Friday, 16 December, 2016
Our business measurement needs.
Summary: In my last article called “Problems with our business measures” I explained the problems we face using the Accounting Model as a business measure; a task it was never intended for. How these problems have developed into the root cause of our most serious social, environmental, economic and business problems. Despite knowing of these problem for nearly three decades, we have done nothing effective in addressing them. What makes the situation even worse is that we have also known what’s needed to address them, (in broad terms.) In this article I will go over these needs with you. I say we’ve known about what’s needed to solve the problem because as soon as you identify the problem, the requirements for a solution become self-evident. That’s what you would expect, but thirty years on, very few “solutions” are based on these fundamental requirements. It really makes you think - it takes us decades to respond and then our understanding of what’s needed is fundamentally wrong. To me, it looks like vested interests are playing for time. They can’t hide from the effects of their inadequate and inappropriate measures, so they make a pretence to fix it.
The bottom-line is - we need a new measurement standard and we need it now.
Identifying the problem is important, but now we need to be clear on what our business measurement needs are. Our new measurement standard has to be:-
1. Based on the principles of value
Every business process has a different purpose, but all processes have the same objective - to add value. Value creation is the objective of business. It is common to all processes. Value creation is the common denominator of business. Value creation must therefore form the basis for our new measurement standard.
2. Fully inclusive.
Business functions as a cause-and-effect, or causal model. Every part of business forms part of this causal model. If any part is exclude it will produce inaccurate results.
3. Based on the structures and
relationships of value creation.
Structure and relationships form the basis of the causal model. We need a clear understanding of these value creation structures and relationships to be able to measure them and they need to provide the framework for our new measurement standard.
Our economy relies on comparable measures. These measures must be comparable across all businesses, irrespective of sector or size (as financial measures are.) If they are not comparable they will be ignored by the market; as all incomparable measures are.
The value creation causal model provides the context necessary to show relevance. Individual measures (even if they are comparable, like profit/loss) have little relevance, as they do not provide wider context. How was this profit created? Was it at the expense of a particular value driver(s)? We don’t know because it's a figure shown out of context. Only measures shown in context of the value creation causal model provide the correct contextual relevance.
To ensure reliability in a measurement standard it needs to be prescriptive. It needs to be specific on what to measure and how to measure. We need established rules and standards and they need to be auditable to be reliable.
7. Easily understandable.
Our new measurement standard has to serve the needs of all business, big and small. What we measure and why, has to make sense. It cannot be too complicated as SMEs need to use and understand it. It has to act as a road map for business leaders to follow. They have to be able to see the big picture, without missing the detail. They must be able to see the interrelationships between parts and how they can use this to build value for all their stakeholders, thereby achieving long-term profitability for their business.
8. Simple Reporting.
Reporting must be simple and straight forward, as again, it has to apply to all.
Our requirements make no reference to integrated reporting as they are based on an integrated system, the value creation causal model. You only need to integrate reports when the measures come from different sources (often disparate sources as the measurement bases are entirely different.)
Because business functions as an integrated system, i.e. as a causal model, reports comes from the same source using the same measurement base. There is no need to integrate reports from disparate systems. Combining disparate reports means you’ve lost the critical interrelationship between the components of business. You’re left with meaningless figures and verbiage.
All the “solutions” proposed so far miss all of the above criteria, making them a huge waste of time.
In looking for a solution everybody turns to the corporate world to test their theories. However, the solution we seek has to be applicable to all, so the “acid test” is how well will this apply to the one-person business? Is it simple to understand, apply and report on? Can it be used as an effective tool to help them unlock the true value creation potential of their business. If it doesn’t apply here, meeting all their requirements, it’s no solution. The one-person business wants a simple question answered - “show me how business creates value.” We have to give them a roadmap that they can follow and report on - no complicated theoretical nonsense.
We will help business and society by being clear on “how business creates value for all stakeholders?” In other words, by providing a clear understanding of the value creation causal model. Without this understanding we won't be able to measure value creation on a comparable basis. To learn more about the value creation causal model, read this blog.
Adrian Mark Dore
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