The one where it’s about value

‘We’ seemed to be obsessed by value…

  •  “Can you give me an example of time a time when you added significant value to the organisation?”
  • “This product is really value added”
  • “Re-engineering this process will reduce lost value to the business”

Those 3 examples I have heard, live, out of the mouths of actual people in the last few weeks, and in addition to my significant score in lingo bingo it always makes me want to ask the individual espousing how they would define value.

In a previous role I was fortunate enough to lead a project that had the broad objective “to find £2million of additional value in the business”, nothing was off the table and the CEO was our sponsor. In preparing for this we got some external support and it was during that process the following equation was introduced (and unfortunately I don’t have a citation for it):

Value= Function/Cost

The first thing that struck me at the time and in subsequent reflection is that in this instance value is subjective, for example, which of the following is of greater value?

Now the answer to the question which is of higher financial value is of course the Aston Martin. But the answer to the value question is far more subjective. If you are a spy evading capture on the lanes of Monte Negro of course the Aston is far more valuable, but for carrying a pallet of products then the Merc is head and shoulders above…

The second thing that struck me and seems stunningly simple (else how could I have worked it out?) is that to increase value there are 3 options:

(a)    Reduce cost

(b)   Increase function

Or secret answer (c) marginally increase cost to significantly increase function

Given the current state of the economy and the impact that is having on both public and private sectors there seems (at least in the rhetoric) to be an overwhelming focus on answer (a) ‘let’s get the red pen out’, a begrugding commitment to answer (b) ‘we’ll sweat the asset harder but very little discussion on answer (c) ‘let’s make some marginal investment to make this signficiantly better.

In thinking this over that the biggest determinant in these proportions is risk. Cutting cost is (at least in the short term) very low risk:

Person A: “Your need to increase your profitability by 10%”

Person B: “I have reduced my payroll by X and I am 10% more profitable”

Person A: *pats person A on head and throws them a rice krispie treat

But what were all those people doing that is now not being done? What is the impact of this reduction on your customer? What is the long term impact on the true performance of your business?

Sweating the asset harder involves some form of management or dare I say it leadership? That is where you either become the slave driver or even extract discretionary effort from people through increasing their motivation and commitment. Now that’s a huge risk…

My belief on the fear of option (c) is that not only does it involve making the kind of quantum unheard of leaps involved in option (b) but it also means asking for money FIRST, it involves actually making a case to do something better but needing some money to achieve it which involves commitment to a long term output but also means forgoing the pat on the head and the rice krispie treat.

What is written here is a exceptionally simplified take on what are often very complex situations (apart from the fact that Aston Martins are cool – that’s simple) so what did I write it? In the vain hope that if it makes 1 person somewhere stop and take a moment the next time they have the choice between options a, b & c and maybe just maybe they would take the risk, think about the long term and not be driven purely by a pat on the head…..and a rice krispie treat

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5 Comments

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5 responses to “The one where it’s about value

  1. Lovely post. For me – value (as opposed to say profit and/or cost reduction) has an element of longevity about it. As your example shows, cost reduction can be achieved quickly, and often quite myopically. I think it takes time to create value. But then what do I know? I chucked the words define value into google and the first answer I got was:

    1. An amount, as of goods, services, or money, considered to be a fair and suitable equivalent for something else; a fair price or return.

    I’m drawn to the word fair in this definition. I like fair in this reciprocal sense. And because reciprocity can take time to play out again I see value as a longer term game. And that doesn’t mean I wouldn’t appreciate the odd rice krispie cake along the way thanks 🙂

    Doug

    PS – we had a great holiday in Monte Negro a few years ago. Based on my experiences of the roads when we visited I’d take the van any day – James Bond would get stuck in a pot hole in under five minutes in the Aston whilst I barrel my way to freedom. Go white van man!

  2. First. Get yourself off to Sainsbury’s and by yourself some Rice Krispie treats. You deserve it.

    Second, it’s an interesting point you raise, and one my dad used to hark on at me about. A while back, my parents could have paid off their mortgage, but they chose not to. When I asked why, he said because it’s better to have an ongoing investment than it is to own something outright.

    And I guess that’s in line with what you’re describing above. The trouble though, as I see it at least, is options b and c are just too damned risky. I don’t know many businesses that won’t go straight for option a because the accountant knows best.

    A good write up Rob.

    • ?law of diminishing returns?

      A short story: I worked for a divisional CEO recently promoted from the post of CFO and he was always moaning about the size of the conference call phone bill. So he stopped the conference call facility. Saved money for sure and in the same breath peed off just about everybody who found themselves no longer able to convene calls with each other, with customers, with suppliers. Needless to say the decision was reverted. Health (wealth) warning – Management by spreadsheet can be bad for your customer experience. The accountant knows best eh?

  3. Good post,
    just to extend Doug’s comment (hi Doug!) –
    One of my mantras is ‘The value is appreciated long after the cost is forgotten’.

    The ‘Value’ definition always resides with the purchaser / sponsor. Our job is to uncover the value, help the purchaser / sponsor define and align to it and then make sure the full measure is delivered.

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