All enterprises, large or small, private or public, for profit or not for profit exist to deliver value to their stakeholders, be they owners or shareholders of private companies, recipients of services from not for profits, or taxpayers.
In the last few years, the nature of enterprise value—and how to achieve it—has become a subject of much discussion. The current global economic situation should be a catalyst for even more focus on this topic. Beyond the current situation, the increased interest in value management has been driven by a number of factors including:
- The poor track record of capturing value;
- The changing nature of value, with a greater contribution coming from intangibles;
- The increased complexity of value creation, resulting in great part from the pervasive use information technology (IT), and globalisation; and
- Increased transparency, often driven by regulation such as the Clinger-Cohen and Sarbanes-Oxley acts in the US.
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The impact of such wishful thinking is particularly visible in the case of investments involving IT - investments that are increasingly no longer about technology but about organisational change. The failure to realise business value from investments in IT-enabled organisational change is a symptom of a wider malaise - one that presents managers with significant new challenges.
The track record for implementing any major change successfully is terrible. The success rates of business process reengineering, and mergers and acquisitions, two examples of major change, are no better than those quoted for investments involving IT.
Root causes for this poor track record include:
- Failing to recognise that the leadership challenge today is one of continually implementing change - major cultural change
- The inability to define or articulate clear and focused strategies to set the direction for change - with clear and shared understanding of the value driven outcomes that the strategies are intended to achieve
- Failure to acknowledge, surface, and come to grips with, indeed often denying the complexity of strategy execution
- Mere measurement of value creation, rather than tight linking of the measurement to the actions required to achieve the outcomes – “focusing on the scorecard rather than. the game”
- Lack of senior management attention or commitment - abdication of accountability for value to lower organisational levels, often without clear operational targets
- Governance processes that are woefully inadequate to manage what is, in most cases, “an uncertain journey to an uncertain destination” resulting in: not knowing what to measure along the way; not surfacing and tracking assumptions; and not sensing and responding to changing circumstances in a timely or well-considered manner
The concept of value relies on the relationship between meeting the expectations of many differing stakeholders and the resources used in doing so. Stakeholders may all hold differing views of what represents value.
The aim of value management is to reconcile these differences and enable an enterprise to achieve the greatest progress towards its stated goals by selecting and executing investments, and managing its assets with an affordable use of resources and an acceptable level of risk such that overall value is maximised.
Value management is not new – its origins go back a number of decades, yet its promise lies largely unfilled today. McKinsey has reported that well-implemented value management practices can typically yield between 5 and 15 percent increase in bottom-line results, yet the 2006 survey mentioned earlier found that:
- 31% of respondents said there was no alignment or only some alignment of strategy with processes and systems
- 47% said there was no alignment or only some alignment of behaviour of employees with processes and systems
- Only 14% have all the necessary processes to achieve significant value creation in their project portfolio
- Only 39% integrated their project/programme tracking into their ongoing performance management process
- Only 16% completely agreed that their companies can respond quickly to changes in the economic, financial, and business environment
ValIT™ from the IT Governance Institute provides proven practices to help enterprises address the issues described above. In a recent Forrester paper, Craig Symons stated - “Organisations struggling to execute IT strategies that deliver business value and to communicate this value to stakeholders should evaluate Val IT as a tool for improved value delivery”.
Although primarily targeted at investments involving IT, these practices apply across the board in most if not all business change investments, whether or not involving IT.
While it may initially seem daunting to target the achievement of some or all of the above hallmarks of good value management practices, an increasing number of successful companies have actually committed to such a culture change, and are achieving results from their efforts.
Studies by Deloitte show that among others, Domino’s Pizza, The Chicago Mercantile Exchange, and Logitech have all embraced some aspects of value management, and integrated these ideas into the way they do business.
Effective value management practices enable enterprises to better understand what value is, how it is created, and to ensure that value is actually being created and sustained. This is particularly important in the case of IT-enabled investments. CIOs should be actively working with their peers to improve value management practices in their enterprises.
Enterprises who embrace and improve their value management practices will not only improve their chances of surviving the current downturn – they will be well positioned to thrive as the economy improves.
This article is adapted from a piece that originally appeared in the Information Systems Control Journal