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September 1, 2005

The Cost of Value

Walk into a meeting, say the word "value", and tally up the other words that people thought you meant.

If your results look like this:
- profit
- performance
- ROI
- economy (as in economical)
- impact

then you already know why the next thing you say about value might easily split the audience into different groups. This split readily occurs based on how much their concerns are:

- goal-oriented
- process oriented
- resource oriented

The interesting thing to note here, though, is that each group at the meeting actually blends together some level of sensitivity to each of those three concerns, and it's the blend that makes the difference in how they understand you when you say "value".

I.

As articulated by the picture below, the blending shows up in the form of three main questions or "attitudes" that people bring to discussions of value. Essentially, what happens is that new ideas that claim to have value are considered in light of what related changes to current affairs are thought to be requested. The three questions are mental placeholders for the assessment of the current affairs:

1. What should we be doing? This looks at the list of current obligations and questions things in terms of priorities.

2. How are we doing? This looks at the way things get done and questions whether those ways -- capabilities -- are effective enough (successful and appropriate).

3. What could we be doing? This looks at whether the assumptions that have driven current choices for engineering benefits are still more logical and exclusively relevant than other credible assumptions that would also represent opportunity.

From the picture, we can also understand how discussions can quickly focus on certain "levers" such as:
- how costly is a resource?
- how risky is a process?
- how beneficial is a goal?

These levers typically show up as hot-buttons -- "justifications", "success factors", and/or "criteria" -- in the consideration of a proposal. Our picture also shows that each lever (such as "cost") easily gets a shared audience (in the case of cost, both the "commitments" and the "progress" crowd). It is not always the case, though, that the audience identifies its shared concerns as readily as its differences.

II.

Addressing multiple stakeholders with a single proposition means investigating shared concerns as much as possible; having a logical approach to doing that should make the problem easier to solve.

But if we go back to the list of those synonyms provoked by saying the word "value", things initially seem to be all over the map.

To sort this out, we can use simple working definitions of each synonym, and use the definitions to map the synonyms to our picture.

- performance: a measured level of achievement towards a target outcome

- impact: the measured difference between the quality of the current state and the quality of the proposed future state

- profit: a net gain in assets beyond the total allocated cost of effort.

- ROI: the difference in resulting assets between the proposed consumption of a resource and the current consumption of that resource.

- economy (as in economical): the efficiency of converting a given level of assets into a given level of resources.

As we now see, some of the terms -- profit, ROI and economy -- are actually types of the other terms -- performance and impact.

Furthermore, performance and impact both refer to the change that has occurred between the current circumstances and the projected or forecast circumstances. They are generally similar. But we can see that performance is really a context-specific description of impact.

In the typical Archestra terminology, "value" is identified as "the importance of the difference". The point is to determine whether the proposed value will test "positive" for being not just "different" but "better" than what is already in hand. The different audience perspectives explore the idea of "important" or "better" in respectively different ways:

What type of "resource" is consumed or created?
- does it increase conformity to obligations?
- does it decrease obligations that are liabilities?

What is the significance of having the new kind of resource versus the old, OR of having the new mode of resource consumption versus the old?
- is it more manageable for the current efforts needing resources?
- does it enable a new or alternative effort

How does that significance logically support the desired future state?
- does it make the path to the future state easier or safer?
- does it provide a path where previously there was not one or where in the future there will need to be an alternative?

III.

Now it is more apparent that the range of issues under the topic of "value" covers a lot of ground that is not crossed by counting money.

But because so much of business is predicated on having the assets necessary to fuel future effort, the overall sense of value typically "rolls up" to an estimation of the change of assets. In fact, it is usually the case that the shareholders of a business will tolerate a wide range of goals and even frequent change of goals as long as the change of assets is "profitable". Perhaps unscientifically, both economy and ROI are assumed to always be underpinnings of profit unless proved otherwise. This finance perspective is in high contrast to the main issue for stakeholders, which is that the way the business does things should be consistent with protecting the operational effectiveness towards the goal.*

Consequently, it seems that shareholders are much more tolerant of change than are stakeholders.

The generalized implication is that when "value" is proposed in terms of effectiveness, stakeholders perk up to catch clues about capability; when "value" is proposed in terms of "advantage", shareholders perk up to catch clues about opportunity.

Although distinct, the points-of-view are not mutually exclusive. In fact, as our earlier picture shows, the factor in common across those two groups is "risk". Although everyone knows that it takes money to get anything done, when the subject is "value" the sense of a related cost is not so much about dollars as it is about the tolerance of uncertainty.

In short, the "cost" of value is risk.

* See an outstanding discussion on stakeholder versus shareholder orientation, in an article about "social enterprises" called
How Organizations Create Social Value, by Manda Salls.

Posted by Malcolm Ryder at September 1, 2005 6:27 AM

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