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|Date: 2022-07-07 Page is: DBtxt001.php bk0006040|
The Basic Concepts of True Value Metrics
Bottom of the Analytical Pyramid
Activities are ubiquitous
Activities are at the bottom of the analytical pyramid … or almost. In TVM the idea of activity has been used rather than any of the words that describe this that originate with either the corporate organization or development institutions like the UN or the World Bank.
In the UN and the World Bank the “Project” is main form of organization at the implementation level. In the case of the UN the project is sometimes very small, but in the case of the World Bank may be extremely large, maybe multisectorial and comprising many different components. In a corporate organization the large organizations may be subdivided into business units, into subsidiary companies, into departments, into profit or cost centers. For TVM is does not really matter what structure is being used by the organization, the value accounting for an activity fits into any of the structures.
What is an activity
An activity is any use of resources to achieve some socio-economic purpose. In order to be easy to measure and evaluate, the activity should be simple if not small. Complex activities with many different things going on are more difficult to analyze and are better separated into individual activities for management analysis. This is what happens all the time in corporate management information systems, and the same should apply in TVM.
In money accounting and management accounting in an organization, there is often cost or profit center reporting, or departmental accounting. These reports are simple to understand and to relate to the activities of the unit. So it should be with an activity in the TVM. In TVM an activity is an entity where socio-economic resources are used … value is consumed … and socio-economic value is created. When the value created exceeds the value consumed, there is value adding, otherwise there is value destruction. In TVM an activity is small … small enough to be comprehensible.
TVM thinks of “activity” as a socio-economic event that converts resources into needed goods and services … and in the process provides jobs and remuneration for workers. TVM has a focus on the activities that are creating socio-economic value for the community … and what is needed so that good surplus producing value adding activities are facilitated. Socio-economic value performance is one of the core metrics for a smart society … yet almost absent from the money related metrics used by the corporate community, capital markets and the broader society at the present time.
The basic entity for performance analysis
An activity is the basic entity for performance analysis. In TVM an activity has two elements:
Use of resources has two components:
The product of the activity has two components:
Use of resources that are part of society's commons and not included at all in an organizations money accounting and activity costs … but they should be using the TVM framework.
Activities are the origin of value adding ... or value destruction. Data about activities may be needed to explain why some aspect of the community balance sheet has changed ... but it many situations is is quite obvious without much need for detailed data.
Activity reporting is similar to the reporting of the corporate Profit and Loss Account or Operating Statement. An Activity Report may show some of the characteristics of economic activities in the community that have had an impact on socio-economic changes. An Activity Report helps to explain the changes that have taken place in the balance sheet of the community. Thus, for example, an increase in stock levels of grain might be explained by an unusually good harvest ... and explain why there was a good harvest.
Activities are the origin of value adding ... or value destruction. Data about activities may be needed to explain why some aspect of the community balance sheet has changed ... but it might be quite obvious without much need for detailed data.
The TVM reporting format embraces the accounting ideas of “roll up” and “drill down”. The TVM reporting framework has the community as the primary unit for accounting. The data about community may be aggregated to provide reporting at the district and provincial level as well as at the national level.
The same framework of data is used at each level. The “roll up” and the “drill down” of the data provides a coherent set of data for decision making at the national policy level and at the tactical operational level in the community.
Data about an activity
What is the activity?
It is activities that change the state of the community. The cause of improvement in the quality of life is a result of a portfolio of socio-economic activities that in aggregate are surplus producing and value adding for the community.
What need does it serve or satisfy? Activities have impact on progress, and cost effectiveness is a measure of this performance. Surplus producing activities result in socio-economic progress. Cost effectiveness is the relationship between the impact and the incremental costs, that is value consumption that was used to achieve this increase.
What cost ... what resources are being consumed?
An activity has a good cost efficiency when the amount of cost or value consumption is better than a norm or standard, and a poor cost efficiency when worse than the norm. The purpose of the cost efficiency measure is to compare performance in the conduct of an activity.
The socio-economic performance of a community is determined by the activities that are going on. Where activities are productive and there is surplus production … sometimes equivalent to profit … the condition of the community improves. Whether or not activities can be productive and surplus producing depends on the available resources, the enabling environment and constraints. Wealth is created with activities that deliver surplus production … poverty is a result of activities that are unproductive and do not add surplus to the society.
What is being achieved … what impact?
Data are needed to show which activities are important .. but no need to have detailed data about things that are immaterial. Quite simple data serves to determine what is important and what is not … common sense may be used. Low productivity is the root cause of poverty. Every activity in a community should be value adding so that the socio-economic activities of the community are producing progress.
The impact of an activity may be noted simply by observation. An observation is noted … and then another … and then another. They add up to some useful information about the activity. Even in quite large contracts it is possible to observe important characteristics of the activity … for example: the way the contract is being implemented and the impact on the surroundings.
Construction … New York 2nd Avenue subway
There is a major construction project going on in New York at the present time to build the 2nd Avenue subway. It is being managed by one of the world's biggest contractors … but you can tell it is a government contract by the lethargic pace of what is going on. The duration of the contract has been extended … one has to wonder what impact that will have on cost to the public and profit to the contractor. Meanwhile there is also an impact on local business and quality of life that only comes into play with TVM
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