As leaders we take responsibility for growing the value of our businesses. But we all know that there are challenges in understanding and growing some of our most valuable assets, such as our intangible assets and intellectual capital. Value Based Management, (VBM) methods have helped draw attention to the failure of traditional accounting practices but they have become a proxy for measurement rather than management. One of the outstanding challenges for business leaders is to identify specific intangibles assets and strategic capabilities that contribute to increased capital value, then to find the metrics and measures that reflect their value contribution.
Traditional value management measures like Economic Value Added (EVA)*, Return on Invested Capital (ROIC) help leaders understand the cost of capital deployed and the efficiency of operations in managing capital invested. But they are a reflection of general capital management and generic growth, that is, they don't help identify specific disciplines that created value in the first place. Even more forward looking value metrics like Discounted Cash Flow (DCF), Internal Rate of Return (IRR) and Cash Flow Return on Investment (CFROI) are simply general outcome based metrics. All these tools are indeed incredibly useful in understanding the general health of commercial operations and growth but fall short of systematic management of intangible assets and intellectual capital that often provide the lions share of corporate worth.
For too long front-end operations have focused on managing traditional P&L and Balance Sheet metrics like Revenues, Cost, Net Income and EBITDA. While these are, of course important, their relevance for business leaders is diminishing when the economic cost of capital, growth, sustainability, capital value and overall longer term performance are clearly becoming more relevant measures of true success.
Progressive leaders are now looking for more systematic approaches and clearer definitions of the specific disciplines and capabilities that drive capital value and growth as well as those that help manage day to day operations more rigorously.
* Registered Trade Mark, Stern Stewart and Co.
4 Thoughts on managing value
1. Beyond Value Trees
Value Trees are part of VBM and are a useful tool for creating objective hierarchies and understanding the decision-making attributes associated with each choice. However, they are not linked to value creating disciplines and capabilities: adaptomy has identified those key 38 strategic disciplines as part of our Unified Commercial Engine DNA. Each of these disciplines contributes to P&L, Balance Sheet, intangible asset and intellectual capital growth. This 'operational engineering' approach provides leaders with the most effective levers of value. It augments VBM approaches by helping to focus attention on management or the engines that drive value rather than the metrics and measures that simply reflect overall performance.
2. Focus on method not targets
Building a collective sense of contribution and outcome, rather than exclusive focus on targets is an essential ingredient in VBM or any other approach to growing intangible assets and intellectual capital. Capital growth targets in the form of traditional or more recent VBM metrics and measures can appear irrelevant to those on the 'shop floor'. There needs to be a sense of shared ownership in setting targets in the first place, but more importantly there needs to be clear process on how targets can be met. This means understanding which levers of value are relevant and the specific actions required to improve their short and long term contribution: the method, not just the decision making process and targets, must be clear.
Would you like to know more about Unified Commercial Engines and key disciplines that drive intangible asset and intellectual capital value?
3. Effective evidence based decision making
Many business leaders accept that too many decisions are based on 'gut feel' or personal preferences and short-term outcomes that don't contribute to value generation and growth. Creating an environment where 'fact-based' decisions are made to contribute to short and long term growth requires leadership intervention. The first step is to explain the frameworks for short and long term growth, that help people understand systematic approaches to growth and pinpoint specific disciplines and capabilities which contribute to growth. Next, assign short and long term metrics and measures to the engines that drive value and agree performance and contribution management systems.
4. Building a value management culture
The first step is to encourage factual debate and challenge to build a shared sense of outcome, target setting and KPI management. However, setting targets and building collective commitment is only the start. There must be deeper endorsement throughout the business of the rationale and relevancy of managing longer term growth and value as a priority.
There is always a balance to be struck between short and long term growth opportunities and it's easy to focus on short term gains when there are no clear incentives to develop long term value. Sadly, there are often gaps, if not complete omissions in many incentive programmes to stimulate long term growth behaviours.
Real understanding of traditional financial metrics in many 'front-end', market and customer facing operations is limited. Understanding of VBM metrics is typically even more limited and understanding of the specific disciplines and capabilities that drive intangible asset and intellectual capital growth is almost always non-existent. In short, considerable leadership effort needs to be directed toward education and coaching in value management.
Managing the levers of value
How critical strategic disciplines are unified to drive growth, customer and commercial value