar to a consultants and they are also outsiders with limited information,
how to they apply these models and make them usable, or do they not?
6.2.4 External Validity
With respect to the certified employee, I can now conclude that the study’s results could
possible be attributable to different areas of competence. By this I mean that it has been
relatively easy to modify the model to the different cases and to simulate different
values. I do not see any reason why it could not be applied to other areas of competence
development. If a databank of used data would be created would also the simulation
results be comparable with actual outcome in other cases and critical factors of success
could be implemented and integrated in the new investments.
A model for evaluating competence and human capital has to be modified with new
input data and assumptions in order to fit every specific situation. This however does
not mean that it is not possible to generalize the result of the model. I have tried to
increase the flexibility of the model in order to be able to generalize the result of the
model. This implies that different factors and variables within the model and the input
data can be updated.
Based on the model and my assumptions there is a connection between the different
perspectives. But I have not proved any statistical relationship. The measures
incorporated in my model are very difficult to measure objectively since they are a part
of organizations overall business and it is not possible to simulate the actual result.
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7 Concluding discussion
The purpose of this study has been to develop a model that tests the possibility to prove
a connection between competence development and the financial result and that
incorporates the relations between organization’s competence, financial result and the
customer value.
Based on my empirical findings and my identified relationships in previous chapter I
have found that these factors are related and do influence each other. The usage of a
model has lead to a satisfying overview of the connections within the model and the
financial impact of these connections. By breaking down the assumptions I have
simplified the complex problem solving that the model involves. I.e. it has been easier
to find and identify the critical problems using the model. The simulations have been
completed without any problems; i.e. the model works technically.
The factors, which I have found, does perhaps not prove a relationship, at least points
out possible relationships between the organization’s competence, financial result and
the customer value. These factors indicate that it is possible to test the causality or
turned around, at least is my theory not falsified even if it is hard to say that I have
proved a relationship.
7.1.1 Factors explaining my findings
With respect to the perceived reliability of the source, I would argue that the inaccuracy
of the data might explain the weakness of relationships. The weaker strength of this
pattern could also perhaps be explained through the fact that my assessment of the
source’s reliability is, among other things, based upon data regarding the certifications’
impact on the overall utility. It is possible that different managers have different
perceptions regarding the value of investments in certifications. Hereby, it is possible
that the relationships would have been different and stronger or weaker if the data only
was collected from one firm.
The cost of certifications has been relatively easy to identify and there is therefore a risk
that the costs are over emphasized compared with the estimated values of the
certifications utility such as value of preview information. My beliefs are supported by
reports presented by different software vendors. The reports I have studied have mostly
been based on the studies done in the USA; this is also a factor explaining the
discrepancies in the result.
The findings within the perspectives are very integrated which makes it difficult to find
the exact value of each perspective. Instead the aggregated changes can be observed
which leads to an overview of the problem. Is there a risk that the model is to complex?
This would imply that the model reflexes the reality to such an extent that it does not
simplify the reality, which is why a model is constructed.
There is also a risk that differences in the collected data and my estimations and
assumptions can question the ability of the model to measure what it is intended to
measure i.e. the model has a low level of construct validity. This is based on differences
in data such as the value of preview information which I have estimated to a value of
SEK 1,000 but is by one of the respondents estimated to SEK 10,000, which is a
difference of factor ten. On the other hand this could be seen as strength of the model’s
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ability to incorporate aspects within different companies and is therefore adjustable to
the situation of different companies.
This flexibility and ability incorporate differences indicates a satisfying level of external
validity thus it is indifferent to the foundings that different companies values
certifications very indifferently, based on the employees tasks, in the model
incorporated as network technicians and consultants. This also leads to the conclusion
that the model have incorporated the relationships presented and there is an satisfying
level of internal validity and the ability to measure what it is intended to measure,
indicates a high level of internal validity.
The dependent variables from which in the model together form the total utility of these
investments, may consist of too many independent variables, which makes an extraction
of my chosen relationships extremely difficult. Secondly, time may be an important
factor since the investments in most cases where done quite recent. Thus, a relationship
might have been statistically detected and proven over a longer time period than used in
this study. Finally, even if competence yield rents, all kinds of competence does not
necessarily do so. Though I am certain that other forms of competence than the one
related to certifications can be used in the sense of testing relationships, my model can
be used for testing relationships within the same areas based on other data, and
assumptions. I base this statement on my theoretical framework of knowledge,
competence, and human capital, which I have used when constructing my model.
7.2 Personal reflections
In this final section I will try to reflect on what I have learned by doing this study.
Although it might seem trivial, I believe that this study has contributed to my personal
development. I have during the course of the study come to re-evaluate my opinion of
methodology. Although I have before perceived it as important for the validity of the
result, I now feel that it can be both interesting and that time spent on developing a
study’s method significantly simplifies the structuring of the data as well as the
analysis.
Composing of a study in a foreign language has meant that I now feel better prepared
for an internationalized business environment. For instance, I now know from own
experience “i before e except after c, but still after efficiency”!
I have also come to learn that competence development is nothing that with ease can be
measured, neither can the return on such investments be taken for granted. With this
challenge in mind I now end this thesis by handing over the baton in the race of
competence management to anyone willing to grab it.
7.3 Further research
 To develop this model with more variables and a data bank, I believe it can be very
useful for companies making these investments. I also believe that these investments
will be more and more common in the future.
 How to secure a low personnel turnover after competence investments are made
 To develop measures and a measurement bank for this area.
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A deductive experimental study - Emma Lind
IDC Report (1998): Opportunity Knocks: Business Benefits Associated with the Microsoft Certified
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www.lotus.com
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www.microsoft.com
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www.microsoft.com/Train_Cert/download/downld.htm
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Interviews
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Ingram Micro AB, 98 11 03
LeyLock AB, 98 11 03
Scribona AB, 98 11 03
NetCenter, 99 01 28
HTF, Kent Wanberg, 98
Master Thesis, 1998-1999
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Emma Lind – How to measure the unmeasurble
17-08-01
Company A
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Business Consultant
Helpdesk Manager
Web-Team
IT-manager
Union representative
Human Resource Manager
Company B
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Team Manager
Company C
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Accounting Manager
Manager, Consulting Team
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