Getting business to focus on value creation is a dream - unless…

It's not enough for value creation consultants to talk the good talk; they've been doing that for the past two decades. If they want to make meaningful change, they are going to have to realise the only way to achieve that is to change our measurement standard.

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We all talk wisely about the need for business to focus on value creation. We know it’s right. After all, it’s the common denominator of business. Every business process has a different purpose, but every business process has the same objective - to add value. Value creation is the objective of business. It is common to all processes. It is the common denominator of business. However, despite our sage advice to our clients to focus on value creation as the key to success, it’s not followed. Initially, there’s enthusiastic take-up, but over time, the enthusiasm wanes. We drift back to where we started. This pattern has been repeated over the past two decades, starting with thought leaders such as Ken Favaro, Don Peppers, Martha Rogers and Patrica Seybold. Surely we’ve learnt by now that simply talking about value creation is not going to make a jot of difference? Unless we approach the problem differently, we will get the same results.

The reality is “If you want to change the way the game is played, you must change the way the game is scored.” The only way we are going to get business to focus on value creation rather than financial measures is to change our measurement standard. We are going to have to develop a new measurement standard which places value creation at the centre of business measurement and management. Without this, we may as well “whistle in the wind." However, we must be clear on what we mean by “standard." The development of a few metrics does not constitute a “standard."  Over the past three decades, we’ve had numerous new measurement models and metrics proposed, to help us “manage more effectively," yet none have made the slightest impact on business measurement and thus management. This is not a reflection on the merits of the metrics themselves, just that they don’t meet the criteria for a “standard.”

So, what are the criteria our new measurement standard needs to meet?

1. Comparable.
Our economy relies on comparisons. If the measures produced are not comparable with other businesses, irrespective of sector or size (as financial measures are) they will not form part of a recognised standard and be ignored by the market. Internal non-financial measures are incomparable and therefore, have no relevance in the market. Over time, these measures are ignored. To be comparable, measures have to be prescriptive.  We have to be clear on what, how and why we measure. We cannot simply suggest what should be measured. The Balanced Scorecard (BSC) is a classic example of a measurement standard which suggested different “perspectives” to measure. It failed because its results were incomparable. Outside the business, BSC measures have no relevance. The business is still assessed in terms of its financial results. As a result financial outcomes are favoured over BSC measures, despite the financial decision being counterintuitive and contrary to the BSC suggestions.

2. Relevant.
We know business functions as a causal model. We also know that causal models are based on structure and relationships. Individual measures or groups of measures must show how they fit into this structure to be relevant. We need to see them in context. Take profit as an example. What does profit mean? It means very little as we cannot see it in the context of the wider value creation casual model. Using financial measures exclusively distorts outcomes as we lose sight of the wider value creation context. Trying to integrate disparate measures (e.g. customer, people, community, etc.) without a clear understanding of (and thus reference to) the value creation causal model, is an exercise in futility. Furthermore, providing partial solutions (or measures) in a causal model where all parts influence outcomes, leads to incorrect results. We have to see business in its entirety, not from the narrow perspective of our own particular discipline (e.g. a customer perspective.)

3. Reliable.
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 we need to adhere to them for results to be reliable. As already mentioned, it cannot be based on suggestions as to what to measure. It must be based on what must be measured and how we must measure them, and this has to be based on the value creation causal model.

4. 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 has to act as a roadmap 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.

Your objective may be to entrench value creation into the philosophy and culture of business, but as I have pointed out, the only way to achieve this is through a recognised measurement standard. However, there are wider issues involved here. Unless we change our measurement standard, we are headed for a socioeconomic and environmental disaster. Using our Accounting Model as our sole measurement standard is the root cause of our most serious socioeconomic and environmental problems. As value creation practitioners perhaps the onus is on you to lead the charge in making the necessary change?

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