Value---How to define it in an organisation

Performance Management is an effective way to understand value creation. Value is an ambiguous term. Does it refer to customer value or shareholder value? In the context of describing an organization’s assets, I am referring to shareholder value—the monetary view. Sustained value creation is another task of the senior executives. But here again executives are running into a problem. The sources of value have been shifting. Ideas are taking the place of land and property in establishing value. Organizations are now much more knowledge-based. Working smart seems to beat working hard.

A simple definition of long-term assets is things one purchases which depreciate as period expenses with time.

In 2001, for every U.S. dollar of market capitalization, only 15 cents represented tangible assets. This means that 85 cents of investor-valued worth came in the form of brands, relationships, and employees. Employees are intangible assets. The knowledge of workers who go home each night and return in the morning is what produces value in many organizations today. A simple definition of this type of intangible asset, in contrast to a tangible asset, is something with potential that grows with time, rather than depreciates.

The sources of value creation are in people’s know-how and their passion to perform. You don’t supervise a product development engineer or advertising editor to create a better product or ad copy. Rather, they do it, given the right environment. PM powers an organization as an economic engine by recognizing that social systems are the fuel. This is not to say that the organization’s mission is not fundamental—it is. It simply means that performance requires cooperation, teamwork, and people giving effort for the benefit of the whole. Value creation is central to the purpose of an organization.

Some publicly-traded corporations feel investor pressure to cut costs to meet earnings expectations, which usually translates into laying off employees. But right-sizing decisions based solely on head count and cost reductions can rob an organization of its key talent. Human resource systems need to acknowledge employees as valued intangible assets, each with unique skills and experiences. Inevitably management must come to grips with increasing bottom-line by getting more from its existing resources rather than removing them with layoffs. This imperative adds to the interest in performance management.

Despite this substantial shift toward valuing intangible assets, current accounting and performance measurement systems still reflect outdated industrial models. Recent accounting scandals, like Enron’s sudden collapse, have alerted the general public that accounting practices have failed as early warning signals. The trio of accounting watchdogs—external auditing firms, boards of directors, and stock analysts—are failing to detect or report impending disasters. The solution is not to meddle with more accounting regulations. Rather than tweak the status quo, where each party likely has vested interests in preservation, the accounting industry should take an investor’s perspective. It should provide disclosure and financial transparency of operating processes. The performance of processes does not suddenly improve or degrade—it changes gradually.