The Basic Concepts of True Value Metrics
Chapter 6 ... Entities for Value Analysis and Reporting

6-3 Organizations

All Organizations Must Be Engaged

Every type of organization

Profit focus organizations

The profit maximizing enterprise ... the engine of the modern economy has a dynamic that seeks the maximum of profit and the maximum of stockholder value. Though a good organization would work to have great stockholder value that is sustained over time ... the way capital markets work, it behooves the management and decision makers to focus on short term value even if this consumes long term value.

While the score-keeping was rigorous and relatively simple fifty years ago ... modern corporate score-keeping is now the subject of all sort of rigging ... no relative of rigorous. The law and rules have allowed all sorts of practices that have helped make it possible to have reportable profits on top of enterprise activities that have been catastrophic.

Bluntly put ... a lot of this has been fraud, even though it has been “legal”.

Value focus organizations

The not for profit or NGO has a very different dynamic. Job one is the survival of the organization, and for this a constant flow of funding to support the activities is crucial. There are a lot of activities that are done to support this priority ... including the production of monitoring and evaluation reports that satisfy the funding organizations, the donors.

The organization must do some of what the donor expects them to do ... enough to be able to show the donors that the activities being funded are taking place. Nobody is, however, looking at cost efficiency and assessing whether or not the spending is resulting in a high or low level of activity. Nor is anybody looking at the results and assessing cost effectiveness in a rigorous manner.

While the mission of the private charity or NGO may well be laudable ... this does not automatically translate into a well run organization that is both cost efficient and cost effective. These metrics are usually missing.

The social business

The social business has a different dynamic. The operations of the business may be highly profitable ... but the resulting fund flows are used to expand the operations to serve more of the market rather than to reward stockholders and maximize stockholder value.

The business model helps to make best use of technology and resources to get the maximum of productivity. The social dimension aims to provide the most of value to the community by scaling up the operations as effectively as possible and as fast as possible. The sustainable business means that the enterprise is sustained not by donors, but by the market.

Faith based organizations

Faith based organization are involved in both worship and in social outreach of various sorts … local and international. The money accounting metrics fail to communicate much of what faith based organizations do … these data only tell about the money transactions, when the major part of a faith based organization is about things that have value without much if any connection with money. FBOs need money to pay their bills, but it is the value creation that they do that is their core value.

Government entities

Government entities have become a very big part of many economic systems and provide some services that are of value to society … and many that cost a lot without doing much of significance.

How Organizations Impact Value

Every stage of the value chain

Employment … the cost of the employment is included in the money profit computation, but there is also the value associated with the staff having employment. In economics the multiplier effect comes about because there is value in employment beyond merely the money that comes to the employee. Goods or services provided … the revenue from these is included in the money profit computation, but there is also the value associated with these goods and services satisfying essential needs in the society. This may be equivalent to the price … but usually not. Usually the price is lower than the value, sometimes substantially, otherwise there would be little incentive to purchase.

What about intangible? It is nice to have the business in the neighborhood … it is convenient. They serve as an anchor to the other businesses, and so on.

Or maybe the intangible are negative and not so intangible. Maybe the organization is using high volumes of water, or discharging polluting effluent into the waterways or sewers, or polluting the atmosphere, or making excessive noise. None of these are in the money accounts, but they are part of the value model for the organization.

The organization perspective is about the money profit accounts and is likely to be “private”… but the community perspective has the value accounts and is “public”. A community wants organizations where the value accounts show that the organization is one that is worth having … not especially for the owners who get the profit, but for the value that comes into the society.

What organizations do!

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An organization has the capacity to do things that an individual cannot do on his/her own. This means that an organization is more efficient in its operations than any individual … but this does not mean that this will translate into a higher benefit for society.

Private sector for-profit organizations deploy resources to achieve the most possible profit and be in the strongest possible financial condition. Whether or not this is good or bad for society is of no concern within the metrics of money accounting.

Not-for-profit social business and faith based organizations that use money accounting only put on the record those activities that are denominated in money terms. This means that the core purpose of these organizations does not get recorded in a systematic way.

The purpose of organizations and their progress does not link well with the purpose of community and community progress. Frequently what is good for the profit performance of a corporate business is not good for the progress of the community … not good for the quality of life of the people in the community … not good for the environment in the community … etc.

A small organization may well have a common purpose with the community where it operates … but this is rarely the case with a big organization. Big organizations do many things in many places … they produce goods and services in response to market demand and in ways that serve the interest of corporate profit performance … but they do rather little in response to what would be the best for the communities that are stakeholders in the corporate operations. Money accounting makes it possible for the corporate organization to know a lot … almost everything … about the behavior of revenues and costs and profits, but these metrics do nothing to inform either business management or the public of the value impacts on society … on the communities.

Data about organizational performance

Generally speaking, very little is known about the operations and performance of organizations. They are very secretive and aim to keep secrets away from their competitors and the broader public. While it is possible for corporate organizations to take credit for some of the progress towards prosperity that has been achieved by the world over the last 200 years, it is also something of a conundrum that the progress of science and technology has been so many times greater than the progress of global society in aggregate. Somewhere in the system, there are huge losses of opportunity and performance … and these are well hidden inside the organizations that dominate the economic landscape.

Different types of organizations handle data in different ways. Whether or not an organization is for profit or not, the default setting for any organization is to be in competition with its peers rather than to be cooperating.

The corporate business has a lot of important data about its performance available inside the organization, but very little of this information is available for public scrutiny. The corporate business makes data about its performance available to the public either; (1) because laws and regulations require the information to be made public; or, (2) the information is useful in furthering the goals of the corporation.

The not-for-profit organization makes data public that are going to further its fund raising activities … and otherwise usually make public only what is required by law.

Government organizations do not make much data public about their performance … though many government organizations make public a lot of data through their publishing activities. The system of accounting used in government is rigorous about the budget process and spending relative to budget, but the value being realized as a result of spending is not a part of this system of accounting. Government accounting as an effective system of financial control is further compromised by the annual cycle which encourages inefficient spending of unspent budget allocations towards the end of any year. This is a source of considerable abuse.

Metrics about impact on society

Mainstream money accounting has nothing to provide a measure of organizational impact on society … and efforts to expand the reach of money accounting beyond the basic profit computation and report has not proved particularly useful.

TVM value accounting goes beyond the money transactions to include also value transactions … and TVM also brings a community perspective to the metrics rather than simply the organization perspective.

In corporate money accounting, periodic financial statements are able to convey a lot of information in a very summary form providing much information with little data overload. These corporate management accounting systems also make it possible to use detailed drill-down to access information about the underlying activities and to see metrics about performance.

TVM looks to this detail of organizational activity as the foundation for knowledge about corporate impact on society. The individual corporate activities are located in a place, and the impact of corporate activity in a place should be on the record and accessible to the stakeholders of the place. There should be an accountability about the activity so that there is accessible knowledge about the impact these activities have on the community … about the value consumption that is going on in the community, the value creation and whether or not the activities are value adding or are value destroying.

Money based performance is commonplace

Socio-economic progress has very little to do with the financial performance of an organization … it has everything to do with the changes that happen to people and to community. Not all activity automatically results in desirable impact … and many decisions have negative consequences as well as the intended benefits.

All forms of organization … small and large business organizations, governments, not-for-profit organizations of all sorts … all organizations measure performance using basic money accounting. They usually have a budget about how money is going to be used and where money will come from … and then accounting and reports to show the income and expenditures of the organization.

There are conventions about how profits will be reported … and taxed … and other conventions about how the detailed accounting will be done. At its core, this is all about money based performance. Within these metrics there is absolutely nothing about value.

Value metrics weak or mostly missing

Most organizations are unable to relate the work that they do with the impact they have on the community or on the larger society. The accounting system does not address value impact on society at all.

You cannot manage what you do not measure

Big organizations that operate in many communities and in many sectors have little connection to the performance of the community. A good community activity implemented by an organization will have a favorable impact on the community independent of the overall performance of the organization … but most organizations do not know much about value impact for the community though they may know more about the profit impact for the organization.

The reason why organizational performance is important in the analysis of relief and development is that the organization is often the vehicle for transmitting resources, and in some cases consuming resources with no related developmental benefit. Communities are badly affected by the transfer of value from the community into the broader national economy or global economy.