Friday, May 21, 2010

Value ... What is it? Why does it matter?

Dear Colleagues

Value is subjective. Value is difficult to quantify. But does that mean that value should be ignored and the only ubiquitous metrics in play those that only relate to corporate profits, stockmarket prices, GDP growth and public debt!

Value is subjective and complex ... and no single number enough to quantify value from every perspective. But something useful can be done.

Community Analytics (CA) uses the concept of standard value ... an idea similar to the idea of standard cost in corporate cost accounting. A standard cost is a theoretical cost based on analysis of the engineering and production process. An item gets a standard cost from this analysis ... and this standard can be used in a variety of ways. When compared to actual cost, there is a measure of performance. With good understanding of the make-up of a standard cost there can be planning and engineering for cost improvement ... and so on.

A standard value is a theoretical computation based on analysis of a variety of elements of value ... those that are important for the people concerned. Big questions have to be addressed, and some of these are related to money, some to future perspectives, some are emotional.

A good starting point is to consider the difference between the following two situations: (1) a 25 year old in the USA with a good education and in good health with all sorts of possibilities; and, (2) a 25 year old in a developing country without education and in poor health and with nothing much in terms of possibilities.

Situation 1 can reasonably be valued at (say) 1,010,000 where you can think of the numbers as US dollars, but in reality they are merely a quantification. Situation 2 can be valued at perhaps 10,000. In the first case the potential and the money earning power of the individual is enormous ... but in the second case the money earning power of the individual is essentially nothing. Arguably there is an emotional value to be attached to both people ... and it is reasonable to consider the quantification of this should be the same in a rich country as in a poor country. Accordingly just 10000 units in both cases.

Another example may also serve to explain value in the context of CA. When an oil company costs its production for the purposes of calculating its profit and preparing financial reports it includes all the cost disbursements made from the time it gets access to an area to explore and drill ... and the costs associated with drilling and pumping and transporting, etc. It does not have any number for the cost of actually using the oil that exists in the ground. This is considered as zero ... even though the cost of replacing this energy resource would be way bigger than the costs being incurred to bring this free material through a production process and to market. The value consumed that is part of the assets of the planet is not being accounted for in normal money accounting, but it needs to be in CA's full value accounting methodology.

Putting the standard value methodology in place is going to be accelerated by applying the ideas at the community level and within organizations rather than at the national level. There are various initiatives to do something different from money data at the national level ... and that is certainly a step in the right direction but it does not have much potential to be used to change the way major operational and investment decisions are made.

One example is the action of leadership in Bhutan to use a metric they have called Gross National Happiness rather than Gross National Product. This reflects the value idea quite well. It is reported that as many as 40 countries are now using some version of this measure ... but it is not mainstream by a long way. Also, some years back ... almost 20 years now, the United Nations Development Programme (UNDP) started publishing an annual Human Development Report to incorporate some human measures of society into the global reporting and to balance somewhat the money economics reporting of the World Bank in their Annual Development Report. While the UNDP initiative had merit, it had a terrible flaw in that the cost of achieving progress was ignored. As a result there is now a lot of data about what is and how it has trended ... but little or nothing about the cost of doing it. Community Analytics (CA), of course, has an interest in both the status, the progress and the performance ... all of which should be optimized in order for society to be successful and sustainable.

There is a lot more to say about value ... this is just a start. More to come. In haste!

Peter Burgess

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