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Burgess Book Manuscript
Basic Concepts for TrueValueMetrics
Version of 2010 by Section
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Chapter 5 ... State, Progress and Performance
5-3 Performance
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Stats on the Game … But What Game?
Better and better quality of life
The game is better and better quality of life … and the metrics of performance should have a focus on this. Better and better quality of life is the way this game needs to be scored, and the way the game is played. The “stats” should be all in support of this game. This is about social value as well as about business profit … it is about values in society as well as money and material wealth.
More and more and more is NOT the game!
The dominant performance metrics are all about money and profit and economic growth based on more and more and more economic consumption. The end game for this system of metrics is a planet that no longer works to support humanity … but will appear “profitable” until it is “too late”.
More and more growth is the prevailing metric! This is a dangerous situation … consumption growth and profits are the top metrics and a path that will ultimately … and maybe quite soon end up with global value destruction on an unimaginable scale.
The main metrics for global economic performance are large aggregates and averages about growth and capital market performance. These metrics have some importance in aggregate, but do not inform decision makers adequately. The measures used for global economic performance are interesting, but not very useful. They have connection with correlation … but do little or nothing to help with cause and effect and with making better decisions. TVM aims to change the mindset that economic performance is about more and more but is better when it is about improved quality of life for society.
Paradigm change
Not only a bigger pie … a better pie!
TVM is aiming for some paradigm change. In the TVM view, global economic performance is the aggregation of socio-economic performance in the individual communities. Progress and performance is a result of tangible activities at the community level … done by real people who understand the cause and effect of actions in their locality.
The history of economic performance has a lot to do with technology and productivity … and much less with issues like monetary and fiscal policy. Technology and productivity are the “changemakers” that enable the creation of wealth, while monetary and fiscal policy, and the framework of law merely reposition wealth among various constituencies in society.
The prevailing metrics suggest that the global economy has done very well when viewed from the luxury of society at the top of the socio-economic pyramid … but the performance of the global economy from the perspective of more than 4 billion people who are poor and hungry, the socio-economic performance is pathetic.
There are chronic problems with the socio-economic system and especially decision making and the allocation of resources and the accountability for resource use … and the prevailing system of metrics does little or nothing to help.
The singular incentive of money, power and profit has created a monster that is difficult to tame … but not impossible. Metrics are very powerful … but the metrics need to be about all the important things and not only about the money profit subset of metrics. There also need to be metrics about important social value matters, even though these are more difficult to quantify.
The way the modern socio-economic systems works is not merely inefficient, it is substantively dysfunctional. It does not have the capability to allocate resources to satisfy the real needs of billions of people, but puts resources into “creating” artificial need for people who already have more than enough for their well-being.
How do Heads of State become billionaires?
There is something very wrong with a socio-economic system where Heads of State in countries that are resource rich become money billionaires while the population of their countries remain in a chronic condition of poverty. This reflects decision making metrics that are money profit weighted with little or no attention to social values … or indeed basic moral values!
Money profit and value performance not the same
Money profit and value performance not the same … they are very different. The economic elite and major decision makers have become comfortable with profit measures that ignore all the value destruction in society that enables profit making at its maximum. The profit money accounting metrics are convenient … but fundamentally wrong.
Activity and impact are different as well
Activity and impact are different as well … though many people doing academic studies and carrying out ORDA funded projects report mainly about the activities they have done rather than any impact these impact that may have been realized!
Two main measures
Efficiency
TVM uses the basics of business cost accounting to get metrics about performance efficiency. The simple questions are (1) how much did it cost? and, (2) how much was done?
With the answers about cost and how much done, it is possible to calculate the “unit cost” of the work done. Performance is not just an absolute metrics … it is also about how much is achieved compared to what could have been achieved.
So there is a third question (3) how much should have been done with this amount of cost? This is often done in the corporate environment using “standard costs” which are the expected cost for any specific activity.
Efficiency is a function of the difference between the actual costs and the standard costs.
Alternatively, efficiency is the difference between what was done relative to what should have been done.
Cost accounting measures performance efficiency. In TVM this is complemented with value accounting so that all the elements of socio-economic value flows are taken into consideration.
Cost efficiency is the simple idea of comparing the actual cost with what the cost should have been. This is a powerful way of getting control of operational performance. How much should it have cost to do what was done?
Knowing how much got done is pretty basic. Without knowing how much got done, there can be no oversight, control or accountability ... no inventory control ... no operational analysis ... in other words, without knowing how much got done, the whole process of management falls apart. With cost analysis it is possible to move on to evaluate whether or not the operations are efficient. One way of doing this is to compare what is being achieved with what should be achieved.
What it should have cost is a technical question. The cost that it should be can be calculated based on what needs to be done and the prevailing processes and costs. The cost in one place can be compared to costs in other places. The cost now can be compared to costs in a prior situation.
Cost efficiency is the simple idea that something should have cost X but in fact cost Y. The cost X is the cost that would be expected with a reasonably high level of performance efficiency ... usually calculated by reference to technical specifications, knowledge of the work to be done, and so on. The actual cost Y is what the accounting shows the item actually cost.
A standard cost is simply what something should cost based on technical considerations and the prevailing normal prices. A well done calculation of standard cost includes norms for efficiency and what would be usual in the usual setting. In the international context different standards may be used for different countries, and used for comparative analysis.
The international relief and development community has been doing “relief and development” for upwards of 60 years. A corporate cost accounting mindset would have set the stage for this community to know quite clearly what things should cost ... but rather than being an “open book” with a full set of accessible standard costs, the cost of everything is treated rather like a “state secret” that will put the nation in danger. Underneath this secrecy ... costs are probably too high and performance too low ... and no transparency a must
When there is a variance and costs are significantly higher than they “ought to be” there is almost always a reason. Frequently the reason is that the buyer and the seller ... people usually, but sometimes the institutions ... have some agreement that is not in the best interest of the groups that should be benefiting from the transaction. This is a common problem.
A public TVM database of standard costs will help to identify situations where costs are out of control or have been distorted by inappropriate transactions. A very simple database of costs will enable comparisons to be made ... and judgments made about where costs are out of line. Too low a cost may be an indicator of a problem just as much as too high a cost. Sometimes low cost is achieved by low quality ... and this might well have serious secondary effects.
Low cost (price) drugs may be because a supplier is forgoing high profits ... which is good ... or it might be because the drugs being supplied are sub-standard and maybe dangerous ... which is bad.
Effectiveness
Effectiveness is not the same as efficiency. They are two very different measures that are critical to management and oversight of performance. A society will progress best when the socio-economic activities are both efficient and effective.
Performance is not just an absolute metrics … it is also about how much is achieved compared to what could have been achieved.
What progress for the money? In money accounting terms cost effectiveness is progress relative to the money used.
What value adding for value consumed? In value accounting terms effectiveness is progress or value adding relative to the resources consumed.
Money metrics a proxy for value metrics … in many cases the money metrics are a reasonably good proxy for the value metrics … but not always.
Need to measure impact, not activity. A football game … American football, that is … is won when points are scored, not merely by having the players “in motion”. The amount of “activity” is merely motion, unless the motion results in some sort of impact.
A society progresses when its socio-economic activities are efficient and effective. TVM therefore incorporates cost accounting that measures performance efficiency and value accounting that is the basis of socio-economic productivity. Performance is not just an absolute metrics … it is also about how much is achieved compared to what could have been achieved.
Productivity measures in the main are broad indexes of relationships between for example the revenues of an industry with the payroll of the industry. This measure suggests that productivity is increased when there is more output for less input. But this measure ignores all the value impact associated with, for example, less payroll and therefore higher unemployment and its associated value destruction.
Money and material resources at the community level only benefit the beneficial owners of these resources unless other things are going on as well. The metrics of the community performance must identify not so much the ownership of money and material wealth, but whether or not the community is constrained because these things are not being used for any benefit in the community.
Take the case of a bank in a community that has control over money and material resources in a community.
Banks operate in and have branches located in most communities … not all communities … but many. A bank is a custodian for money wealth, and produces money profit for the owners of the bank and its senior executives and decision makers using this wealth. All of the bank's money transactions are recorded and periodically consolidated and reported on. There is no reporting of what the bank does for the community where is is located … whether the bank serves to diminish the performance of the community and quality of life or not … the only metrics are about the bank's profits!
Wealth
The driving force of modern market economics and capitalism is the simple idea that the pursuit of wealth is the best incentive for people to be fully engaged in activities that produce progress. There is no question that an economy based on this premise is better than one driven by egalitarian sharing of the product of enterprise … as in socialism or communism … but that does not mean that the capitalist market system works very well and is the best that can be devised.
Without an alternative measure of performance the capitalist market system is going to be “the best there is” … but based on true value metrics it is abundantly clear that something better is possible.
Building wealth by the exploitation of the poor is as old as history. There is nothing wrong with the creation of wealth … but there is a lot wrong when there is little progress out of poverty because it is the price being paid for the accumulation of wealth and its concentration in the corporate sector and among powerful individuals in the economic elite. Concentration of economic power was seen as detrimental to society in the era of the “robber barons”, and the basic logic of the argument has not changed at all over the years.
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