Measuring value creation
Organisations measure many different things in many different ways, but they usually face the problem that measuring activities and outputs is easy, while measuring outcomes is difficult. Organisations may have a lot of data but not be able to use it sufficiently to create value. However, value creation is vital for companies if they are to meet demand and secure a stable market position. For example, working more hours (activities) and providing more services (outputs) does not necessarily lead to a better customer experience (outcomes).
Evidence-based management focuses on four key areas of value: in addition to using hypotheses and experiments to achieve goals, evidence-based management offers a range of options for value and the ability of an organisation to create value. These perspectives are called Key Value Areas (KVAs). These areas look at the organisation's goals (Unrealised Value), the organisation's current state relative to those goals (Current Value), the organisation's responsiveness to value creation (Time to Market), and the organisation's effectiveness in creating value (Innovation Capability). By focusing on these four dimensions, organisations can better understand where they are and where they need to go.
Each of these KPIs focuses on different aspects of value or the organisation's ability to create value. On the one hand, it is important to deliver business value (Current value), but organisations also need to demonstrate their ability to respond to change (Time to market) while being able to sustain innovation over the long term (Ability to innovate). And they need to be able to keep moving towards their long-term goals (Unrealised Value), otherwise they risk stagnation and excessive complacency that hinders progress.
The current value is the value provided by the product today. The purpose of examining Present Value is to understand what value the organisation is providing to customers and stakeholders at that moment in time; it only considers what exists now, not what value may exist in the future.
Here are some questions that organizations should continually reassess in terms of Current Value:
1. How satisfied are users and customers currently? Is their happiness increasing or decreasing?
2. How happy are the organisation's employees currently? Is their happiness increasing or decreasing?
3. How happy are investors and other stakeholders currently? Is their happiness increasing or decreasing?
Considering Current Value helps the organisation to understand what value its customers/users are currently experiencing.
Example: while profit - a way of measuring investors’ happiness - shows the economic impact of the value an organisation delivers, knowing whether customers are satisfied with the results tells us more about where to improve to keep customers. By monitoring Current Value from multiple perspectives, an organisation can better understand its challenges and opportunities.
At the same time, customers’ satisfaction and investors’ satisfaction are not a complete indicator of how successful the organisation is in creating value, as ultimately it is the employees who are the value creators, so it is important to analyse value creation from their perspective. Engaged employees who know how to retain, maintain and improve the product are one of the most important assets of the organisation and, as you may have experienced, happy employees are more engaged and more effective at work.
The unralised value is the potential future value that could be realised if the organisation meets the needs of all potential customers or users.
Examining unrealised value helps the organisation to maximise the business value realised from the product or service over time. When customers, users or clients experience a gap between the experience they have and the experience they want, the difference between the two represents an opportunity; this is Unrealised Value.
To achieve Unrealised Value, organisations need to continually reassess the following questions:
Considering both Current and Unrealised Value allows organisations to balance current and potential future benefits. Strategic goals emerge from some satisfaction gap and the organization's ability to reduce Unrealized Value by increasing Current Value.
Example: the Current Value of a product may be low because at this stage it is only an early version developed for market testing, which if it has a very high Unrealised Value means it has a high market potential. This is why it is worth investing in the product in order to increase the Current Value, because it has the potential to pay off as the Unrealised Value is realised.
Conversely, a product with a very high Current Value, a high market share, no close competitors and very satisfied and loyal customers may not necessarily justify new investments; it is the classic "cash cow" product, which is very profitable but is nearing the end of its life cycle due to its low Unrealised Value.
Time to market
The time to market is the ability of an organisation to bring new developments, services or products to market quickly. Examining time to market is important because it can help an organisation minimise the time it takes to deliver value. In terms of time to market, organisations need to continuously reassess the following questions:
Improving Time to Market helps improve the frequency with which an organisation can potentially change its Current Value.
Example: by reducing the number of new features in a product, time to market can be drastically reduced. Many organizations also focus on eliminating non-value-adding activities during the product development and delivery process to improve time to market.
The innovation capacity is the effectiveness of an organisation in creating new capabilities that meet customer needs and deliver a better customer experience.
The purpose of the Innovation Capability assessment is to maximise the organisation's ability to deliver new features and innovative solutions. Organisations should continuously reassess their innovation capability by asking the following questions:
Improving Innovation Capability helps the organisation to become more efficient so that its products or services can deliver real value to customers/users.
Example: an organisation spends too much time improving product quality, lack of proper operations, lack of decentralised decision making, lack of recruiting and inspiring talented, passionate team members, etc., to maintain multiple versions of a product.
As low-value features and systemic barriers accumulate, more and more of the budget and time is spent on product maintenance and overcoming barriers, reducing the capacity to innovate. In addition, any factor that prevents the product from delivering value to customers and buyers also reduces the capacity to innovate.
Small steps to achieve your goals and create real value
The first step towards a strategic goal is to understand the current state of play. If the focus is on achieving the strategic goal of Unrealised Value, then it is necessary to start by measuring the Current Value provided by the product or service (of course, if the product or service is new, then its Current Value is zero). Understanding the area to be improved may also require measuring Innovation Capability and Time to Market.
The Experimental Cycle method helps organisations to move from their current state to their next goal, and ultimately to their strategic goal, by taking small, continuously monitored steps. This cycle consists of:
Explicitly setting hypotheses, measuring the results, and using the results to check and adapt the objectives are implicit parts of the agile approach. Making work clear and transparent is what evidence-based management adds to the organisational development process.