Value Based Management

What gets measured, gets analyzed.

And what gets analyzed, gets acted upon.

It is paramount to measure a business's performance. A lot has been discussed on how to effectively manage and monitor a business. Value Based Management (VBM) is an approach that ensures that corporations are run consistently on value. VBM includes the following aspects:

1)  Creating value: Implementing strategies to generate sustainable returns.
2)  Managing for Value: by Governance, communication, leadership etc.
3)  Measuring value: by using Metrics, Dashboards etc.

Now, we need to have a clear action plan on how to implement VBM for a business. For ease of implementation, VBM can be broken into 3 sub-parts which can be individually implemented and taken care of. This post will discuss in detail on how to apply VBM in a business.

Value Based Management = Balanced Score card + Economic Value Add + Activity Based Costing

or in short; VBM = BSC + EVA + ABC

Thus if a business maintains a Balanced Score Card for its processes and operations, calculates the Economic value of its business and does a proper costing of its processes; it is essentially employing Value Based Management. VBM is a very powerful tool and all businesses must employ this practice. Some of its benefits are:


1) It will help a business measure and track its performance.
2) Metrics in BSC will help decide what all parameters a business should track.
3) ABC will help identify and segregate the bleeding operations/processes from the profitable ones.
4) EVA will help monitor the financial performance.

Let's have a look at these parameters individually.

Balanced Score Card:

BSC is a powerful way to implement strategy and continuously monitor strategic performance. BSC is a performance measurement tool. It gives an overview of the following business perspectives:
Financial, Customer, Internal Business Processes, Learning and Growth Initiatives.

A business needs to identify certain parameters/objectives which it needs to measure. These objectives should be divided into different categories and a balance should be struck between each quadrant.
The following image shows the framework of a Balanced Score Card.

Once the objectives of the firm are decided upon, its time to create a Marketing dashboard. A Marketing Dashboard helps in experimenting and measuring different action plans, ideas or hypothesis. A business might have different action plans, it needs to measure and evaluate its plans or action items. If the plans are not working out accordingly than there might be need for some adjustments. A business should also have a backup plan (Plan B) in case the primary plans do not work well.

A Marketing dashboard helps in monitoring the progress of your plans. It covers all financial, operational, customer service oriented metrics etc. For example you can measure the customer churn rate, repeat rates, customer average spend, daily website hits, daily sales, daily complaints, employee turnover rate etc. etc. This will provide a birds eye view of the entire business. The metrics should be updated from time to time based on the business needs and the evolution of the business.
The following image shows a sample dashboard:

The image shows how different assumptions or hypothesis are being tracked by different metrics on a weekly basis. Thus a Balanced Scorecard which captures the vision of a business followed by a marketing dashboard to monitor the business performance forms the first part of VBM.


Economic Value Add:

A business should calculate how much value it is creating. Say if i am running a textile business in India and with an investment of 1 Million dollars, suppose I am able to generate $60,000 profit each year. i.e. i am getting a return (net profit) of 6% on my investment each year. But if i look at other available options, the safest being a bank deposit that provides me an 8% fixed interest. Thus i may be having a profit of $60,000 each year but i am not adding any economic value.

Economic Value add measures how much real value the business is generating through its operations. A healthy EVA value is desirable for a business. 


Activity Based Costing:

Activity based costing is the process of allocating costs to each individual processes. Suppose the company manufactures and sells three products A, B and C. Suppose the company has X number of resources dedicated to the production and selling of all the three products. ABC costing method calculates the breakup for amount of each resource dedicated to each product. This way the profitability of each product can be calculated. A company can identify which processes are eating up more resources, which are costing less. It basically helps a business to look at its operations at a more granular level and help separate its star products from the bleeding ones. ABC costing method is a great way to manage costs and to find the profitability of a product or a process.

Thus, to sum up, each business should employ Value Based Management (VBM) to run in an efficient and a more sustainable manner.

Reference: http://www.valuebasedmanagement.net/faq_what_is_value_based_management.html