One of the most ambiguous terms in these discussions about business and gov- ernment is value. Everybody wants value in return for whatever they exchanged to get value. We can have endless philosophical debates about the definition of value. The ancient Greek philosophers have already put a lot of time into that.
The much more interesting question for the 21st century is, “Whose value is more important?” In the supply chain there are three groups who believe they are entitled to value: customers, shareholders, and employees. Are they rivals? Is there an Adam Smith-like invisible hand controlling checks and balances to maintain an economic equilibrium so that each group gets its fair share? After the expected cost savings from a project are realized in part or whole, how will the financial savings be divided among these groups?
Figure P4.2 illustrates the interplay among the three groups. Customers con- clude that they received value if the benefits or pleasure they received from a product or service exceeds what they paid for it. At the opposite end of the figure are the owners, shareholders, and lenders. They also have entitlement to value.
As investors, if their investment return is less than the economic return that they could have received from equally or less risky investments, then they are disap- pointed; they would feel they got less value.
The weighing scale in Figure P4.2 indicates that there is a trade-off between INTEGRATING PERFORMANCE MANAGEMENT WITH CORE SOLUTIONS 147
Customer Value
Shareholder Value Employee
Satisfaction Product/
Service Utility A proxy for
customer satisfaction
Suppliers Suppliers Suppliers
Price
An Enterprise SVA
ABM systems will be the only fact-based and quantitative linkage between customer satisfaction and shareholder value.
ABM CRM
Figure P4.2 Value Is Ambiguous: Whose Value?
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customers and shareholders. Under certain conditions, increasing customer satis- faction can result in reducing shareholder wealth. For example, if the enterprise drops its prices too much or adds many more product features and services with- out a commensurate price increase or gain in market share and sales volume, then the shareholders give up some of their value to their customers.
Figure P4.2 also involves supplier-employees, which includes the execu- tive management team. Their perceived entitlement is their job value. For many this is their security and financial compensation. Heroes of the 20th- century labor union movement, such as Walter Reuther of what is today’s AFL/CIO labor union in the United States, confronted Henry Ford for “a fair day’s pay” for hourly workers. In today’s more mobile knowledge worker la- bor pool, employees who are dissatisfied with their job value simply vote with their feet by switching to pursue a greater-value job with another employer.
Or they become contractors and establish their own value with their own fees or billing rate.
Figure P4.3 decomposes Figure P4.2. The two ultimate core business processes, encompassing the specific ones, that are possessed by any organiza- tion on the planet are represented by the solid arrows. The two are (1) take an or- der or assignment, and (2) fulfill an order or assignment. When stripped to its 148 INTEGRATING PERFORMANCE MANAGEMENT WITH CORE SOLUTIONS
Strategy, Mission
Customer Satisfaction
Shareholders Needs
Order Management
(front office)
Inputs Senior
Management
Your Organization Assets
Employee Behavior
Scorecards
CI / CRM
EVM/ROI KPIs
Employees Adjusted
Strategy
$
Products, Services, Missions
ERP, etc.
“How am I doing on what is important?”
Process Planning &
Execution (back office)
Figure P4.3 How Do They All Fit Together?
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core, that is what anyorganization does. Can you name one that doesn’t? Figure P4.2 reveals that the IT world has named the support systems for these two mega-processes as front officeandback officesystems. Other IT systems serve as components in managing the value chain.
The concept of value is imbedded in Figure P4.3. The three groups entitled to value are defined as follows:
1. Shareholder value. This is measured by economic value management (EVM) methodologies, which detect whether the profit margin generated from satisfying customers is also sufficient to reward shareholders and lenders beyond risk-adjusted investment returns that investors and lenders could achieve elsewhere, including financial returns from financial market instruments, such as U.S. Treasury bonds. Accounting profits are not eco- nomic profits (see Chapter 20).
2. Customer value.Thefront officecustomer intelligence (CI) and customer relationship management (CRM) systems are intended to maximize com- munications, interactions, and sensitivity to each customer’s unique needs. (See Chapter 17.)
3. Supplier-employee value. The back office enterprise resource planning (ERP) and advanced planning systems (APS) ensure effective execution tofulfill orders. The PM strategy mapping and scorecard systems ensure that specific groups of people, equipment, and other assets are performing in high alignment with senior management’s strategies.
ABC/M data permeate every single element of Figure P4.3. As earlier men- tioned, ABC/M itself is not an improvement program or execution system like several of those systems in the figure. ABC/M data serve as an enabler for these systems to support better decision making. However, a strong case can be made that ABC/M links CI/CRM to shareholder value, which, as previously mentioned, is heralded as essential for economic value management. The tug- of-war between CI/CRM and EVM is the trade-off of adding more value for customers at the risk of reducing wealth to shareholders. ABC/M is the only fi- nancial calculation engine that can quantitatively translate changes in one value to measure the impact on the other. In my opinion, the key event that will catapult ABC/M to front-and-center as an essential PM methodology will be the recognition that ABC/M modeling can be the best link between what now appear to be disparate systems. We know they all connect, but we struggle with how they do it.
Part Four concludes by describing how information technologies—namely INTEGRATING PERFORMANCE MANAGEMENT WITH CORE SOLUTIONS 149 ccc_cokins_pt4_145-150.qxd 1/14/04 10:30 AM Page 149
data warehousing; data mining, with its powerful extraction, transform, and load (ETL) features; and business analytics (e.g., statistics, forecasting, and optimization)—all produce data from diverse source platforms transpar- ently. That is, these technologies convert raw data into intelligence—the power to know.
NOTE
1. See Paul Greenberg, CRM at the Speed of Light (McGraw-Hill, 2002);
and Michigan State University, 21st Century Logistics: Making Supply Chain Integration a Reality (Oak Brook, IL: Council of Logistics Man- agement, 1999, www.clm1.org).
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