By Ken Vermilion
Exactly what is value? How is it created? Is measuring value and its creation the application of straightforward financial metrics? Value can be expressed in terms of financial strength or growth, or as a function of quality or prestige. In many ways, value is in the eyes of the beholder.
What is value? It depends! Let’s take a look at a couple of short stories that illustrate this point.
Satisfaction Guaranteed –
A colleague of mine tells a story about an experience from his consulting days. Roughly, the client he was working for was discussing the values of the company and how his employees understood the company’s core values. Especially the “satisfaction guaranteed” value.
The company was a catering business. The story related to a customer not being happy with an element of the food offerings for their event. Without hesitation, the young crew chief apologized and promised a full refund, not just a refund for the disappointing offering. The owner of the catering business was proud that this employee understood that they had the authority to make things right for the customer on the spot. No need for securing approvals.
We Will Address Global Warming –
Out of the blue, the CEO announces, “Your Company has committed to reduce its carbon footprint by XX% over the next 10 years. Let’s get to work!”
The buyer of “contraptions” immediately partnered with the vendor to rethink the production process. It was determined that packaging for “contraptions” was excessive. Paper backing was reduced, plastic coverings were eliminated, and the overall package size reduced. Good news, more “contraptions” fit into the reengineered shipping containers. Job well done! Maybe yes, maybe no.
Logistics wasn’t prepared for handling the new dimensions of a box of contraptions, which caused inefficiencies in loading, distribution and storage. Inventory managers economic ordering quantities calculations no longer were efficient and out-of-stock issues bubbled up, and displays in the stores just looked goofy.
Some history –
In the mid to late 90’s, publicly traded companies began to contemplate measuring Economic Value Added (EVA) and shareholder value. Companies worked to crystalize value drivers and their employees role in the management of these drivers, e.g. customer service, new business development, return on investment thresholds, expense management, etc. And the finance group was busy developing metrics that ensured profits covered the costs of capital, including expected returns to shareholders.
Companies launched training programs focused on explaining how each employee’s role contributed to the development of EVA. Senior management began to see one more performance criteria creep into the calculations for compensation purposes.
Smaller operating units within the corporation were seeing this somewhat esoteric “Headquarters EVA” initiative begin to reshape their thinking, but not always in a good way.
For example, smaller operating units with the company began to analyze their operating costs with an eye on reducing them. But rather than looking inward for operating improvements, some looked to off load costs to other operating units within the organization. “These extra production steps accommodate the shipping department specifications. They should pay for these added costs!” “Why is my P&L burdened with the cost of the legal department? We don’t use lawyers!” “The basis for my headquarters cost allocation is wrong! Tell the finance manager to reduce it?”
Value creation within particular units of a company’s operations may be very different than within other unit operations. Value drivers for the sales department are very different from the value drivers of customer service or manufacturing or the finance department. And not carefully managed, creation of value in some operating activities may actually destroy value in other activities.
So, Tell Me More –
What do these stories have to do with understanding value? And is there a difference between a company’s value proposition and its value promise? Keep reading.
At the end of the day, senior leadership should determine what the organization’s value “promise” is going to be. That “promise” will most likely be measured differently across the various parts of the organization. The marketing department’s metrics might measure sales productivity or company reputation as viewed by customers. Human Resources might utilize any number of employee engagement measuring tools and implement an employee attitude survey. Company legal departments could create cost avoidance measurements rooted in implementing risk management and compliance initiatives. The finance department has any number of metrics that look at a company’s change in financial condition over time or value to shareholders to illustrate the creation or loss of value.
The previous paragraph doesn’t suggest that in order for an organization to create value over time that every operating entity within the organization needs to demonstrate the creation of value over the same period of time. Or does it? What a wonderful world it would be if that were the case.
Stay tuned for the next chapter in this series.