Why Value Based Management Implementations may not produce the expected results
 
VBM is typically seen as an analytical, fact-based approach to management whose primary purpose is to create long-term value for shareholders. Where VBM has under-delivered, it is usually because of the way companies have chosen to implement VBM, and because its champions have underestimated the scale of the challenge involved.
Here are six causes often observed which explain why VBM goes wrong:
 
Wrong definition:
Serious obstacles often arise from the way companies choose to define VBM. In the worst case, VBM is interpreted as being little more than a new financial performance measure for the finance function to use to monitor business performance. In such instances, the attitude that creating value 'has got nothing to do with me' is widely held outside the finance function. As a consequence, very little progress towards improved performance is made. All too often, companies get bogged down in the step-by-step process of implementing each piece of the VBM jigsaw, rather than focusing on developing the necessary organisational capabilities that enable improved value creation performance to flow.
 
Wrong champions:

Part of the problem is also the people who champion VBM initiatives inside companies. Typically, these people come from a finance or strategy background and are 'wired' to think and act with machine-like rationality. Almost inevitably, these people over-emphasise the financial and analytical aspects of value creation, and disregard the 'softer' human and organisational dimensions, such as the quality of management, the ability to execute strategy and the efficiency of the decision-making processes which increasingly are being recognised as the crux of a successful VBM programme.

 
The 'black box':
When a company has chosen the measure that suits its circumstances, it usually attempts to 'explain' past and current performance in terms of an econometric 'value driver' model. These are 'black box' models that can provide powerful insights into the company's most important value driving variables, but they often give little insight into what 'inputs' have to be managed in order to drive improved value creation performance. For example, price is often found to be a key value driver, yet knowing this will not enable managers to decide what elements of its business mix need to change in order sustain higher prices. In all companies, it is the 'input' drivers, such as strategy, organisational capability, management capability and the quality of operations that are the real creators and destroyers of value, not the 'output' drivers that can be more easily measured and modelled.
 
Not taking people with you:
Many companies also fail to think through the presentation of their message at the front-line. Most employees will not set off for work with joy in their hearts at the prospect of enriching shareholders just because senior management has decided to espouse shareholder value and briefed them accordingly. Companies that succeed with VBM do so by taking the time and effort to explain in simple terms how creating value is a common sense approach to management that benefits not only shareholders and senior managers, but also employees, suppliers and customers.
 
Swimming with sharks:
It is critical to secure early commitment to shareholder value among senior management. Without this, the champions of VBM are likely to find themselves swimming in a sea of sharks eager to bite at the first sign of difficulty. It is also important to recognise upfront that many people in the business will have to unlearn some powerful beliefs before they are able to adopt the new behaviours appropriate for creating shareholder value. Consider the situation where the management of a 'star' operating business discovered that it had a history of consistent value destruction when viewed through the lens of a new financial performance measure. Not surprisingly, there was denial and a reluctance to accept the new perspective on what constituted 'good' performance. Overcoming this has taken time and effort. Pockets of resistance should be accepted as the norm and planned for right from the outset.
 
Measurement myopia:
All VBM programmes place great faith in the well-known adage 'you get what you measure'. When a new performance measure is adopted, management attention inevitably focuses on improving performance as recorded by the new yardstick. This is particularly the case where bonus payments depend on delivering improvements in the new measure. However, it is a mistake to assume that all improvements in the measure necessarily correspond with improved value creation performance. For example, short-term improvements in a financial measure such as economic profit can be achieved though postponing capital investments, reducing marketing and training expenditures, or by divesting assets. While each of these may have a positive effect on near term performance, they could also have an adverse impact on longer-term value creation. Nevertheless, when incentivised to 'manage for the measure' this is exactly what many managers will do, regardless of the consequences on shareholder value.
 
Tips for avoiding pitfalls in VBM:

VBM is still a comparatively new focus for management, and knowledge about what works, why and how is still in its infancy. Nevertheless, there is now a wealth of information that enables companies to avoid many of the painful 'mistakes' of the pioneers. Our advice on what constitutes better practice is:

  • Approach value creation as a long-term voyage of discovery. There are no quick fixes.
     
  • Recognise that value creation is about more than analysis, facts, numbers and rational behaviour and that human and organisational dimensions really do matter.
     
  • To succeed, a value creation initiative has to address the four dimensions of finance, strategy, organisation and change management.
     
  • Recognise that value is created and destroyed not only by the few 'big' strategic decisions, but also by thousands of everyday operational decisions taken at all levels throughout the company. Front line employees have an important role to play, so view them as contributors to change.
     
  • A sustainable value creation culture and capability will only develop when made relevant to the everyday lives of employees deep within the organisation. This means using language that people can relate to, and communicating how value creation benefits them and other stakeholders.
     
  • Don't get hung up by trying to choose the 'perfect' new measure.
     
  • Instead focus your efforts on identifying the most important 'input' value drivers and then manage them rigorously. Reward good management of these 'inputs' rather than 'managing for the measure'.
     
  • Also make sure that VBM is not seen simply as a way to enrich a small group of senior managers. Share the rewards widely.
     
  • Work only with those consultants who want to work alongside your teams to ensure it's your people's capabilities that are developed and not theirs.

 
 
Conclusion

VBM is certainly no miracle cure for poor performance. There is no single 'right' way to proceed with VBM, but don't assume common practice represents best practice and don't underestimate the scale of the challenge involved. There are no quick fix solutions to embedding a value creation culture, design a programme that addresses strategy, finance, organisation and change management and not just the first two. It is the combination of all four that is critical to success.