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|Date: 2022-07-07 Page is: DBtxt001.php bk0004090|
The Basic Concepts of True Value Metrics
An Average Almost Always Wrong
Must have place and time specific data
An average is a good way to keep score and measure progress … but an average is a bad way to make decisions or manage anything. There is some talk of the “Tyranny Of The Average” but most measures are all about average, and nothing else.
There is no universal master list of what metrics matter. TVM is based on the fact that every place and time is different, and therefore deserves to have metrics that reflect the reality of the place and the time, and not merely be a derivative of some average derived from complex sophisticated statistical manipulation.
THIS community is NOT an average community!
One of the techniques for data acquisition that is supported in TVM is the idea that the first set of data will inform what should be the next set of data. In this manner it is possible for data to be acquired that have focus on what is the most important.
Some issues are more important than others … and importance varies from place to place and from time to time. TVM uses the concept of materiality to focus on things that are important, so that the metrics can be used to make better decisions about the major matters of importance. In other words, TVM has meaningful metrics about everything that matters.
The process of building a value balance sheet for THIS community results in knowing specifics about THIS community:
For all the value that this represents, there are also constraints that are associated with the lack of specific things … treated as liabilities in a balance sheet construct.
Detail On Demand
Avoiding data overload
Data overload is an enemy of performance in a high tech society. The efficient use of large amounts of data requires a system and some compromise … but the compromise should not detract from the utility of the data and its effective analysis. By using data in a summary form for oversight, and then doing drill-down or roll-up to have more useful information to address problems that are emerging.
With the community as the main reporting entity, analysis summarized at the community level has meaning in the community. Specific decisions are made either at the activity level or within organizations, so there has to be capability for the data to be useful at these levels … by drill-down … or accessed in a summary form at the organization level, which may be a roll-up from specific activities.
A management system helps to measure progress and performance as the scorekeeper … but also provides ways to ascertain details of the performance for action … in other words the ability to have “stats” for action as well as just the outcome of the game!
The “roll up” and “drill down” framework
The following shows the “roll up” and “drill down” framework by geographic area from community “up” to the country level.
Within a community the “roll up” and “drill down” framework may also be done by geographic place using a framework such as the following:
Drill-across … is value chain analysis
Almost everything is linked
While a business organization may be quite happy earning a profit, the impact on society may not be all good. Value chain analysis is a way to get at the socio-economic value impact across society and the economy as a whole.
Value chain analysis is a way to see impact throughout the value chain. The value chain starts with a resource and ends with an impact on quality of life. Value chains exist in a complex and chaotic economic ecosystem with a variety of resources, a variety of actors and a variety of interactions that produce a variety of outcomes. It is virtually impossible for a value chain analysis to be academically rigorous, but it is incredibly useful in understanding the main drivers of socio-economic performance.
Drill down for granular detail
Need for detailed analysis
Decision making requires specific information. It is rare for good decisions to be made based on “average” data. Data for decision making needs to be specific, and may differ greatly between different locations.
Good information systems enable granular analysis without forcing the user to handle vast amounts of redundant information … but the data needed are available when needed in a specific context.
Activity … ultimate drill down … the origin for roll-up
The activity is the source of value creation … as well as being the vehicle for the consumption of resources. Understand the activity, and it is possible to manage the activity and the progress of the community as a whole. The roll-up of activity may be done in a variety of ways.
Roll-Up … Accounting Consolidation
Consolidation rules in the value context
Not easy but very important
Consolidation accounting is a part of this paper because hardly anything is as simple as it seems, and consolidation accounting has the essential critical logic that helps to sort this complexity into its component parts. Community is impacted by many different economic entities and activities, and the way in which these interact and are recorded has been defined comprehensively in the accounting principles associated with consolidations.
Consolidation rules disallow double counting and other misinformation. TVM has a level of rigor about data similar to that used in good money accounting where there are some basic rules about consolidation so that the process of consolidation does not result in “double accounting” and other misinformation.
The principles of consolidation are critical to corporate reporting where a simple but meaningful presentation is needed for complex organizations. Over the past 30 years both organization and reporting rules have become more complex ... with the inevitable outcome that this complexity cannot be managed and there can be no oversight. This is, of course, the data failure that was an important part of the systemic economic failure of 2008.
The TVM principles of consolidation for a community build on the old corporate accounting principles of consolidation ... but consolidating not only the debit and credit of money transactions, but also the value adding that occurs as money transactions multiply around the community and the value destruction that takes place when money transactions take place with entities outside the community.
Analysis of aggregated activities is difficult, if not impossible. Aggregated activities are always difficult to understand and report with clarity. The reports of large corporations are rarely clear enough to be useful ... except to people who either have studied the company for a very long time or have insider information.
Macroeconomic indicators are the ultimate in aggregation. This maybe helps to explain why so little of these indicators have specific relevance in the communities where people live. They are largely intellectual constructs. They do perhaps help to explain “what” but do little to help understand “how”. Because of this fatal flaw macro-economic dialog is one where opinion and interpretation hold sway rather than clarity about the dynamics and mechanism of actual economic activity.
Accounting has good concepts for how corporate entities and subsidiary activities should be aggregated so that there is a minimum of double counting and distortion ... this is consolidation accounting, and it is very useful when rigorously applied in the analysis of community performance.
The TVM analytical model aims to have a minimum of assumption and a maximum of simple aggregation ... accounting arithmetic more than statistical mathematics.
A good system is easy to navigate ... and with the ease of navigation there ought to be questions arising. Typically the questions will be (1) let me see more details about this; or (2) how does this affect the big picture?
The drill down capability helps to get at more details. For example going from the total cost to the specific elements of cost that make up the total, or, going from total child mortality to the specific causes of this mortality ... was it malaria, or diarrhea or respiratory illness.
Roll-up activities to community
TVM has focus on the community more than on the organization. Socio-economic progress and performance is first about people and their quality of life and only secondarily about the profit of organizations. The quality of life of people is more closely associated with community than it is with organization.
The roll up capability makes it possible to see how changes in a detail change the performance at the aggregate level. In most of national level reports the data being reported are statistical constructs that incorporate all sorts of assumptions.
In this roll-up the various activities are summarized into a community. This is the main roll-up that drives socio-economic progress of the community and for society as a whole.
Community --- --- ---
In this roll-up the various activities are summarized into organization. This is the roll-up that managers of organizations have always looked to as the measure of success for the organization
TVM makes it possible to analyze socio-economic progress and performance at the community level. Decision makers in a community are able to look at activity performance and determine where there is value adding and where there is value destruction.
The preferred way and the most reliable way to look at progress and performance of the community is to summarize to the community level directly from the activity as follows:
Community --- --- ---
Activity It should also be noted once again that progress of a community is most easily assessed by looking at the change in the “state” of the community over time … the change in the value balance sheet of the community. This is roll-up through the location:
Community --- --- Where Activity
This is roll-up though the local organizations: Community --- ---
Local Organization Activity
This is roll-up through local sector: Community --- --- Local Sector Activity
Care should be taken not to “double count” by taking the activity into account multiple times through different roll-up ways of summarizing.
Roll-up activities to organization Within community there may aggregation by sector or aggregation by organization. While the social goal is better quality of life for the people and families, the organization is the main implementing actor, and their performance is critical for the performance of society.
Decision making about activities determines socio-economic progress and performance … and TVM acquires data to help with decision making and holding decision makers accountable for performance.
Organization --- --- ---
It would be better if the organization management also occupied itself with the roll-up of activity to impact on community to organization since this is what ends up influencing the quality of life in the community and the quality of life of people.
Organization --- Impact on Community Activity
Roll-up branch organization to HQ
Headquarters of organization --- --- Branch in the community
Roll-up by sector
Roll-up by sector may be used to demonstrate that a certain sector activity is highly productive or the converse. This may help with strategic decisions like whether or not to move from one sector into another. The basis of this analysis would be return on assets employed. An example, might be the decision to change from one crop to another, or to migrate from rainfed agriculture to irrigated agriculture with all the incremental investment that this would require.
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