Can Value Management help improve your business Efficiency Ratio?
As companies grow and expand their customer base, they increase their market share. As customers’ taste and needs change, so does the level of expectation for companies to quickly adapt and develop new strategies to meet the demands of the change in consumer taste and preference; while continuing to adequately meet the needs of the existing customer base and newly acquired customers.
Within the dynamics of the aforementioned changes, business managers often face the challenge of balancing the competing priorities of delivering value to their customers, while efficiently managing financial resources—or otherwise, to deliver value to their shareholders. This conundrum can inevitably create a gap between what is expected verses what is delivered, to both constituents. Often, this expectation gap is the result of the inability of companies to effectively manage existing resources, without significant cost overruns with impact to their business efficiency ratios—which consequently affect the bottom line profits.
What is business efficiency ratio? In simple terms, business efficiency ratio measures how companies manage revenues verses expenses. Most companies aspire and aim to lower their efficiency ratio, either by lowering or containing their costs of doing business. However, I will digress to say as much as business managers want to lower costs, fixed costs are rarely within their control. Likewise, business managers are most effective over the long term, at lowering or containing costs by astutely managing controllable expenses, which are variable costs.
Without citing supporting research statistics, we have heard of companies in their growth stage that were too timid to spend financial resources on the front end, to reap the rewards on the backend. As such, their conservative business management approach has had the unintended consequence of arrested growth potential. Similarly, we all have experienced or heard anecdotes about companies with stagnant or negative growth patterns that have attempted to boost their bottom lines by reducing employee head counts, which resulted in massive cuts to salary expense as a component of fixed costs. However, through the triage process, these companies often end up losing employees with critical skill sets that are able to drive revenues, service and retain customers. Often, the collateral impact is not visible unless it is tracked. For losing a sizable portion of a company’s human capital can arguably cause trauma in the workplace; which can result in low morale and anxiety about job insecurity, which undoubtedly can negatively impact performance.
I should also caution that there are times when cutting fixed costs through salary expense is a business imperative. Most business managers, as much as they are mindful of how their decisions might negatively impact individual employees, sometimes are left with no good option. They have to make an executive decision to cause the least trauma to their employee population through job loss; but it was a measured approach to continue delivering value to their shareholders, after exhaustively looking at all options.
Conversely, we have heard many case studies where business managers have taken a different approach to the former, by evaluation their entire growth strategy to identify barriers to execution. What they have often learned is that a strategy deployed three or five years ago, may not be dynamic enough to compete in their current market environment. Or they have a good growth strategy, but not the band strength for execution; or finally, they have uncovered they have a middling plan that has been well executed, but if perfected, can help advance a negative growth outlook to marginal growth. For these business managers, this is where value management methods have played a constructive role in creating a work plan to break down management problems, obtain a view of their organizations from many perspectives and complete a framework for business improvement to transform their business growth strategies.
What is value management?
I asked Mark Law, Value Management Practitioner and Senior Partner at Advanced Management Skills, a leading UK firm specializing in training consultants, value practitioners and change agents, to provide his best expert definition of Value Management. He cites, “Value Management is a style of management, particularity dedicated to motivate people, develop skills, and promote synergies and innovation, with the aim of maximizing the overall performance of an organization.”
I could not agree more to say that it takes leaders to inspire and motivate people, coaches to facilitate and support skills development, and employees to lead innovation. Yes, you heard it right! Innovation is bottom up and not top down! The most innovative companies are decentralized and their leaders promote a culture of creativity—which fuels innovation. Innovation happens in the engineering labs, manufacturing floors and is seldom born in executive suites. More importantly, value management methods—when linked to the business strategy—promote the synergies necessary for the function of any company’s economic model to drive profits, either by increasing revenues and/or reducing costs.
As business managers, when was the last time you have held a strategy session for an external review of your business unit’s performance? As business managers, do you use an “MBA” approach to strategy? While an “MBA” approach to strategy is traditional, however, the most innovative strategists use a situational approach to strategy, by considering several approaches and identifying the best approach to address specific business problems.
To be innovative, a strategist has to be open to new learnings and adapt to changing business environments. For me however, my most practical learnings have been imparted by being a front row student in the school of life. In my pursuit of being open to new learnings, I was in London most recently to attend an advanced strategy consulting curriculum, registered consultancy and value management program registered with the Institute of Value Management Certification Board, as meeting the full Advanced – level training requirements for registration as a Professional in Value Management (PVM) Certificate Number: ADV2 257. I am also in the process of writing my reflective learning thesis for Level 7 Award in Professional Consulting, registered at Chartered Management Institute and Institute of Consulting in the UK; which focuses on core skills for tackling complex management problems. If you are a business unit manager or a business executive with a wider scope of responsibilities, and want to consider linking value management to your business strategy, I am interested in a conversation with you!