Value metrics are important. But value metrics are not easy, because the quantification of metrics is not easy.
Measurement of value has a large subjective component ... but it is still possible to have useful measurement. In fact, because value is so important, it is vital that there are relevant metrics about value.
The metrics of value is independent of dollar money ... currency money.
In TrueValueMetrics values are placed in a structure rather like money is placed in the structure that is double entry accountancy.
By using the concept of standard value ... a concept rather similar to standard costs ... it is possible to compare different programs and see how one program performs relative to another.
In the case of malaria control programs, the goal is to reduce mortality and morbidity. By having a table of standard values it is possible to report that one approach had more value relative to the costs than another.
The perception of value differs from place to place, and also changes over time. The changes are ongoing. Values change over time because of the evolution of society. The TVM set of standard values makes it possible to start a process of understanding value perception better, and also to make value adding the goal of economic interventions.
Value adding ... social value adding
Value adding is a broader concept than profit. Value adding is the difference between the ending value and the initial value. It may also be thought of as the value created less the value consumed.
Value is rarely the same as price. Many things in life with the most “value” are truly priceless ... good health, friends and family, the birth of a child, happiness, and so on. It is a challenge to associate a number with value ... but TVM does this by using a dialog around sets of standard values.
Value consumed is more than the financial costs. Value consumed reflects costs but also includes issues like the damage to the environment ... or the exploitation and consumption of natural resources that have taken millions of years to create as in the petroleum industry.
Value ... financial and social
Capital markets are all about value ... but it is financial value only. A stock has a value based on its financial profit history and profit potential. What the company does for society is not a part of the capital market computation. It is just about profit history and profit potential ... about money flows ... about risk and the safety of money capital.
Social value is much more. It is no accident that the phrase “Pursuit of Happiness” is in the founding documents of the USA and not “Chase for Money”. Happiness derives from social values that end up making life worth living. TVM embraces both the financial and the social value and puts both in the metrics of the community.
Unit costs, prices and values are very informative ... they make comparison easy both over time and from place to place. There are some challenges because units of measure and currency exchange rates may confuse ... but when these issues are taken into account, unit costs, prices and values are very powerful.
Cost, price, value and productivity, profit and impact.
Three critical metrics in understanding economic activity are: (1) cost, (2) price, and (3) value. The relationship between these numbers determines the performance of almost any economic activity. All of these measures are important ... any one missing and the understanding of the dynamic of societal progress is compromised. These metrics are a part of a further three critical indicators: (1) productivity ... productivity improves when less cost produces more goods or services; (2) profit ... profitability improves when price is increased and cost is decreased; and (3) impact on society ... impact improves when the value increases and the cost decreases.
Value adding is a derivative of value and cost. Value adding may approximate profit when the price reflects value and there are no social costs in addition to the money costs. Value adding is a much better measure of progress and performance than money profit. Value ... that is value to society ... is almost totally excluded from modern financial and economic metrics. The reasons are many including (1) it has a subjective dimension that makes valuation difficult; and, (2) it has a devastating impact on the norms of financial valuation of corporate activity. TVM has value more than profit as the key element in performance.
An economic dynamic that creates value will sustain not only at a present level, but at an increasing level of value creation ... a virtuous outcome. In a simple world it would be easy to plan progress and achieve progress, but in the world of reality there is little that is simple. Besides value creation and a virtuous compounding, there is also value destruction.
Value adding takes place whenever something that adds to quality of life occurs ... frequently in small increments
During the 2009 Clinton Global Initiative (CGI) I was asked what I thought of it. My instant response was that it was largely PR, and the value of it was rather modest. I was then bombarded with statistics about how much the CGI had “raised” for global good causes and was made to feel very bad. The previous year “over $1.8 billion had been raised at the CGI”, I was told.
But essentially, I was right. The statistic of how much CGI raises is a very poor metric of the CGIs value ... because much of the money described as being raised by the CGI is money that is already going to flow into philanthropic initiatives anyway.
The value of CGI is not how much money the participants talks about, and then gets published as a money raised amount. ... but the fact of the meeting and the cachet of having talked about the project in this forum ... which in turn facilitates fund raising.