Roger Davies is a business consultant and author. His specialist topic is Value Management — that is, ensuring that business transformation delivers on the goals it sets out to achieve. He’s also an old colleague and friend — we worked for the same consulting firm, back in the Nineties.
I caught up with Roger to get an update on the latest thinking on how we define the value of our business change programmes.
1. What the heck is ‘value’ anyway, and how does it relate to money? You once told me value equated to “benefits minus costs” — is it still this simple?
Yes it is that simple. The challenge is how to frame value so that this ‘Value Equation’ works in any context and when the units of benefits and costs are not the same. Value is most effectively framed as energy transformation. Money is effectively a surrogate for energy, and money transactions the mechanism for energy transformations – an invention up there with the wheel in terms of energy transmission. That is why it is called currency, because it is all about the flow.
Therefore, it is more appropriate to frame money as a measure of value for the purposes of transaction – i.e. the informational means by which energy can be transformed through value chains. Money helps us define the value of a relationship, a transaction or a situation. The concept of money works very well under near perfect competition where choice can (but not inevitably) create equitable balance, reflected in cost and price – i.e. costbase and revenue, the 2 sides of the P&L.
2. Where does use of money to define value fall down?
Whilst money is an efficient tool for transaction, research shows us that it is an unreliable indicator of value. Symptoms of this include excessive C-level salaries at one end and at the other, the ‘gig’ economy and aged care, where substantial value is often delivered by people on subsistence income. So when money is used as a direct synonym for value, we come unstuck.Whilst money is an efficient tool for transactions, research shows us that it is an unreliable indicator of value. Symptoms of this include excessive C-level salaries at one end and, at the other, the ‘gig’ economy and aged care, where substantial value is often delivered by people on subsistence income. So, when money is used as a direct synonym for value, we come unstuck.
3. So, shouldn’t we look for other ways of measuring value?
The brutal reality is that money drives the physical world which we have created, so we either change the model (tricky) or define and frame value using money in a way which drives the right stakeholder outcomes, taking into account its limitations. My stance is not to declare dogmatically that everything can be measured directly in financial terms, but that through precise tracing of cause and effect, it is possible to determine how intended outcomes can be delivered with equitable return to all stakeholders. In other words, quantify the benefits to the decision makers in the units they need to deliver win-win outcomes to all stakeholders , This requires a very different approach, not right or left wing dogma but precise causal thinking.
4. Ok, but Wwhat does this mean for organisations looking to ‘deliver’ value?
The answer is two-fold. First you should use money where appropriate, and other measures where not. And second, you can see money as the cart, not the horse — which is vision and strategy. For example, in the case of aged care, you can start with the highest purpose – ‘people living comfortably and in dignity in their later life’. You can then work backwards through the value chain to determine how all the players, including tax payers, investors, society as a whole, can gain from the attainment of this purpose through the performance they deliver.
5. This sounds quite complicated — can’t I just say, “Here’s a problem, what’s the solution, how much does it cost?”
This quantification cannot be achieved using conventional linear thinking and static models. Indeed, it’s precisely this kind of thinking that leads so many projects and programmes to under-deliver. If we really want to deliver benefits to our organisations, we are directed to master the world of complexity and systems thinking, where causality exists in patterns and probabilities, with many soft drivers, such as trust, security, relationships etc – which boil down to values.
This quantification cannot be achieved using conventional linear thanking and static models. Indeed, it’s precisely this kind of thinking that leads so many projects and programmes to under-deliver. If we really want to deliver benefits to our organisations, we are directed to master the world of complexity and systems thinking where causality exists in patterns and probabilities, with may soft drivers, such as trust, security, relationships etc – which boil down to values.
This may sound like it’s over-complicating things but the fact is, too many projects today work on the basis of throwing money at the problem, rather than thinking about how to ensure the solution delivers value. Accordingly, Value Management places great emphasis on non-linear causal modelling of Complex Adaptive Systems, such as markets, to quantify the linkage between programme deliverables (interventions) and stakeholder outcomes.
In an industry driven by cycles of telling the world that the latest raft of technology can achieve less with more, it’s important for all enterprise decision makers to resist any urge to accept these mantras. At the same time, thinking about value as opposed to money is a challenge: while the latter is tangible, the former is amorphous and, not ironically, a harder sell.
As a result our business cases tend to be linear, talking in terms of TCO or ROI over a fixed period. And meanwhile, we struggle with concepts such as ‘digital transformation’ — business leaders know they have merit, but can’t put their finger on what it is.
The answer, like it or lump it, is to tease apart the link between value and financial measures: as Roger suggests, use money when appropriate, but not when it isn’t. It is incumbent on any strategist to know the difference between value and money, and be able to drive better business decisions as a result.