The Cost and Effect of Value Management
Roger Davies, co-author of the book Value Management: Translating Aspirations into Performance explains the critical role that cost management professionals can and should play in the important emerging discipline of Value Management.
What is Value Management?
Value Management is about delivering more for less. It addresses the urgent imperative in our current dire economic climate to grow wealth whilst consuming fewer resources and incurring less cost. Value Management is outcome focused on delivering benefits to key business stakeholders, such as shareholders, customers and staff, in addition to society and the global community as a whole. Value is defined as the relationship between the benefits realized by stakeholders and what it costs them. As economics is the study of how wealth is created and distributed, value is the measure of more for less.
Change programmes are the most effective vehicle we have for delivering better stakeholder outcomes and cover all types, sizes and combinations of initiatives from continuous operational improvements to radical business transformation. So more specifically, Value Management provides a practical means to deliver much
greater stakeholder value from change programmes and portfolios.
Why is Value Management Important?
Change programmes have a very poor record in delivering anything like the value that they promised and in many cases incur massive losses. This is particularly true of, but not confined to, Information Technology (IT). Whilst advances in standards, process, programme management and management of change, have resulted in more reliable technical outputs, these improvements have not been mirrored in value outcomes. If anything, complexity is making things worse. We must be missing something, but what is it? The usual suspects, poor specification, over-complex design, low buy-in and weak implementation only go so far in explaining this failure.
Our experience and research spanning 30 years across both private and public sectors indicates that failure to deliver intended value is due to a fundamental causal disconnect between programmes and the stakeholder benefits which the programmes are intended to deliver. Consequently, Value Management places great emphasis on working with the true cause and effect relationships driving today’s dynamic business environment. To make this shift we need to change the way we perceive and respond to problems and opportunities. Essentially, this means that we must see beyond surface events to the underlying patterns of cause and effect and support this thinking with tools that deal with relational complexity, particularly where cost is concerned.
In commercial enterprises intended outcomes invariably include financial benefits in the form of increased revenue and/or reduced cost base, i.e. the two sides of the P&L Account. For the public sector focus is directed at greater value for money, translated into more services for less tax dollars. In all cases, it is crucial to quantify the linkage between programme deliverables and changes in the cost base that the programme is intended to deliver. There are essentially three challenges in achieving this linkage:
- Quantifying the Benefits:The challenge here is defining the true drivers of cost and quantifying the precise causal linkage between programme deliverables, changes to the cost drivers and consequential financial benefits, such as reduced cost base. This often requires unravelling, whilst respecting, absorption cost structures.
- Aligning the Benefits:This involves balance, ensuring that cost savings on one area are not at the expense of adverse effects on costs and/or revenues in other parts of the business.
- Tracking the Benefits:Typically the least addressed, this aspect concerns tracking both projected and actual benefits during and post programme implementation, and using the causal connections to direct corrective action to ensure that the programme remains on purpose and on value.
In Value Management we combine Activity Based Costing, dynamics modelling and the Balanced Scorecard to define, quantify and manage cost base benefits and link the benefits causally to programme Discounted Cash Flow. In this way, the impact on NPV, IRR and discounted payback of any changes in compliance and/or timing of programme deliverables can be assessed in real-time and corrective action directed where and when it is most effective.
The Critical Role of Cost Management in Value Management
Cost management professionals are uniquely placed to support the causal costing approach in several key ways. First, through their mastery of cost dynamics, they often see causal cost patterns which lead to opportunities. Secondly, they can spot and correct flaws in logic and calculations based on incorrect causal assumptions.
Thirdly, by addressing the underlying causes of cost drivers, cost accountants can have a far greater influence on the business beyond a cost focus. For example, usually a significant cost driver is errors manifested as rework, returns, warranty claims etc., which result in both cost escalation and reduced revenue through customer attrition or increased use of competitors. We have found that Cost Accountants not only understand the dynamics but can often target solutions to the root cause to this kind of performance driver.
For this reason, we always request beginning- to-end involvement of senior cost management professionals in our Value Management assignments. Ideally, they should bring a level of healthy scepticism through which to ‘destruction test’ assumptions and calculations, so ensuing that Business Cases are transformed from statements of wishful targets to causal certainty.
Where can I learn more?
The book, Value Management: Translating Aspirations into Performance published by Gower and provides a manual for what we have outlined in this article. Learn more about the power and application of Value Management by visiting www.impactdynamics.co.uk.