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BURGESS BOOKS
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Multi-Dimension Impact Accounting
Accounting for ALL the Capitals ... for Society, Nature and the Economy
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Section V
MANAGEMENT / ACTION INFORMATION
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Why is this book being written? What does the writer hope to achieve? What sort of impact will a changed paradigm for development produce?
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ACTION INFORMATION FOR ALL OF SOCIETY
Metrics about the State, Progress and Performance of the Economy and Society
Metrics about Impact on People, Place, Planet and Profit
CHAPTER 10 - ANALYSIS AND REPORTING
MULTI DIMENSION … MULTI PERSPECTIVE
10-1 THE PURPOSE OF ANALYSIS
ANALYSIS ... UNDERSTANDING
Analysis ... a step to creating value from data
Data are nothing without analysis, and TVM Value Accountancy is the same. The effective use of
analysis makes improves decision making and enables people and organizations to be more
accountable. This is what makes TVM Value Accountancy valuable. Experience has shown that
performance improves when there is active feedback and there are the data that enables people
and organizations to be held to account. People may not like it ... but their performance
improves.
The purpose of analysis is to get a better understanding. The data are neutral ... the analysis then
produces results that might suggest some conclusions. It really does not matter what analysis is
done as long as the result is better understanding and improved decision making.
One value step is moving from data through analysis to understanding ... another is to move from
understanding to effective action. In some situations this has been done with wonderful results,
but mostly there have been interventions that were more expensive than effective.
Comparative analysis
Comparative analysis has many forms ... including (1) the comparison of data from one locations
with another location; (2) the comparison from one time to another time; (3) the comparison
from one organization to another (4) the comparison of what should be to what actually is; (5)
the comparison of one approach to another approach; etc.
Analysis releases the power of data
Data without analysis is a waste.
There are data … and then there is information, then knowledge and then wisdom.
It takes analysis to move from having data to having information. Knowledge is getting
information into the human brain … and then wisdom is sorting this knowledge so that it gets
used in a useful way.
The world has a whole lot of data … most gets used for just a very little bit of analysis … a
terrible waste!
An issue ... studies
Almost every study needs some data to be the foundation for the analysis and conclusions.
Enough data are collected to satisfy the methodology of the study … and analysis is done …
conclusions drawn … and report submitted. Some time later another study in a similar area of
interest … but usually little or no reference to the prior data. Easier analysis … easier
conclusions … easier report without the problem of more data that may or may not fit exactly the
new study format, analysis and conclusions. What might be the problem and what might be the
solution.
The problem might be that many studies are part of an education process that requires original
study, analysis and reporting. In this, the primary objective is passing educational requirements
… not helping directly with the progress of society and analysis to make this better.
Merely recognizing this reality and getting the data more completely into the public space could
help significantly.
Management of data ... making metrics useful
TVM is about making metrics useful. In order to be useful the analysis has to be fast, based on
reliable data and the conclusions clear. The whole process has also got to be affordable … in
other words, low cost even if the eventual value of the process has a huge potential to be
substantial. Any process of metrics and analysis is part of the “overhead” of society, not directly
productive and its cost reduces the resources available for the valuable work!
Adding the value dimension to accounting sounds like it is adding a lot more work … but it may
simplify accounting and by adding a dimension to accounting that facilitates answering
important questions way better than a money accounting system can do on its own. Part of the
essence of good analysis is to focus on matters that are material … that are important.
Don't sweat the small stuff
The big questions about social impact cannot be answered reliably unless there is a value
component in the accounting system.
Making analysis fast and useful
Decision making needs to be timely … is best when the relevant data is available and presented
in a clear useful manner.
Management information is the least amount of information that enables a good
decision to be made in a timely way!
What this means in practice is that available data are used … and the analysis is as good as
possible relative to the available data. Rigorous academic analysis takes time … and by the time
the analysis is complete, the situation has changed … or should have changed!
TVM recognizes that the academic community and many experts in the international relief and
development industry, and in institutions like “think tanks” favor rigorous academic study of
complex economic development issues … but this approach is expensive and of rather little
practical decision making value. It is too expensive, too little and too late.
Some successful organizations have used simple rapid planning processes for years with good
outcomes … for example the UN High Commission for Refugees (UNHCR).
UNHCR Used Really Rapid Planning
For many years, the management approach of the UN High Commission for
Refugees (UNHCR) was unusual in the UN system, and very effective. They
estimated the number of refugees as quickly as possible and as accurately as
possible, and this number established a default budget framework for their
immediate operational activity. The UNHCR method made it possible for UNHCR
to do in hours what other units of the UN system would take weeks or months to
do. This approach saved lives … not to mention saving money!
In much of the business world a rapid planning process is used to take advantage of opportunities
and to avert crisis.
Fast Planning in a Business Setting
An international fishing company negotiated fishing licenses to operate in a
country's Exclusive Economic Zone (EEZ) … with the provision that a fleet of
fishing vessels should be in operation on site within a short period of time …
three months, I believe. The expectation was that the international company
would not be able to deploy suitable vessels in this time, and the licenses would
therefore lapse. The international company did an urgent plan that involved very
unconventional solutions and was able to deploy suitable vessels within the time
limit imposed … much to the annoyance of the government officials who had
designed the “trick”! Fast planning made it possible to take advantage of a
desirable opportunity!
Analysis should be done with an open mind about what the results will be. This is rare, because
much analysis is done with a clear idea of what the outcome should be, and this has a terrible
impact on the objectivity of the analysis.
When I was a student, my tutor, Andy Roy, was very clear about the idea that
there were data, there was analysis and there were conclusions. I got high marks
for my willingness to do analysis that resulted in conclusions different than the
conventional wisdom. We talked a lot about the problem of data and analysis that
was used merely to attempt to support conclusions already made.
In my career I have seen another issue ... data and analysis used to get the results
that those with control of the purse wanted. This is common in international
development where recipients of funds always wanted the analysis to show what
their funders expected. I believe that this has been one of the big failures of
development, because it has obscured the very limited impact that most
development projects have had.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009100100#sthash.MDyvRXDq.dpuf
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10-2 SPARE
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10-3 ANALYSIS ABOUT COST, PRICE, AND VALUE
Cost, Price and Value ... three key numbers
Cost, price and value are very key numbers about any economic activity. Though modern society
is founded on economic activity, and though there are massive datasets about prices. ... that is
what a buyer pays for a product or services, and what prices stocks and other financial interests
are trading at, what prices commodities are trading at, etc. etc. there is a surprising lack of
information about cost and value.
The explanation why there is little information about costs may well be that those that make
decisions would be embarrassed at the internal value chain within their organizations.
Corporate accountancy is only about money cost and money price. TVM uses cost, price and
value. The value derivatives of cost, price and value are key numbers that describe economic
activity. 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.
Money cost, money price ... money profit
Cost and price make it possible to calculate margins and profits ... and this is what is done in
normal corporate accountancy and financial reporting. As we shall see later, in modern financial
reporting both cost and price are capable of being distorted so that the most favorable margins
and profits are being reported ... something that professional accountancy was structured to
avoid.
Cost and value
Cost and value make it possible to calculate value adding ... something that is very important for
society. For this to be of greatest use, the calculation of cost must include not only the money
cost but also the value consumed associated with the activity.
What is this? In the case of the oil industry, the costs of crude oil production include payments
made for royalties, licenses, etc, as well as the costs of exploration, drilling and extracting the oil
from the oilfield, and shipping the product to refineries and to market ... but the costs do not take
into account in any financial metric the depletion of the resource, and what it would take to
replace this resource. This is a huge problem, because the resource being depleted has taken
many millions of years to accumulate, and the cost of this
There are other examples ... see ????
Price and value
In some cases price and value are the same. In this situation the value chain through delivery to
the final consumer is extracting from the consumer a price that is equivalent to the value. The
consumer does not get anything of the added value. In fact the typical business model is one that
aims to extract as much revenue from the market as possible.
The use of resources does not automatically mean that there is either going to be efficient or
effective use of resources.
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Disbursement is no way to measure performance
The World Bank did a disservice to itself and to the whole process of development by using the
amount of loan disbursed as a proxy measure for how much development progress was being
made. It was a stupid idea and went on for years.
In the current global malaria control programs, the amount being disbursed is a more prevalent
measure than the amount of malaria disease reduction. The idea of effectiveness measurement is
missing!
What is the cost?
Performance is both efficiency and effectiveness. The profit and loss account summarizes the
activities of the organization in money terms showing the revenues and the expenditures. The
profit and loss account that is presented to outsiders tends to show the least amount of
information allowed by law, while the internal profit and loss accounts will show all the
information needed to facilitate good management.
Cost efficiency … how much actual was relative to standard
Cost efficiency is how much the actual cost was relative to what the cost should have been …
often expressed as a standard cost. There are many ways to evaluate cost performance including
also comparison with activities undertaken in other places or with activities undertaken by other
organizations.
Well designed data systems makes it possible to compare how much something actually cost
with what it should have cost.
Cost efficiency is a measure of how well something is done. Cost efficiency answers the question
about whether or not resources used are more or less than would normally be expected?
Comparative cost efficiency answers the question about cost relative to other similar works at
another time or in another place.
Cost effectiveness … How much value for the cost?
Well designed data also makes it possible to measure the relationship between the cost and the
impact … that is the change in value arising for the community. Cost effectiveness is a measure
of how well doing something results in getting the desired impact. Did the use of resources solve
the problem that is being addressed or not. Did the use of resources have a favorable impact on
the community and quality of life … and was the impact what should have been achieved.
Cost effectiveness is the more complex idea of relating cost to the value of the accomplishment.
The idea is simple in theory, but becomes more difficult as the problems being addressed are
more complex. TVM uses techniques to get an overall idea of cost effectiveness, and then goes
into more detail to assess the way different initiatives contribute to progress. This may require
multi-variate analysis of the datasets where there are multiple interventions being used.
TVM accounts for value with as much rigor as possible even though value is perceived
differently depending on many subjective elements. TVM uses a system of standard values
which makes it possible to compare cost with value on a uniform basis.
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Standard costs and standard values facilitate analysis and avoid data overload. Separately TVM
allows for the analysis of standard values and the use of this set of metrics to understand
differences between societies and to help with the determination of priorities.
External resources complicate analysis. The performance of the community is a function of the
amount of external resources needed to maintain a good quality of life. A low performing
community is unable to maintain its quality of life without getting external resources. A high
performing community needs no external resources to maintain and improve its quality of life.
There are organizations that use large numbers of unpaid volunteers. The labor resource is
money free to the organization, but the “opportunity cost” for the volunteers is not zero, and the
optimum opportunity for the organization should be bigger than the value of just “stuffing
envelopes”!
Quantifying Value
Standard value is key to efficient analysis
The core hypothesis that justifies the development and deployment of TVM is that money profit
is not enough, there also has to be value. But value will never the there if value cannot be
quantified in a widely accepted way.
If you cannot measure it … you cannot manage it
The TVM solution to this problem is to make use of “standard values” rather like “standard
costs” are used in cost accounting … but even this has to be done with care. Value is not a simple
metric … but it is a very important one.
Value is subjective … and this is part of of its importance as a key metric of progress and
performance. A simplified value construct will not work to guide society to its best performance
… or even to know what best performance might be.
Ignoring value … which is essentially what has been done in money accounting and economics
certainly simplifies analysis, but over time the result of this is increasingly poor allocation of
resources. Value is subjective, and as such its quantification has to have an element of
pragmatism in order to be practical.
One part of the solution is to have standard values for everything that is of value … in other
words, for everything.
The idea of a standard value in TVM is similar to the concept of standard cost in cost and
management accounting. Everything has its standard value computed, just as everything has its
standard cost computed. Periodic comparison of actual cost to standard cost makes it possible to
have standard costs that reflect the actual cost very closely. Routine management analysis may be
done using the standard costs … and the answers are good enough for most day-to-day decisions.
Similarly with standard values … they may be used in day-to-day analysis and the answers are
good enough, and easy to get.
Price as a proxy for value
Price is often used as a proxy for value … because sometimes the price is close to the value. But
this approach to value has many problems of which (1) price is determined in the main by the
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seller, and (2) the analysis going into determining price usually ignores almost all the elements of
the value construct except what value a buyer might place on the item. In other words, you
cannot set the price higher than the customer thinks the item has value if you want to sell the
item!
This idea that price is best when the price of the item and the value of the item to the buyer is the
same is an interesting dynamic … with the result that all value adding then becomes attributed to
the business part of the value chain, and none for the consumer. In the end, a damaging economic
idea.
Value is everywhere
Examples in every sector
A standard value needs quantification, but not as money value … not as a monetization of the
value quantity … but using a separate unit of measure.
Value changes depending on whose perspective is being used … and these changes are complex
and difficult to explain. They are not only based on simple economics, but there are cultural and
social issues as well.
Every person has their own profile of values … many people may have similar profiles … and
within a community there may be only one general profile … or a relatively small number.
There needs to be a large repository of value profiles so that what people think one value is
relative to another value. Many of the value ideas will be different … many will be the same.
When all the profiles get linked together relatively, it becomes possible to see the aggregate
average value profile.
Housing has value … a house has value … part of the value is its role in sheltering the family …
part of the value is being a home for the family, the social center of the family … part of its value
is the image it gives of the family … part of its role is a contribution to the neighborhood as a
whole.
An education has value … part of the value is the socialization learning that children and young
people get at school and college … part of the value is what they learn … part of the value is
learning how to learn … part of the value is the opportunity expansion that results from being
well educated.
Infrastructure has value … part of it is to enable socio-economic activities to take place more
easily … a bridge saves people time in getting from one place to another, or getting there at all
… a road makes it possible for people and goods to move from place to place efficiently. The
value arises because people save time and things can be more productive. In some cases
infrastructure makes the community safer. In some case infrastructure makes it possible for a
community to expand … or to build some new economic activity in the place.
Health has value … part of the value of health is that good health enables people to live their
lives in a far better way than when they are sick. All the things that are possible when a person is
health become compromised when there is debilitating sickness.
Low crime has value … quality of life is at its best with no crime, but becomes impaired when
there is crime. Low crime has a big social value, that is lost when crime increases. Getting low
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crime is expensive … police, courts, prisons and remedial programs are high cost parts of the
community fabric, but important.
Electricity has value … quality of life is improved with access to electricity … when used
electricity is clean … though there are questions about how clean electricity is when it is being
generated.
Jobs have value … to the employee, those that are remunerated have a value in the family that is
big relative to the same person when they are unemployed and unremunerated. Jobs are
interesting in that they are also of value to the employer … every job helps in the process of
carrying out the mission of the organization … and build value for the organization.
Things that impact value are everywhere
Things that impact value are everywhere as well … so the framework of metrics needs to be able
to handle the multiple characteristic of the value item and how issues impact the matter.
Good health has high value
Good health has a high value … but this is reduced by the onset of illness. Being sick lowers
quality of life. Being cured improves quality of life. Being in good health is the desirable norm in
the quality of life matrix.
Health in GDP is nonsensical
With modern GDP metrics, the cost of treatment is captured, but nothing else. The erroneous
supposition is that the more treatment there is, the stronger socio-economic performance. TVM
disagrees profoundly and has a very different approach.
Good health is always desirable … but maybe good health has a different value at different
points in ones life. This should be reflected in the way the value matrix comes together. Maybe
health value is going to be different for different people who do different jobs. The details are
tricky … and they should be respected … and also there should be some simplification so that
the system stays workable.
Low crime has high value
Low crime is very desirable and enhances quality of life in a community. In turn low crime has a
favorable impact on the desirability of the neighborhood and house prices. Low crime reflects
the people who live in the neighborhood and those that come into the neighborhood. Low crime
also reflects the capability of the police and law enforcement.
In the quality of life measure, low crime should be the norm, and be a value component. All the
various forms of criminality … anti social behavior … are negatives that detract from quality of
life.
The cost of police and law enforcement may be needed to have a low crime outcome … but the
costs are a negative in the quality of life. That money has to come from somewhere.
Efficient public transit systems have high value
Efficient public transit systems have high value and should be the norm in a well measured
society. If the value of having excellent efficient public transit systems is incorporated in quality
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of life as the default, then the various costs can be set off against this. If there is a good transit
system there is a history of investment in the transit infrastructure and the equipment, and an
ongoing cost of operating staff, operating costs and maintenance. There is also a cost of
congestion that varies according to the state of the transport infrastructure and the performance
of the transit system. With a good transit system the desirability of neighborhoods can improve
… but not always.
Urban and regional mass transit systems
It is difficult to imagine a modern city without a high performance urban mass transit system as
well as regional mass transit systems. Most of these systems are run by government entities that
use cash based money accounting, a system that fails completely to keep the value of past
investment front and center of performance analysis.
The value of transit systems is a component in quality of life … not having one is a deficit .. and
the cost of building one and the cost of running one is also a deficit … the cost of congestion is a
deficit. The cost of building and running transit systems is substantial … and the matter of
whether this is best paid through a public funding process … bonds, taxes, etc … or by user fees
is an important question.
Not funding mass transit adequately, and having the system deteriorate is usually a value
destroying outcome. At the same time, allowing high costs and low efficiency in the operation of
the system to become the norm is also a value destroying outcome
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009100300#sthash.6FLMrHZF.dpuf
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10-4 ANALYSIS OF THE VALUE CHAIN
Source of Profit/Value Adding
Impact in different parts of 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.
The prevailing money accounting metrics has the corporate organization as the primary reporting
entity with no metrics at all that relate to the impact the entity's activity has on the community
and society at large. This is a major limitation of the present system of metrics
For the corporate stakeholders the only metric that matters is aggregate profit of the organization
… but for society what matters is the impact of the business activity throughout the value chain
and in all the communities where the business has activities.
Value chain analysis shows that in some cases a business has a favorable impact in one
community while have an unfavorable impact in another community. This might be a function of
employment, or what a company is doing to the environment.
Who wins and who loses in the value chain?
Value chain analysis is a core analytical technique that may be used to help understand why some
people and organizations accumulate wealth and others do not. Value chain analysis is used to
show cost and profit distribution across multiple areas and organizations as in the petroleum
industry, or across time as in the case of education and the student's subsequent career.
TVM makes use of the idea of value chain analysis. What appears successful in one part of the
value chain may be negative in other parts of a value chain.
Corporate profit reporting is based on a small part of the value chain ... a small part that excludes
all of the consumption of social value. This reporting takes no credit for the social good that a
good economic activity creates. Looked at from the TVM perspective, typical corporate
reporting is very incomplete and does a major disservice to society as a whole.
Value chain analysis is not difficult except that the data needed to do it are rarely available. This
may be because responsible parties do not want their performance to be visible or the data do not
exist. Most of the effort goes into having data to work with. These are some value chain example
Supply chain value analysis. It gets very interesting to see which part of the value chain is
profiting and who are not.
Longitudinal (over time) value chain analysis. This may be intergenerational or it may be over a
person's life-time, or the life of a product. Inter-organization or inter-group value chain analysis.
What organization profits ... and which ones do not!
Inter-place value chain analysis. Is it the rural village or the big city that makes the profit ... is it
one country or another?
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Powerful
Value chain analysis may be the single most powerful element in TVM ... but also the aspect of
TVM that concerns those that are making profit from an elite position in the prevailing value
chains.
Value chain analysis is a technique that relates cost, price and and profit ... and value
consumption and value creation in a complete transaction matrix. The value chain analysis
explains the aggregate of value consumption or destruction and the aggregate of value creation
and value adding and reconciles the aggregate with the winners and losers at different stages of
the value chain. The value chain analysis may be applied either over time, over geographic
space, or between organizational entities. Value chain analysis shows how critical local
community based economic activities are to the community and how damaging many profitable
global value chains are to society.
The TVM value chain incorporates both the money costs and value and the social value
consumption and social value creation. That is the value chain has both profit and value adding
in its construct.
Value chain analysis is used to identify the winners and losers in various parts of the economic
structure, and makes it possible to understand the systemic flaws in the way the economy
operates. Value chain analysis is used to show cost and profit distribution across multiple areas
and organizations as in the petroleum industry, or across time as in the case of education and the
student's subsequent career.
A healthy value chain has two key characteristics (1) end to end value adding; and, (2) value
adding at each step of the value chain. A healthy value chain serves to “pull” economic activity
because it is in everyone's best interest for it to continue and grow. When either of these
characteristics are missing, economic activity declines because there are interests that are not
satisfied.
Follow the money!
The phrase “follow the money” suggests that the basic concepts of “value chain analysis” are
being used. Decisions are often made with multiple “agendas” … frequently a public agenda that
is all about how much good a project will do the the community, and a private agenda which is
about how much money individuals connected with the transaction are going to make. High costs
and low performance in publicly funded projected can most often be traced to a private agenda
that was more important than the public agenda! The value chains show how costs accumulate
and what profits are extracted from the value chain. Value chain analysis is used to identify the
winners and losers in various parts of the trade flow, and makes it possible to understand the way
the economy operates, especially the international trade economy. Value chain from raw material
to consumer is important. It shows why some companies are very profitable and others are not.
The value chain show how costs accumulate and profits are extracted from the value chain
Examples … value chain for goods and services
From raw material to final consumer in petroleum The value chain from raw material to
consumer helps to show why some companies are very profitable and others are not..
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An example … the petroleum value chain
The petroleum value chain helps to explain the various connects and disconnects
between the origin of oil in a poor part of the world to gas being used in rich
places. How is it that excellent crude oil in the Niger Delta makes some Nigerians
super rich, with the country remaining terribly poor. How is it that there is
seemingly little rational link between high gas prices at the pump and the costs of
producing this gas? How do markets work ... and who do they work for?
From raw material to final consumer in coffee
An example … the coffee value chain! Coffee is an interesting value chain.
Farmgate prices for coffee have been relatively static for decades … yet the retail
price for a cup of coffee has increased by almost two orders of magnitude. The
farm may not be making much profit, but somewhere in the value chain there are
big profits and good true value data would show this. Who is making the profit?
Where is the value adding going?
Very few transactions are simple and have impact only on the direct participants ... most have
other ramifications which are important in the money accounting of the business world, but have
even more importance in the context of the combined flows of value and money around the
community. Modern corporate accountancy is complex. Most of the rules apply to the way an
organizations reports to the financial stakeholders and, to a much lesser degree, to the public.
These reports are the result of complex consolidation that takes into consideration the way the
internal and external value chains impact costs, revenues and profits. Managing these value
chains makes it possible for a corporate organization to minimize its exposure to taxes, duties
and other regulations that impact its financial performance ... and understanding and having data
about value chains makes it possible for the public to hold organizations accountable for their
performance in the community and towards society as a whole.
Within the service sectors … banking and finance Value chain analysis in the banking and
finance sector is interesting. Very little of what any bank or financial institution does has any
direct role in value creation … they function merely to move value around the economy, and in
doing this they extract profit. This profit is not related to value creation, but merely moving value
from one place to another. The profit is part of a zero sum economic activity, and because of this
the value chain analysis is to locate the counterpart losses. In the recent financial sector
implosion the profits of the banks were obtained on top of losses by millions of ordinary people
who were totally misinformed about the reality of what they were doing in financing house
purchases.
Within the service sector … retail The retail trade sector satisfies needs up to a point, but it also
merely serves to satisfy wants that are purely “entertainment”. In the “more and more” culture,
“shopping” is a way of entertaining oneself … of indulging oneself and enjoying it. If one has
wealth … there is nothing inherently wrong with buying things with it. The money goes into
circulation in the economy, and the economy appears to do well. When people feel wealthy and
spend on luxury goods, the luxury goods sector does well and it hires more employees. Whether
the luxury industry and this value chain is as good a source of quality of life improvement as
some other value chain is another question.
Sports and entertainment sectors The sports and entertainment sectors contribute to quality of life
… and in many ways these sectors in the modern economy are very efficient. A small number of
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people are able to play in the big teams and in the big entertainment spectacles, and an enormous
number of people get pleasure from it. There is a reason that sports stars and entertainment stars
are paid large amounts of money for what they do … these sectors have a money model that
supports this. The value model for spectator sports and entertainment is also favorable … but
probably not as favorable as small scale community level sports and entertainment. There is
value in spectating … it entertains … but the value is modest compared to being a participant.
Playing the game, competing in a sport is very satisfying … as is being an entertainer. It is not
about the money, it is about the well-being associated with doing these things.
Examples … value chain analysis over time The value chain technique may also be applied over
time. In this case an activity that has costs today creates profit and value tomorrow. The concept
is fairly well established in money accounting and analysis … and similar concepts also work for
value. In fact the value arising in the future because of good activity now is very, very important.
Education The education of a child is a big expense ... but it is an investment that will pay back
many times over the life of the person. Value chain analysis shows something of how a cost in
early years creates opportunity for benefit in later years ... and could be the basis for economic
analysis to justify investment not only by parents, but also by society in education and building
human capital for the future. Examples … value chain between sectors
Infrastructure The building of the US Interstate Highway System is an example of how activity
in one sector creates value in another sector. The construction cost the US Government more
than $100 billion ... an immense investment in the 1950s and 1960s … but the increase in
property values around the country were way more than this immediately ... and the productivity
improvement of the national economy were even bigger and kept on for decades. The value
chain analysis of much infrastructure shows similar amazing results and shows how good
infrastructure investments can be for society.
Health Treating disease is a big expense ... and again with an economic dynamic that changes
over time. A strategy that invests so that there is no need to treat disease because the disease is
controlled or eradicated is probably better than one that merely waits and treats the disease and
incurs the associated costs. Value chain helps to determine whether prevention rather than cure is
the optimum strategy.
Energy This is an example from the design and construction of a seafood processing plant in
Africa in the 1970s. Freezing and cold stores require a lot of energy … and it needs to be
reliable. The local electrical energy infrastructure was missing so the electrical energy had to be
produced within the organization using generators owned and operated by the company. In a
more developed economic environment the energy infrastructure would have already been in
place!
Examples … value chain analysis between places
Within community transactions add value
Transactions that appear as costs in one entity in a community are revenues in another entity in a
community. The net cost to the community then becomes zero.
In corporate consolidation accounting, this is a consolidating elimination! This has very
important implications for planning and the optimization in the use of resources. The most
important example of this is wage remuneration. Wage remuneration is a cost to the employer,
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but is a critical revenue to a family. The value construct in this situation may even be more
significant. The cost to the employer may be quite unimportant in the greater scheme of things,
while the income to a poor household may be a matter of life and death … or certainly with a
very significant role in the economics of the family. But this wage remuneration may go further
in delivering value to the community. The family that might have had to depend on some form of
welfare, either from an NGO, the government or others in the community is now able to buy
what they need. Food, shelter, clothing, water and sanitation services, health, education may now
be purchased and are not delivered based totally on a welfare type of funding.
External to the community transactions lose value
Transactions that involve entities that are external to the community may be to the advantage of
the community or not. It depends. The analysis is rarely done … but where it has been done, it
becomes clear that an external transaction has the potential to be either advantageous or
disadvantageous. In general the “export” of goods or services and the receipt of a money
payment is good, while the “receipt” of a money loan will only be good if the money can create
money profit sufficient to repay the loan together with interest. This does not always happen …
usually the loan repayment is for sure, while the profit generation is a maybe. Foreign direct
investment (FDI) is an example of a transaction with an entity or entities external to the
community. For the investor the profit potential has been the subject of analysis and approved by
the entity's decision makers. For the community, there will be jobs which are usually considered
to be a valuable benefit … but what is being given up. In the extractive industries there is a
reduction in the amount of the item in the community eco-system … the natural resources of the
community are being depleted. They may not be generating cash profit by standing being left
alone … but they have value which does not diminish as long as the resource remains
unexploited. The value of diminishing the resources is rarely if ever articulated in the course of
justifying an external investment in a community.
Profitable Value Destruction
Very common and very bad Value adding is good, and so is profit. But being profitable does not
mean that the economic activities are value adding. Profits may be earned while the activity is
value neutral, or the profit may be arising while the activity is destroying value. Value
destruction is often associated with environmental costs that impact society, but do not have to be
incorporated in the financial accounts of the corporate enterprise. In recent times, more and more
environmental regulations have made environmental degradation a cost to the enterprise and a
drag on profit ... but the cost to society is still not part of the corporate accountancy and reporting
system. TVM, on the other hand, takes the cost to society and makes the cost explicit and
associates this cost directly with the enterprise that is causing the value destruction. Value
destruction compounds to form a vicious cycle of increasingly difficult outcomes. Value
destruction may start slowly, but if not corrected the compounding eventually takes hold, and it
is very difficult to control. In the complex reality of the economy, both value creation and value
destruction are going on at the same time ... one offsets the other ... but there is always the
potential for one of the other to get the upper hand. When it is value destruction that becomes
dominant, the socio-economic outcome is catastrophic ... and this is what is happening in most
poor settings.
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- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009100400#sthash.qnF0tAmw.dpuf
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10-5 ANALYSIS OF SUSTAINABILITY
Sustainability … the Value Proposition
Sustainability metrics
“Sustainability” is a popular social goal, but exactly what it means and how to measure it are not
very clear. TVM articulates sustainability in relation to resources used, value created and the
resulting quality of life.
Limited resources
The idea of limited resources has been on the agenda for several decades. The “Club of Rome” in
the 1960s raised awareness about limited resources and tried to change the dynamic of
development. In some ways they were successful, but only in a limited way. While the basic
message that resources are limited was valid and remains valid, improvements in technology has
made it possible for “proven reserves” to rise over the past few decades even while consumption
of resources was accelerating. For those inclined to the view that limited resources is “not a
problem” these facts were sufficient to debunk the message of the Club of Rome.
In fact there is progress
In fact there is some progress. In the early years of the industrial age, industry was a chronic
polluter of the land, air and water. In the early years of the 20th century the United States
established its National Park system with the unexpected support of some of the “robber baron”
industrialists … but dirty industry was the norm until the 1950s and 1960s. Western Europe
started to clean up its rivers in the 1950s and the United Kingdom passed clean air legislation
after a “killer smog” in 1956. In the following decade the United States moved towards cleaner
air and cleaner water and in the 1970s established the Environmental Protection Agency.
Progress may have been slow … but there is progress.
A widely accepted framework of metrics is needed
Every company keeps money accounts and does financial reporting using universally accepted
accounting principles. Money capital employed and profit are ideas that are understood
everywhere.
The problem is that costs beyond money costs are not included in the money accounting and
without this sustainability is a talking point but nothing more. The consumption of the
“commons” is not part of any money accounting equation. It has to be in any system of metrics
that aims to be meaningful as a metrics that reflects sustainability.
When toxins are poured into the local river, a business is probably saving money and increasing
its profits … but the value decrement of the “commons” associated with this action is not in any
money accounting record … but it is a part of the TVM framework of analysis. There is a
standard cost for EVERY transaction that has an impact on the state of the community and the
socio-economic activities of the community … whether or not the organization wants to take
responsibility for the transaction or not!
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Reducing carbon footprint
For example: Reducing “carbon footprint” is a legitimate initiative … but the value of doing this
is unclear for several reasons: (1) do the costs associated with reducing carbon footprint
represent value destruction in themselves that offset the value or reduced carbon emissions; and,
(2) does carbon emission reduction change have any impact when there are many other factors
going into atmospheric degradation. TVM uses a standard value profile for everything, and in so
doing has the potential to use very large datasets to see cause and effect more clearly than merely
statistical correlation. TVM also values natural resources and the lack of natural resources in
ways that are important, and ignored in all money profit accounting.
Running out of oil for energy
When there is no natural oil for energy available for extraction from the earth's crust, the
structure of the present global economic system will have to change dramatically. There will no
longer be the highly profitable oil industry and those profitable industries that rely on oil as their
feedstock. There will no longer be an easy convenient transport system driven by the petroleum
consuming internal combustion engines. This industry is driven by profit and attracts huge
investment in exploration and extraction because of the huge profit potential of these investments
using the prevailing money profit analysis formulations. Using TVM where the value of the
resource being “mined” and consumed is also taken into account, there is huge money profit, but
even larger value destruction. Specifically, the costing that prevails in the oil industry and the
related petroleum product consuming industries ignores the cost of maintaining the global natural
resources that represents a “sunk cost” of millions of years of sun energy conversion. Oil
industry costing starts with the costs of acquiring “rights” to explore and exploit, and then only
adds in the costs of exploration and the well drilling and extraction and subsequent downstream
activities … nothing is costed to reflect the consumption of the global natural resources. In TVM
value analysis this value consumption is costed in using a standard cost that reflects the
prevailing available technology to replace the natural resource being consumed.
Sustainability … money based cash flow
This is only money sustainability to pay the bills
Profit may translate into positive cash flow that makes a business sustainable ... but society can
only be sustainable when economic activities are both sustainable in themselves AND are
providing positive value increments for society ... for all the value elements of a society
including the people and their complete physical environment.
Sustainability is “in fashion” … and would be a good idea if it were based on a value agenda
with related metrics. As it is the word “sustainable” is being attached to everything and a “story”
is then linked to the initiative, whatever that might be to monetize the effort … at which point
“value be damned”!
Nothing is sustainable for ever … because eventually all sources of energy will be consumed ….
but that ought to be in billions of years into the future. Sadly, the way we use energy now and
consume raw materials … and the way we do money accounting means that we will consume the
accessible resources for our present profligate economic activity in a matter of not many
decades. The use of TVM will improve decision making around energy and start to make it
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possible to get an allocation of revenues within the energy sector that reflects true value rather
than prevailing profit fiction! (see page ).
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009100500#sthash.LsZXtDXl.dpuf
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10-6 SPATIAL ANALYSIS
Where? Very Important
Physical location determines many things
Where you are born determines a lot about what your future is going to be. This goes from the
national level where different countries have different quality of life outcomes … and it happens
at the very local level where there are differences between different neighborhoods.
Some places have a lot of natural advantages … others do not. This is a function of the place.
Knowing where something is helps to identify some of the characteristics that are associated with
the place.
Mapping
TVM has location data associated with every other aspect of data. … and from this is is possible
to make maps that show what is where … and conversely for a place, what is there. Typical
national data has little meaning for making decisions … merely it serves to identify the outcome
… on average … of decisions that were made. These national level data are inadequate for
managing at the local level.
The location of things … the spatial element … is a very important in very many situations.
Safety … the fighting is in the “next valley”
I was working in an area affected by civil war, and traveling with a local
colleague to visit a commercial farm in a remote rural location. I expressed
concern about our safety … and was assured that the fighting was in the “next
valley” and would not affect where we were going! It turned out my colleague
was right … we traveled without incident! I learned that even something as nasty
as civil war has an important spatial component. Even in a civil war, a civilian
population still has to get on with its economic life as best it can!
In reports about the lives of people in poor rural communities in developing countries, the
distance women and girls have to walk to collect water and to collect firewood is usually a big
item. This is actually very important … and is about the spatial situation in the community.
Distance to water and distance to firewood are important facts. (See also the section on Time
Series Analysis)
Comparative analysis
Each place is different … but comparison of performance between different places can show
what it is that is allowing one place to perform well and another not to perform at all well.
Sometimes the difference is associated with geographical characteristics, sometimes they are
societal factors.
WHY SPATIAL ANALYSIS?
There are very big difference between places
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There are very big difference between places ... and spatial comparisons helps to sort out the
various causalities. The big difference between the socio-economic status of the industrial north
with the under-developed south is just a very aggregate example of this.
Some of the lessons that can be learned are uncomfortable. What lesson should be learned from
the fact that there is science and technology that has put man on the moon, but our society cannot
organize itself so that there is enough food for people on the planet. Some places seem to have
abundance ... and some places have critical shortages.
Basic spatial metrics
The basic spatial metrics are nothing more than advanced common sense. The data are little more
than what a middle school student might learn in a geography lesson. But nevertheless, the data
are important. Some of the elements that have to be associated with the place include the
following:
• Where is it,
• How big is it,
• What is the population,
• What are the physical geography characteristics,
• What is the weather,
• What are the natural resources,
• What are the characteristics of the land,
• What organizations are present,
• etc.
Spatial metrics in TVM Value Accountancy
The whole foundation of TVM Value Accountancy is linked to the idea that a place ... the
Community ... is the entity around which there should be reporting. The reporting should go
beyond money reporting to something that embraces non money elements and the consumption
of value and the creation of value in addition to the money costs and money incomes.
All of the elements that were referred to above are an integral part of TVM Value Accountancy.
Importance of multiple datapoints
The importance of multiple datapoints applies in spatial analysis just as it does in other
techniques of analysis. It may not be easy to know exactly about something ... or the complete
story about anything ... but most often, it is relatively easy to learn something by comparison
with what it is in another place.
Spatial materiality
Materiality is a key to successful use of data ... but what is important in one place may not have
the same importance in another place. It depends. While there may be an academic causality that
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can be identified using sophisticated analysis, most of the big questions can be answered using
very simple data and very simple analysis.
Starvation
There is no food ... the crops have failed ... people are dying. Very simple data are
needed to figure out that there is a problem with starvation. More important very
simple data would have shown what are the causes of starvation in a specific
place, and what might be done about it
There is a substantial amount of mathematics and statistics being used to analyze data ... and the
mathematics are academically rigorous ... but it does not seem to have had much impact. There is
a systemic problem of methodology and materiality. Most of what is being done in terms of data
and analysis has little practical value and has made little difference in the past ... and needs to
change in order to do anything of use in the future.
While it may not be possible to have absolute numbers about many important things ... time
series analysis helps to show whether progress is being made or not, and something about how
fast it is happening.
Getting results
I have always taken the position that fixing a big problem was a lot easier than
improving a near perfect operation. If this is a valid reality, then it should be
possible to make a big impact on the global relief and development industry.
Prices in different places
Price time series have historic value in putting current prices in perspective ... but prices are also
a key indicator of what might be going to happen in the immediate future, or ever a longer time
span.
A big part of the theory of economics concerns itself with prices and behavior in the market. It is
very interesting, however, to try to understand what is happening to prices based on real world
facts about costs, demands and structure.
Time series of prices are very powerful. Every major market has time series about prices,
whether the market is for financial instruments, commodities or engineered items. Price
information is also used in small markets ... and is just as powerful. More of the small market
data re needed to be collected and put into easily accessible form. The outcome will be
interesting.
Shrimp prices in different markets
I became the CFO of Continental Seafoods Inc. in June 1974. In the previous
twelve months crude oil prices had increased from $3.00 to $13.50 and costs and
prices for everything was in turmoil.
Costs in different places
Cost time series are very interesting ... but much less accessible than price time series.
Cost is a result of productivity ... which in turn is a result of science, technology, organization,
training and investment.
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Cost estimating for the World Bank
For several years I did financial analysis
Modern economic society has been blessed with amazing progress in science and technology that
has translated into low costs for valuable things. But also high profit and low value for society as
a while.
Time series of costs may be very different from a time series of prices. Costs reflects
productivity and it is costs that have the most impact on the socio-economic status of the planet.
Cost has multiple components, and one of the most useful data points for cost is the one that
eliminates all the profit elements from the cost value chain. The socio-economic success of the
last two centuries has been reduction in cost.
Productivity in different places
Enabling environment in different places
Comparing data from different places
Budget and actual by month is a commonly used plot. Sometimes it does not tell very much,
sometimes it does. Budget/Actual By Month
This plot of budget and actual by month is from place A and it does not show very much ... some
months are above budget, some below. There is no clear seasonality.
But this plot from Place B shows what seems to be some important seasonality. The budget looks
as if it was a year number divided by 12 ... the actual has a distinct form. What has caused this
seasonality can be researched and used in future planning.
Project performance impact by place
The following graphic shows the very different timeline for incurring costs and realizing values.
This is a
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009100600#sthash.TATHZkIi.dpuf
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10-7 TEMPORAL ANALYSIS
Time Series
Time series are very powerful ... the corporate world uses them all the time. Capital markets use
time series ... the public needs to have time series that show what is going on that specifically
impacts their community.
One datapoint in time … or two … or more
When there is just one datapoint it is possible to know something … but not really very much. As
soon as there is a second datapoint there is another dimension of analysis and understanding that
is possible. There is now an ability to have some comparative direction … is the item more or
less … what is the change … what is the trend.
TVM uses time series of key items to gain an understanding of what is happening in the
community.
Multiple datapoints provides a time series
A time series may be build from multiple datapoints over time. Raw data plotted as a time series
tells lots of stories
When I made a very simple plot of prices of shrimp in the New York market month
by month over a period of nearly thirty years .. from 1946 to 1974 ... I gained a
perspective of the shrimp industry better than most. I believe this enabled me to
interpret the history of the industry correctly, and because of this I was able to
predict how the oil shock turmoil of the 1970s would impact our company ... a
major producer of marketer of shrimp worldwide ... and how we should position
ourselves for success.
Time series data … trends are important
Time series trends are great indicators of progress ... or not. Time series are simple, clear and
powerful. While it is possible to do advanced statistical manipulation ... simple and clear time
series tables and charts work very powerfully as well ... maybe better.
Time series are also very easy to manipulate so that the result is serious misinformation.
Objective rigorous analysis will produce good results … but the analysis may be rigged to
produce data that suggests completely wrong trends.
There are ways to prevent time series data being used to suggest one trend when the opposite is
true. One technique is to included both the short term detail together with the long term trend on
a longer time scale.
Multiple baseline time series
A plot of a single parameter shows how this parameter has changed over time ... but in isolation
does not show what might have been the cause of any changes. Plotting multiple variable may
show something about cause and effect. While this may be done by simple visualization for a
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couple of variables, a more rigorous mathematical approach is needed for large scale multivariate
analysis.
In any specific situation is is possible to plot different datasets as a time series, and “see” how
each element changes relative to the other. The goal is not to have an academically rigorous
statistical correlation, but to find out what seems to relate to what.
TVM uses time series analysis … and TVM uses the datasets that may be related to very specific
activities or locations. An excessive amount of external variables makes for too much “noise” in
the data and make the comparative plots meaningless.
Changes over time
In the section on spatial attributes of data, the following was said:
In reports about the lives of people in poor rural communities in developing
countries, the distance women and girls have to walk to collect water and to
collect firewood is usually a big item. This is actually very important … and is
about the spatial situation in the community. Distance to water and distance to
firewood are important facts.
Something else is important … it is the matter of time and the question of change.
Twenty years ago … or thirty years ago … the water and firewood was only a
short distance away. Over time there have been changes, and now the situation is
dire. But this change did not happen suddenly, this change happened over a
period of many years … and nobody took any notice. The fact that nobody took
any notice is an indication of failure of management and metrics.
Some important time series
Market prices
Market prices are a leading indicator of market conditions and other broader issues in the
community. In economies that are reliant on subsistence farming, a combination of high food
prices and low livestock prices is a reliable indicator of emerging famine conditions. People in
remote villages know this … and have known this for thousands of years … while development
experts and government decision makers may not yet have grasped the full significance of these
indicators.
Data identified the problem … what to do?
Tracking market prices helps to identify issues in the economic performance … but what to do.
Food price increases can result in malnutrition, starvation and death … and the “invisible hand”
may in time respond with more supply of food, but only if there is buying power and market
demand as well as high prices. Markets about money profit do not have any way to monetize the
value of survival and saving lives … but a mechanism is needed in situations where basic needs
for survival cannot be satisfied. Pre-positioned security stocks of food are a part of the answer …
but there also needs to be other elements of organization, management and metrics in place to
provide for oversight and accountability.
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Timeline of costs and values
The following graphic shows the very different timeline for incurring costs and realizing values.
This is a critical problem in development and not central to much of the development planning
process that is practiced.
As a practical matter most of the cost have been incurred before it can be shown that there are
any benefits ... and this provides a dangerous opportunity for costs to be misused long before the
lack of benefit raises questions about performance.
Cost time series
Cost time series are very interesting ... but much less accessible than price time series.
Cost is a result of productivity ... which in turn is a result of science, technology, organization,
training and investment.
Modern economic society has been blessed with amazing progress in science and technology that
has translated into low costs for valuable things. But also high profit and low value for society as
a while.
Time series of costs may be very different from a time series of prices. Costs reflects
productivity and it is costs that have the most impact on the socio-economic status of the planet.
Cost has multiple components, and one of the most useful data points for cost is the one that
eliminates all the profit elements from the cost value chain. The socio-economic success of the
last two centuries has been reduction in cost.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009100700#sthash.j5w31aah.dpuf
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10-8 VARIANCE ANALYSIS … COMPARATIVE ANALYSIS
Standards Reduce Workload
Systems for costing are data intensive
Actual cost systems are data intensive, with very many transactions that vary all the time, but
most of the time, inconsequentially. The aggregate of these transactions is important, and the
aggregate should not vary very much unless there is something going on that is of importance. A
standard is built by being thoughtful about the item ... whether cost or value. The aim is to
determine what the cost or the value should be. In the aggregate the cost should be the unit
standard cost times the number of items. The aggregate of actual costs should be about the same
as the aggregate standard cost. If there is a substantial difference, then there needs to be analysis
to see what is causing the variance.
Standards for cost
Standard costs variance analysis reduces workload
A standard is simply what one expects … what is the norm. It is a useful construct to facilitate
comparison … it is an important tool in simplifying high volume measurement.
A standard cost is theoretical construct … it is what cost should be expected based on a technical
analysis of the costs of production and other relevant factors. If the actual costs are different from
the standard cost, there is a prima facia case that something is wrong either with the
implementation or with the assumptions used in computing the standards.
Standard costs and variance analysis is embedded in most modern management information
systems used for corporate decision making and oversight. If there are no variances or very small
variances the management and decision makers do not need to become engaged in change
anything … but if there is a variance then some effective reaction is needed.
Standard costs common in analytical accounting
Standard cost is a very simply idea … it is what something should cost based on technical
considerations. In every factory I worked in … on every construction site … every activity that
was going on had a standard cost. This was the cost that we expected based on technical
considerations. If our actual costs were higher than the standard cost, then there were questions.
Something was wrong! This might have been the calculation of the standard cost was wrong, or
it was something that was going wrong in the factory or construction process. If the total of the
standard costs was about the same as the total of the actual costs, it could be concluded that the
operation was going according to plan.
Standard cost is useful and efficient for comparison. Standard cost may be used to compare
actual performance against the standard. The standard for different approaches to the same
activity can be compared. The standard cost for different places can be compared. The standard
cost changes over time can be compared. All the time actual performance against standard can be
compared.
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Cost efficiency is defined in the TVM framework as the relationship between what something
did cost, the actual cost … with what it should have cost, the standard cost.
Cost effectiveness in the TVM framework is the relationship between the cost of a set of
activities and the impact on society … and in the TVM system it is standard value that is used to
quantify impact.
A foundry at a company in Georgia was critical to the overall company
operations … but out of control, with over 10,000 different castings flowing
through the works. Nobody had any idea how much these different castings cost
to make … and used a crude “per pound” costing for planning and pricing. The
results were bad. Per pound costing sent the wrong signal to the design engineers
who designed castings to be lighter and lighter, but actually more and more
difficult and costly to make.
There were less than 20 different operations in the foundry to produce the casting
… and each casting was produced using about 7 of these operations. By having a
standard cost for each operation … and a production or manufacturing standard
for each casting … a standard cost for the casting could be compute that was very
much equivalent to reality. When engineers started designing to a cost standard
that reflected the reality of production quite accurately, it became possible to
have significantly lower costs and higher quality. Author's personal experience at
Southern States Inc, Hampton, GA
How much should have been done?
How much should have been done with the money is a key question that becomes easy to answer
with variance analysis when there are standard costs. It is used internally in almost every well
managed corporate enterprise in one form of another, but is rare in the public sector, the not for
profit sector and the international official relief and development assistance (ORDA) sector.
Missing Data
The international official relief and development assistance (ORDA) sector is notorious in the
secrecy associated with all its performance data. As long as there is no accessible cost data about
their activities they are able to operate at will be very very low cost efficiency. It is then
impossible to know how much of the resources they are entrusted with has been used to good
effect or not.
Standards for value
Using standards for value
Value is subjective ... but very useful. Arguably, the core of TVM is the use of value withing a
framework of accounting. Everyone knows that value is important ... but nobody wants to
embrace value as a numeric measurable elements, despite the fact of its centrality to quality of
life, and of everything that is important in society.
TVM uses standards for value. Value is a subjective idea and there are as many views of what a
quantified value should be as there are people who think about this subject. However, value is
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very important, and in order to manage value there needs to be a set of metrics about value so
some solution to this has to be developed.
The idea of standard value along the same lines as a standard cost is an elegant solution. The
standard value assigned to anything does not have to be perfect, but it must be reasonable and
then it can serve as a benchmark against which everything may be measured and compared.
The standard value approach helps with the understanding of complex systems. The single
standard value eliminates a whole set of variables that are not critical to decision making about
progress and performance per se, while maintaining the core idea that value is important.
Establishing value standards
TVM uses an iterative process to establish standard values, and uses these values to understand
the socio-economic performance of the community. When the consumption of value (a standard
value calculation) exceeds the product of value ... that is the creation of value (another standard
value calculation), then there is value destruction. If value creation exceeds value consumption
there is value adding.
It is recognized that value is subjective, and that value is difficult to quantify … but value is the
most important element in quality of life, and ignoring value is tantamount to saying that
decision making may ignore impact on quality of life. This is not a reasonable conclusion.
Value is the driver of quality of life ... society will be at its best when the available resources are
used with a maximum of productivity. A measure like profit, or cash flow is important for
sustainability ... but it is the mix of value and profit rather than just profit alone that should be
driving decisions about the allocation of resources.
TVM uses standard value as a way to quantify value ... essentially a concept derived from
standard cost accounting. In TVM, everything has a standard value tabulated and in the record ...
a best estimate of what the value is based on what is known.
For example ... good health has a value ... but people are uncomfortable with putting a money
number to define a value like this. Education has a value … as does opportunity.
In some cases value and cost may be the same … or value and price may be the same. These
money accounting metrics may be a good proxy for value, but this is not always the case.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009100800#sthash.BK7iC2BV.dpuf
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10-9 CAUSE AND EFFECT
Determining cause and effect
This is not an academic exercise
Needs to be timely and low cost
Making decisions needs to be done on a timely basis … not at some time convenient to academic
researchers that is measured in years but perhaps in days. The academic community may say that
this is not the “right” way to do things, which may be true in an ivory tower, but is not the best
way when the family is hungry and likely to starve!
Most problems in society are unique … not in every aspect, but in enough to make the usual
form of academic research inadequate. In many situation the need for societal improvement is
urgent, and rapid decisions are required.
An academic analysis of the correlation between quality water and health does not inform the
decision … the connection between decent water and better health is well known, so knowing
more about this is not going to add much to decision making. What is needed is knowledge about
how best to make water available, and how to pay for it both in terms of capital cost and in terms
of ongoing maintenance and operation.
Cause and Effect NOT Just Correlation!
Decision making requires a practical understanding of the process … in other words responsible
people have to know the behavior of costs and the cause and effect in the process. This is not an
academic exercise … it is real experience in play.
Data have some value in helping to identify causal relationships. In general, though, systems that
are influenced by humans are complex, and good data and analysis can only go so far to
understand how the system works.
There will never be strong accountability just using economic analysis for decision making and
oversight. Decision making needs data that help with “cause and effect” that is very specific to a
community … not simply a generic causality … something that can emerge using value analysis
along the lines of TVM. Accountability follows when there are data about progress and
performance … a routine analysis of TVM.
Most, if not all, economic models to simulate the development process are are based on
statistical correlation which has limited reliability when causality … cause and effect … is not
understood. TVM discounts planning and projections based on models that rely on correlation,
preferring to have data that are more closely associated with action items that produce
measurable results.
Statistics alone insufficient
Management information not rigorous … but it works
In any complex system ascertaining cause and effect is not easy … and in fact it is essentially
impossible using small surveys and statistical interpretation. In the TVM analysis framework the
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question of cause and effect is addressed using a process of drill down, and data acquisition
about matters that might be meaningful.
Where the balance sheet comparison shows some element of the balance sheet has changed,
there should be focus on what activities of the community or what set of externalities might be
the cause of the change.
Conversely, where it is known that there have been substantial changes in the activities of the
community and the externalities associated with the community … then it is reasonable to be
looking for changes in the balance sheet of the community that serve as metrics for progress.
Large scale datasets and complex multivariate analysis may make it possible to discern
relationships within complex systems ... but it takes very large datasets that in many cases are
impractical to obtain.
Big computer or a little bit of common sense?
Some years ago the operators of one of the biggest commercial computers in the world were
asked a simple costing question … how much does it cost to process a piece of luggage through
an airport. They took their available data about luggage throughput, and the available data from
the accounting department and worked out complex algorithms to calculate the answer. After
hundreds of computer hours … piles of printouts … the computer analysts admitted defeat.
For a tiny proportion of the computer analysis cost, it would have been possible to do a process
study, cost that, and draw conclusions. The answer would have been easier to understand , and
likely more correct … at a way lower cost, and in less time.
Use location specific small datasets
By using location specific small datasets it is possible to figure out some of the most important
causal factors by simple observation over a short period of time. Good observation and common
sense judiciously used are powerful analytical tools. Quite brief observation of a situation where
performance is very bad may be sufficient to identify a practical solution ... a low cost analysis
giving a high value outcome.
Operations analysis … simple common sense
A factory production line is producing on average 20,000 units per shift. The theoretical
production should be nearly 40,000 per shift. Labor cost was nearly double what it should be!
What is wrong?
Watching the production line for a short time showed the unreliability of several of the
machines ... strung together in series ... and downtime escalating exponentially.
There were two possible solutions ... redesign the production line to have parallel equipment ...
or using a spare line approach so that the production crew could be fully utilized. The second
approach was used and labor costs dropped to almost what they should be theoretically!
Analysis of a small dataset in an academic setting may produce little or no conclusions of value.
Considerable care needs to be taken in drawing conclusions from small observations. This is a
problem that is everywhere in the official relief and development arena. In many cases material
improvement can be achieved by getting additional data simply by “walking around” and making
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observations. Especially, this validates other data. Most important it may add the important
dimension of externalities that are the bane of small dataset analysis.
Data getting worse … statistical methods better!
This is what I was told at FAO in Rome a long time ago, and updated more recently. From 1950
to about 1965 the data about fisheries resources improved substantially … from 1960 to 1980 the
mathematics and statistical methods for fisheries resource data analysis improved substantially.
From 1965 to the present much fisheries resource data has diminished in quantity and
deteriorating in accuracy. No matter how good the statistical analysis of data … bad data
produces bad conclusions.
Capital markets all correlation
The public news about capital markets and investment is all about correlation. There is a big
industry associated with the distribution of news about capital markets and the correlation of all
sorts of money economy data.
Stock prices are reported as a continuous stream ... indexes of capital market valuation are also
reported in real time. Why? Bloomberg News and others facilitate some knowledge about
economic activity ... but rather little of the totality of what is required for an informed public.
The socio-economic behavior of society would be changed substantially if more understanding
of cost and profit were in the public debate.
But this is not how money is made in the capital markets. From time to time there are scandals
about “insider trading” which is not allowed. Insider trading happens because it is very profitable
… if the perpetrators are not caught … and it is pure “cause and effect” rather than the mushy
correlation accessible to the general space.
Some make money in the capital markets because they have done their research and know their
industry very well. Many of these people are able to bring this knowledge to bear and improve
the performance of an organization because they know more about cause and effect in the
industry than other managers who are under-performing in their jobs. This is the essence of some
successful hedge funds … profitable and value adding because they reduce waste and
inefficiency.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009100900#sthash.wrQhyjmY.dpuf
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10-10 DRILL-DOWN AND ROLL-UP
An average is 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:
• Specifics about people
• Specifics about housing, water and sanitation
• Specifics about land and natural resources
• Specifics about infrastructure
• Specifics about business organizations
• Specifics about jobs and economic opportunities
• Specifics about the health state of the population
• Specifics about the educational state of the population
• Specifics about the wealth of the population
• And so on
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.
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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 drilldown … 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.
• Country
• Province
• District
• Community
• Where in community
Within a community the “roll up” and “drill down” framework may also be done by geographic
place using a framework such as the following:
1. Community
2. Neighborhood
3. Block
4. Building
5. Where in building
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.
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An example … the impact of WalMart
There is no question that WalMart is disruptive … putting an end to the status
quo. But is the WalMart value proposition for society better than the alternative
or not? The basics of the money market economy would suggest that WalMart is
better at profits than the alternatives … but is it a value adder or a value
destroyer for society. Tom Walton, the founder, was passionate about customer
satisfaction … and the modern WalMart works hard on that. Price, quality and
courtesy are in evidence in the customer experience. Their operations are
efficient … high volume, low cost, on time. If you are a competitor, it is going to
be tough to compete. Employee conditions … better than some in the retail sector.
Procurement practices … better than some in global procurement.
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
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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.
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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
Activity
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 --- --- ---
Activity
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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
Activity
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.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009101000#sthash.cBrSZz3p.dpuf
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10-11 ANALYSIS FOR DECISION MAKING
Why Do Decisions Get Made?
The simple answer is that decisions are made to get the best possible results! This is also the
“right” answer. The problem is that the prevailing metrics for measuring performance are
“wrong” and accordingly most decisions are giving the wrong outcomes … or are they?
Heading for an economic train wreck?
It can be argued that the decisions that have been made by the economic elite and political
leadership over the past several decades has ended up with the global economy headed for a
catastrophic train wreck … maybe one can argue that global poverty eradication has been at a
historic high … or again that poverty itself is at a historic high. The metrics are a mess!
Dig deep … understand the money flow!
Who benefits from the decision?
A good decision is one that benefits society AND benefits decision makers and all the other
stakeholders associated with driving interventions that improve society. There is no reason why
the stakeholders of enterprising organizations cannot benefit at the same time that society
benefits. Making everyone happy is never easy … some compromise is needed … but
compromise is easier when there are data to help.
History suggests that it is decision makers and their friends that benefit the most from decisions
that get made, and this is maximum when there is weak accountability … which is the norm.
TVM uses data to help decision makers make good decisions and for these decision makers to be
held accountable for subsequent performance.
Use value chain and other analysis
Value chain analysis is a way to identify where it is that there is profit and value adding … and
where in the chain there are constraints of some sort, or maybe excessive profits. A fair value
chain is one where the return on asset employed at each stage is reasonable related to the risk.
Use various comparison techniques. It is possible to estimate what the costs “should be” for any
activity anywhere. If actual costs are significantly different and there is no reasonable
explanation, there is a problem. This is a basic technique of analytical accounting and should be
applied throughout the value accounting system.
Causality more helpful than correlation
Academy is mainly about correlation
Data have great value when analysis helps identify causal relationships. Most systems that are
influenced by humans are complex, but good data and analysis can help to understand something
of how the system works.
Large scale datasets and complex multivariate analysis may make it possible to discern
relationships within complex systems ... but it is also possible to figure out some of the most
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important causal factors by simple observation. Good observation and common sense should be
used to the maximum.
Community decisions need cause and effect
Quite brief observation of a situation where performance is very bad may be sufficient to identify
a practical solution ... a low cost analysis giving a high value outcome. People with good
technical instincts, a capacity to observe and experience can get very workable solutions without
substantial research and study. The following is an example:
Walkaround Analysis
Production records showed a group of factory production lines were producing on
average 20,000 units per shift. The theoretical production should be nearly
40,000 per shift. Labor costs were nearly double what they should have been!
What is wrong?
Watching the production line for a short time showed the unreliability of several
of the machines ... strung together in series ... and downtime escalating
exponentially.
There were two possible solutions ... redesign the production line to have parallel
equipment ... or using a spare line approach so that the production crew could be
fully utilized. The second approach was used and labor costs dropped to almost
what they should have been theoretically!
Considerable care needs to be taken in drawing conclusions using sophisticated statistical
methods on top of small observations. This is a big problem in the official relief and
development assistance (ORDA) arena, and in many areas where academic study is supporting
long distance decision making.
In many cases material improvement can be achieved by getting data simply by “walking
around” and making observations. Common sense is a surprisingly powerful methodology, but
not used frequently enough!
People with experience often know a lot more than is accessible through academic research and
peer reviewed papers. Some of this knowledge cannot become part of the academic knowledge
because the data are not designed to satisfy the prevailing criteria for academic data analysis.
Data for Decisions: Vector Control
A successful US vector control organization goes through a complete data
collection, analysis, planning and operation cycle every 24 hours. The success or
failure of an intervention is known within hours … and steps taken to have
success in the next cycle. For fast moving vector disease transmission this is the
right way to operate. The goal is zero transmission of disease by insects. The data
used to drive decisions is timely and geographically detailed.
Some data are voluminous … but essentially not very helpful in facilitating allocation of
resources based on value criteria. Much of the data associated with the financial sector and the
capital markets is giving the wrong guidance.
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Bloomberg Dataflows
Stock prices are reported as a continuous stream ... indexes of capital market valuation are also
reported in real time. Why? Bloomberg News and others facilitate some knowledge about
economic activity ... but rather little of the totality of what is required for an informed public.
The socio-economic behavior of society would be changed substantially if more understanding
of cost was in the public debate.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009101100#sthash.GDjiMLFm.dpuf
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10-12 ANALYSIS FOR OVERSIGHT
Oversight with TVM
The basic cycle of management
The basic cycle of management has the following steps or variants that are very similar.
1. Collect data
2. Plan
3. Organize … mobilize resources
4. Implement … with operational reporting
5. Analysis and review
6. Oversight, feedback and accountability
TVM oversight based on exception reporting
Most operations work very well. Oversight consists of little more than a cursory glance at an
exception report that shows that the activities are going according to plan. No oversight time is
needed to do anything … except maybe to celebrate their success and give credit to those that are
making it happen.
Exception reporting will show from time to time that activities are not working well. The
question then is to find out what is going wrong and why!
The structure of TVM data might be sufficient to locate the problem … but it may not be enough.
TVM data allows for drill-down to a level of detail where specific information might show
problem issues.
TVM data may be the catalyst for oversight action … it is part of what good performance data
should do. But TVM does not include any specific methodology for interaction between an
oversight authority and the user of resources. These arrangements are made in the “getting
organized” stage of TVM implementation.
TVM is keeping score
TVM is simply about keeping score … and compiling stats. TVM is part of the scorekeeping
staff … not the coach … not the referee … not the general manager … not the owner … not a
player … and not a fan. The role of TVM is simple … to keep score and to compile stats!
Oversight has the most meaning when it takes place in a timely way … in hours or days … not
months or years later. Oversight helps to ensure that implementation is done in a good manner.
Oversight includes accountability
Accountability is a close relation of oversight … but more something that is of interest to the
public and the owners of resources.
Management of performance is best done where and when it matters. Implementation
performance matters most at the community … and it is therefore in the community that there
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should be the most interest in accountability. Accountability is an important incentive for good
decision making and an important aspect of implementation performance. It is important for the
community to know what decisions makers are doing and how effective the goals are being
accomplished.
Feedback, Oversight and Accountability
A system with no feedback is a waste of time
Feedback for the community is important to facilitate continuous improvement and better
performance. Everyone engaged in the work of the community should get feedback to help find
better ways of doing things. Control theory teaches that rapid measurement and feedback to
improve performance is very valuable … enabling good things to be replicated and bad things to
be eliminated. A process with continuous timely feedback is very powerful.
Implement … with operational reporting
This is process … that includes measurement
Implementation determines everything. It is implementation that determines effectiveness. Good
data and good planning help … but it is the way implementation is actually done that determines
whether or not there is success and the maximum of benefit realized. A good plan may be ruined
by bad implementation … but a bad plan may be saved by good implementation.
Management and supervision are key to good implementation … and good data helps all of those
who have to make decisions to make better decisions. The difference between management and
administration needs to be well understood in order to get effective implementation.
The strength of this community focus plan is that implementation is in a community and for a
community … with deep involvement of the people of the community. The activities use as
much available know-how as is possible … but linkages to other sector activities is strong so that
no one activity is constrained by the progress of any other sector.
Measure, Analyze and Report
Good data facilitates good implementation
Good data facilitates good implementation … providing early warning of problems that need
attention. TVM metrics are timely … compared to the typical monitoring and evaluation (M&E)
process to acquire data is too little too late, and costly without having great value. Timely metrics
enable rapid corrective action and better performance.
M&E almost worthless!
The typical monitoring and evaluation (M&E) process to acquire data and do analysis is always
“too little too late”, and is costly without having great value. M&E would not be needed if there
was good management accounting driving the operation … rather than almost no accounting, and
then the “cover up” of M&E study and analysis!
Analysis is important. Possibilities take on realism during implementation. A community that has
difficulty with the concepts of progress in a verbal or intellectual form should become engaged
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and have good understanding with implementation. For this reason it is good to design
implementation as a journey of many steps rather than one huge leap!
The community planning framework aims to integrate all the sectors into a coherent whole. The
community is like a living organism that needs all its components to survive and be healthy.
Every single sector activity needs the service and support of other sectors in order to be
successful. A missing sector capacity is a serious constraint.
Reporting also important. The way reporting is done has changed substantially over the years …
but the reasons for reporting remains the same. Stakeholders should be able to see information
that shows how well an organization is performing … and the impact activities are having on the
community. When paper reporting was all that was available, a paper report was prepared that
included financial statements … but as alternative forms of access to data and to analysis become
possible, they may be used to supplement or replace paper reporting. Good data and analysis
should be nothing more than “a click away”.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009101200#sthash.dkh0RH96.dpuf
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10-13 ANALYSIS FOR PLANNING
The Big Challenge
Main focus is the community perspective
The community perspective is the most important perspective … it is the community where
people live their lives.
Every community is unique. There should be a plan for every community. A community needs a
plan in order to progress … and the plan has to be specific to the community. A plan is only a
starting point … but a useful first step in improving a community and making a community more
productive. Sustainable progress depends on productivity, and in turn productivity depends on
decisions made about the organization and use of resources.
A community needs a plan in order to progress … and the plan should be specific to the
community. A plan is only a starting point … but a key first step in improving a community and
making a community more productive. Sustainable progress depends on productivity, and in turn
productivity depends on decisions made about the organization and use of resources.
It is also at the community level where economic activities produce tangible results … or not.
TVM uses the community as the main reporting entity because of this, and the fact that it is in
the community where all the different activities in different sectors come together to produce
quality of life for people.
Within in a community it is possible to do further data acquisition, analysis and reporting at the
neighborhood, block and building levels. The key is for the data to be related to a place that can
be easily identified and where data and reality are clearly connected.
Essential to avoid imposing decisions
Need clarity about what is what! The big challenge is to avoid a merging of planning with
implementation … and to confuse data acquisition and analysis with decision making.
How to make “bottom up” real!
Making “bottom up” a reality is hard … a requires compromise so that success is not constrained
because of the complex incompatibilities of cultures, management and operating styles. Planning
is usually top-down. When planning is top-down, there are usually ... almost always ...
significant resistance to the implementation. This may or may not be justified, but it must be
taken into consideration.
My experience has been that most development planning is poor ... not taking fully into
consideration the key constraints and issues that will impede success.
It is better to plan using a micro-up approach. A community centric micro-up approach changes
the dynamic of development. The plans can be made taking into consideration the priorities of
the community and what is most needed by the community for progress.
The NIH factor
Decision making is very much affected by the NIH factor … “Not Invented Here”!
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The only way that good decisions are going to get made is when decisions are the result of
trusted dialog on top of good data and analysis. Decisions that are imposed have a high
likelihood of being rejected in practical terms even though the words might suggest that there is
agreement.
Planning is part of a process
Planning is a process that is ongoing so that there is a continuum of progress. The program
anticipates a continuum of data acquisition and analysis so that there is critical knowledge about
the community, about how much progress is being made, and what needs to be done next.
Planning is based on the reality of the community and assume the following concepts:
1. planning is part of a management construct;
2. without planning there can be no management;
3. without planning, measurement has no purpose;
4. without measurement there can be no management;
5. without management there is low performance;
6. without metrics there is no traction;
7. without structure there is no movement.
Multiple perspectives
From the national level
Planning at the national level is difficult unless the nation is small and homogenous. Normally
planning at the national level is ineffective because the number of different situations at the
community level, and national averages are hardly every right for any hard initiative that
originates with national level planning.
The national level policy making can make a big contribution to progress by ensuring that there
is an enabling environment that facilitates activities at the community level that will progress the
communities. Soft policy is advantageous and facilitates progress where hard projects for the
community level may fail.
From the sector perspective
Planning at the sector level has similar issues to planning at the national level. Community
specifics cannot be adequately taken into consideration.
But sector is very important. Technology is a powerful driver of progress, and best practice
sector know-how needs to be accessible to the people who make decisions in the communities
and people who make decisions in organizations. All the activities that are using resources should
be using best practice for the sector.
From the organization perspective
Planning in the organization has importance when it is optimized for an activity in a community
… and the activity in the community is consistent with the priorities of the community.
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At the activity level
The activity level is where performance analysis can be done in detail … it is activities that add
up to produce change in the community or not. Data about an activity, like date about everything
else, has an association with place and time so that the data may be used for meaningful analysis.
Non-place communities
TVM does its primary analysis at the community level, where community is a place. A
community may also refer to an “affinity group” of many sorts, like that of a school, or a church,
or a sporting club. In modern times, a community may also be “virtual” with its members linked
together in some way through the Internet and social networks like Facebook, LinkedIn or
thousands of others.
Planning “Lite”
Helping to determine what is best
The goals of progress can be defined by the community ... and steps taken to move the
community towards its goals.
TVM measures not only profit, but also value adding and impact on society. The corporate
accounting ideas of balance sheet and operating statement are applied to the community as a
whole, and not just the organizations in the community. identifies causality by using temporal
(time) analysis ... it , and how the activities of society result in value adding progress or value
destruction. the place. TVM is ubiquitous ... pulling data from remote places where little is
usually seen and reported. TVM goes beyond single stories to make multiple stories tell the
complete story in a meaningful manner.
Possibilities are enhanced with planning. Planning is analysis that helps to determine what is best
to do. Planning is a framework for effective decision making … and effective decision making is
achieved when the decisions are based on what is good for the community.
The TVM based planning framework for a community in Haiti is the same as for any community
anywhere in the world. It is a methodology that empowers local people so that local resources
are mobilized as the core of a sustainable program for the community.
TVM accounting goes beyond corporate money accounting to include in the accounting the idea
of not only accounting for money transactions, but also to include the accounting for value.
TVM also uses the community as the entity for accounting, analysis and reporting and not the
organization. The organization has a role in the accounting and reporting about community when
its activities impact the community.
Metrics about socio-economic progress and performance are needed for society in the same way
that money accounting metrics are needed for organizations. Money accounting is used for detail
measurement inside the organization so that the organization can be managed and for summary
reporting to outsiders. Meaningful socio-economic data of many types are used in a community
to have metrics about socio-economic anything and everything that affects progress and
performance. With relevant meaningful metrics there may be management. Management
includes many elements including planning, analysis and feedback to improve performance.
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In order to achieve the maximum of sustainable development progress from the available
resources, they should be used to take advantage of the multiplier and accelerator behaviors of
dynamic development.
The proposed program builds on the potential of the Haitian population of around 10 million
people, as well as the potential of some 2 million international Haitians.
In an enterprise society people are both producers and consumers and everything is organized
accordingly. In this rebuilding initiative, the most efficient program is going to be where Haitians
are remunerated to do much of the rebuilding themselves. They will then be in a position to pay
for most of their basic needs and the foundation for a surplus production sustainable economy
will start to emerge. With this approach, the funding required for development becomes a
fraction of the static welfare model planning incorporated in the proposed GoH plan.
Planning is a management tool that makes it possible to know a lot about the resources, the
constraints and how things are organized. With people focus planning, the link between people as
resource and people as beneficiary is closed. With planning data about a community it is possible
to have a dialog about how people and organization and resources might work together in the
most effective way, This approach to planning makes it possible to have planning and
coordination and to maintain a strong bottom up focus.
Seven planning steps
Planning identifies ways to remove constraints … some constraints are easy to remove, but some
are not. Some things can be done quickly, but some will take a generation or more to change.
Some people related constraints may be removed quickly, but most are going to take a long time.
The deficit in education cannot be removed instantly, it is going to take a number of years … but
the value of addressing the learning deficit is substantial. Some knowledge can be shared
quickly, but some has to wait until there is an underlying level of education for the knowledge to
have any meaning. In very practical terms the plan has to reflect what people want to do and can
do … what organizations want to do and can do … and what other resources there are in the
community. A data driven dialog about these things make it possible to understand the
possibilities and the constraints of the community.
The TVM approach to planning aims to be as simple as possible. In the initial stages the data
about the community is compiled as a simple Seven Step program. The process includes the
following:
1. STEP ONE: Having the basic data about the community
2. STEP TWO: Identify key issues and priorities of the community
3. STEP THREE: Available resources … priority sectors … opportunities
4. STEP FOUR: Main constraints … limiting factors
5. STEP FIVE: Prioritize things to do
6. STEP SIX: Mobilize resources … get organized
7. STEP SEVEN: Implement … assess progress
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Having the basic data about the community
The basic data about the community is an essential starting point … while there are easily
accessible data about the country these data are averages and aggregates that tell very little about
the individual specific places in the country. The elements that are needed are set out below:
• About the community
• About people
• About organizations
• About material and natural resources
• About money resources
• About constraints
• About economic activities
Key issues and priorities of the community
The process of planning is not merely to have a plan … but to get results. Data about the
community is going to be voluminous. By identifying the main priorities of the community it
becomes possible to focus effort on something that is more manageable. The identification of
priority is a community process that reflects community knowledge of the state of the
community, the goals of the community, the possibilities of the community and the constraints.
Available resources … priority sectors … opportunities
Available resources are very important. Start with people because it is people that have needs …
people who are a potential market and people who are a potential source of labor or human
capital. What organizations are available … what can the existing organizations do to help? What
is constraining existing local organizations from doing more. What material and natural
resources are available? What buildings and infrastructure are available? What equipment is
available? What are the big opportunities?
Main constraints … limiting factors
Some of the constraints in the community are going to be specific to the community … things
that can be improved by action at the community level. There will be others that are externalities
to the community … and while they should be documented, they should not be used as an excuse
for not doing other things that are within the control of the community.
And what are the small constraints that are stopping the people of the community from making
progress to achieve the potential of the community?
Prioritize things to do
If you try to do too much, you do not do anything! What needs to be done has to be identified
and sorted so that something can get done.
• Identify just one thing to do … and do what is needed (see 6 and 7) to get it done!
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• Identify something else to do … and then do what is needed to get this thing done!
Disagreement about priorities is likely to be the norm, rather than the exception. The plan is a
guide to getting results … making progress and having effective performance. Have many small
initiatives with rapid results rather than a single big thing where too many people are going to get
left out!
Mobilize resources … get organized
Nothing is going to get done unless the necessary resources are mobilized … people … money
resources … material resources … knowhow. In addition everything has to be organized so that
what needs to be done gets done. This is both people and organizational structure. In some cases
it will be impossible to mobilize the resources needed simply because there is not a viable
organization to work with.
Implement … assess progress
Implementing … doing the work … providing feedback about work done and resources
consumed. This enables:
• Oversight of the portfolio of initiatives using metrics of progress and performance;
• Rethinking the plan for the next iteration.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009101300#sthash.Wz3ellk4.dpuf
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10-14 ANALYSIS OF NEEDS
What Are The Needs?
Needs start with people
Without people, there are no needs … up to a point! Most “needs” are related to people, the more
there are people, the larger the need. In other words needs are a function of population.
But needs are more than this. Every aspect of life … plant life and animal life as well as human
life have needs and all of this is part of one great complex ecosystem.
Needs are one thing … wants are another!
The basic needs for human beings are quite modest … food, water, clothing and shelter. It is
appalling that there are many people in the world who have inadequate food, water, clothing and
shelter.
Security is not a basic need … but the lack of security is a root cause of people not being able to
access food, water, clothing and shelter.
Basic needs in the modern context
In a modern economy basic needs are more than a minimum of food, water, clothing and shelter.
People also need basic healthcare, education and economic opportunity … and security and a
framework of governance and rule of law.
None of these ideas are new. These ideas were already well developed way before biblical times
… but the importance of these ideas continues into the modern era.
Progress out of poverty has been accomplished in large part because of improvements in
productivity that now make it possible for everyone to have things they need to satisfy basic
needs with plenty left over. The reason why many remain poor is because of dysfunction in the
way the socio-economic system is working … too many people are economically active … that
is, work … but do not gain much from the work.
A dysfunctional socio-economic system
Professor Muhammad Yunus often talks about people who work hard for fourteen hours a day,
seven days a week, and remain poor. He says that this is not because the people are bad but that
the socio-economic system is dysfunctional.
The modern working class society has evolved a lot in the past two centuries so that people can
have enough of food, water, clothing and shelter. Maybe there is less of war and insecurity as
well … and there is more widespread availability of healthcare and education … and the
infrastructure of society that supports productivity has been improved. Most important …
knowledge has also improved.
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Middle class needs and wants
In many ways the United States of America represents the possibilities of a modern economic
society … human creativity and enterprise making it possible for everyone to move into the
“middle class” … what is referred to as the “American dream”.
In this economic model a profligate amount of resources were used to build a production
capacity so that a massive amount of food, water, clothes and shelter were available to
Americans. Economic activity that produced the goods also produced profits and wealth for both
investors and workers. The model works quite well when the regulation of the system is a
competitive efficient market framework, but falls apart when the market is gamed by powerful
participants … something that has happened with surprising regularity.
In addition to the problem of gaming the market, this economic model is problematic because it
uses resources as if there is an unlimited supply … especially land and energy. What started out
as a highly productive system that enabled the formation of a middle class during the industrial
revolution is now constrained by limits on the availability of land and energy … and by the
damage the effluents from this system have been doing.
The idea that the middle class needs more and more and more still prevails in economic analysis
and public policy … and must be replaced by a middle class dream that is about better quality of
life and more happiness on top of easy access to all the basic needs of an affluent middle class.
Knowledge needs to be not only accumulated for academic advancement but applied to improve
productivity and the effectiveness of economic activity.
Luxury wants
One way in which the modern economy has been weakened is the concentration of economic
money wealth and power in the hands of a small number of individuals and corporate
organizations. A large scale luxury sector ecosystem has emerged to serve the wants of this
community … often highly profitable, but with only limited socio-economic value to society as a
whole.
There is a “value” of the luxury sector that should not be ignored. Beautiful things have a place
in human happiness … but the allocation of resources to luxury activities should be balanced
with the allocation of resources to improving socio-economic performance where there is
poverty and a dysfunctional economic environment.
Matching resources and needs
Bottom line … this is NOT being done
The institutional framework for the modern economy is very efficient in terms of relating capital
market pricing to money profit performance and a range of other indicators in the “more and
more” economic model. Using this framework capital flows into profit opportunities that are
completely independent of any meaningful socio-economic value metrics.
Capital flows … hot money
It appears that every few years there is some economic crisis that is aggravated by global capital
flows that are unstable simply because they are purely profit seeking with no value component.
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The situation is made worse by poor accounting and financial reporting that routinely fails to
alert decision makers to problems until it is too late.
The capital flows have everything to do with making a profit … with little at all to do with
achieving more socio-economic progress and improving the value dimension of society.
Decisions about capital flows are disconnected from any reality that relates to quality of life in
any community anywhere … the decisions are not in any way matching funds to socio-economic
needs.
Little or no investment in the future
The modern capital markets invest in profit … whether it is over the next minute, next hour, next
day or next quarter. The mechanisms to invest in value so that society is better off in 20 years or
maybe in two generations are very rudimentary compared to the mechanisms used to trade for
the short term.
What mechanism for community investment?
When the goal is to have the state of the community improve progressively over time, investment
allocation should be done on a basis that changes the state of the community. This is about what
people need … and how people can be better equipped to satisfy needs in an increasingly
productive way.
It is also about what people want … and how people can get more of what they want by being
more productive.
Everything is interconnected … and the achievement of sustainable performance is when the role
of people is more important than the role of material resources and money. A community centric
socio-economic model that has people as the primary resource and contribution to quality of life
as the main output is paradigm shift. The model may be quite simple or incredibly complex …
but with the help of Adam Smith's invisible hand becomes perfectly feasible. The key matter is to
be using meaningful value metrics to inform the market and decisions about allocation of
resources.
Unmet needs
Most communities that are poor do not have access to resources to satisfy their needs, even basic
needs, let alone their wants. Sometimes there are resources, but for a variety of reasons, there is
no access to these resources. This may be because of external factors like the “ownership” of the
resources … or it may be that the human capacity of the community is constrained by lack of
education, skills and knowhow … or it may be a lack of organization or a lack of money and
working capital.
Handling unmet needs probably requires some external intervention. This intervention should be
such that there is community progress … not merely a “welfare” type intervention that merely
makes poverty a little more bearable, and not an approach that helps the community a little bit
with big profits for everyone else.
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Upgrading people capacity
Upgrading people capacity to facilitate development progress should be a priority. But this needs
to be more than just building educational capacity, it is a much more. The present value of
education is huge … but only when it is combined with things that are valuable and need to be
done. Education must deliver a skill set that enables real physical value creation. The value of
education is a derivative that relates to economic opportunity in the society as well as the
education itself. This is a paradigm shift in the way the goals of education are framed. Needs
being satisfied is the job that human resources must do … education is needed to that people are
able to do this.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009101400#sthash.4uKLc1AO.dpuf
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10-15 ANALYSIS ABOUT RESOURCES
Resources are an Asset
Resources of the community ... No ... not so quick
One would think that natural resources would be an asset of the community, but sadly, the rule of
law may have preempted what seems like common sense so that the legal reality is something
very different.
Not simply money
Resources are not simply money. Resources are many things. The most important are:
• Human resources, and
• Natural resources
The following are also important resources. They can be created in order to build more potential
for success in a community. They are created as a result of use of human and natural resources
and all of the other resources in different ways:
• Organizational infrastructure
• Enabling environment
• Physical infrastructure
• Production equipment
• Working capital
• Money
• Knowledge
Human resources and natural resources are the ultimate determining factors in the potential for a
community. The potential for progress is a function of the underlying potential of the human and
natural resources.
Resources
The resources are people, natural resources, infrastructure, material and equipment, financial
resources and knowledge. For resources to get committed to development purposes there must be
value adding and there must be a “return” to the owners of the resource.
Success in development needs resources. The world has the resources to achieve amazing
success and development progress, but resources need to be managed so that there is economic
value adding as a result of their use. It is time to end zero-sum development and replace it with
initiatives that are economic value adding and benefit both the funding entities and the users. It is
time to do development making best possible use of local resources in collaboration with needed
outside resources.
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Importance of local resources
The failure of development is due in large part to the failure to use effectively local resources.
The value of local resources is well recognized and international business has made huge
fortunes be exploiting local resources, but the business model has been all about the corporate
bottom line, and nothing much about creating value from these resources in and for the host
community.
It is possible for local resources to become the investment driver in local communities. External
resources added on top of local resources can create huge wealth, and it is reasonable that this
wealth improves the quality of life of the local community.
In the development space there has been a complete unlinking of these various resources so that
resource use has been very inefficient and ineffective.
If we look at the resource situation from a global perspective, there are enormous resources. If
we look at the way the resource flows are going on, there is a total disconnect between resources
available and resources needed. This is a process problem. This is not a resource problem, at any
rate from a global perspective.
If we look at resources in a community, there are likely to be some resources, but rarely all the
resources needed to operate a “closed” economy successfully.
Resources are being wasted
Resources are an issue. It is not that there are not enough resources. There are lots of resources. It
is just that resources are used in very wasteful ways.
And there is also a situation where assets that ought to be resources are liabilities simply because
of the process and organization of development.
Development needs resources in order to be effective. But more important than the absolute
amount of resources is the way they are used. Economic progress is a dynamic process, and a
small amount of resource well placed will do more good than a massive amount of resources
badly utilized.
There are four principal resources: human, natural, material and financial. It is possible to argue
that these resources are abundant, but badly distributed. Certainly, it can be argued that the
resources are not distributed in the optimum way for development progress.
This chapter addresses the issue of resources both from the perspective of resource availability as
well as how resources are mobilized and allocated to priority works. The chapter explores ways
in which available resources can be used to achieve maximum economic value adding and
progress towards the goal of success in development. This chapter highlights the importance of
all resources. Resources are not just money and financial resources.
What are natural resources used for?
In the short term, the world has an abundance of natural resources. The problem is that the
world's resources are not being used to support economic value adding activities that benefit all
the stakeholders, but only to benefit certain key stakeholders, especially top corporate
executives, investors and often senior government officials and regulators. Even though the
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SOUTH has enormous natural resources they have not been used in ways to create economic
value adding for the SOUTH. The development and investment process has suited those with
poweer and in control, but not society as a whole.
How are human resources used?
The world has an enormous pool of labor, and over the past two decades there has been a trend
for this to become one very large global pool. Education and training has improved over the
years and the skills of these workers have improved substantially. The result is that there is now a
very large pool of labor and now substantially surplus to business needs. If the classic market
economy is applied, the outcome of this surplus is downward pressure on wages ... and this is
what has happened bit by bit over the last two decades. Some workers are now earning more
because they now have skills, but many others are earning less because the jobs are moving to
low wage areas.
The worker wage pressure is an issue that needs to be addressed, and drives in part the design of
the TVM framework of metrics.
Organizational infrastructure
The formal sector organizational infrastructure for success in development in the SOUTH is not
strong. This includes government, the legal and regulatory frameworks and the banking sector
and the local enterprise sector. But in spite of this NORTH business seems to be able to invest
and profit when it sees opportunity for itself.
Physical infrastructure
The physical infrastructure in the SOUTH is generally poor and deteriorated. Enormous
economic value adding would be achieved with major investment in infrastructure, but it is long
term and should be part of an integrated program.
The material and equipment used for productive activities in the SOUTH is also limited, and in
most cases old and dilapidated. The applies in all areas of the enterprise economy, but especially
among small and medium scale enterprises (SMEs). Investment in incremental materials and
equipment for production can have and enormous economic value adding impact.
Finance is limited in the SOUTH, but abundant in the NORTH. But investors from the SOUTH
are scared about investment in most places in the SOUTH. In order to get comfort, the main
vehicles for investing in the SOUTH are the paper of the World Bank and the similar regional
development banks (RDBs), but this feeds into essentially low performance on-lending to the
SOUTH. Most other vehicles for investing in the SOUTH are also committed to investment
models that extract wealth from the SOUTH for the benefit of the investor without much
economic value adding remaining in the host communities. Getting finance into the SOUTH in
ways that are going to facilitate economic value adding sufficient to build the economies in the
SOUTH and satisfy investors is going to be the way and is the challenge
Knowledge is a final element of resources in development. Knowledge is not just data, nor just
information. Knowledge is part facts and part experience. The SOUTH has a lot of knowledge,
and so does the NORTH. Up to now the NORTH has too much tended to ignore the knowledge
of the SOUTH. And too much, in my view, the SOUTH has tried to bundle knowledge (technical
and technology) with financing, and mostly has lost out on both.
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Using resources for net value adding
The challenge is twofold. The first is to mobilize resources in ways that give satisfaction to those
that own or control resources, and the second is to make use of the resources in ways that create
“economic value adding” and enough surplus to pay for the use of resources.
In order to make the best use of resources and to generate the maximum of economic value
adding in the SOUTH it is of importance to make use of resources in a well balanced manner.
When the minimum of resources is used to the maximum of benefit, the economic performance
of the global economy can be improved immensely. The best results are going to be achieved if
the least amount of resource is consumed in net economic value destruction.
The resources are people, natural resources, infrastructure, material and equipment, financial
resources and knowledge. For resources to get committed to development purposes there must be
value adding and there must be a “return” to the owners of the resource.
Success in development needs resources. The world has the resources to achieve amazing
success and development progress, but resources need to be managed so that there is economic
value adding as a result of their use. It is time to end zero-sum development and replace it with
initiatives that are economic value adding and benefit both the funding entities and the users. It is
time to do development making best possible use of local resources in collaboration with needed
outside resources.
Financial resources
Africa and the SOUTH needs investors that are looking for a high return on a small investment,
and want their investment to be earning well for a long time. Africa and the SOUTH needs to get
away from reliance on international investors who are looking for a big return on a big
investment and an early and easy exit strategy.
There are enough financial resources in the modern world to finance anything that is low risk and
economic value adding. The challenge is to create financing vehicles and the financial
intermediaries that will make it possible for the capital markets to operate for the benefit of their
investors and development at the same time.
It was said of the Rothschild Bank in the Victorian era that they had the best information in the
financial community, and that this was the secret of their success. It is still true in modern times
that information is key to development performance.
While manipulated information has the potential for scandal and crisis in the financial
community, good information can be the foundation for a new era of success in development
investment.
The pool of financial resources is substantial, both in the institutional capital market and among
private investors and philanthropic organizations, but is not going to flow into socio-economic
investment until there is the right system of metrics and structure so that the risk is low and the
results credible.
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Know-how
Know how is important. There is enough technical know how for development success to be
achieved anywhere modern people with resources choose to work. Developing countries need
technical support as well as investment.
Management
Good management of limited development resources should aim to focus the use of development
resources where there can be the most economic valueadd, and therefore the most benefit for the
host community and the local people. Good management is only possible when there is
organization and structure as well as basic resources required.
Making the best use of resources
Why does the prevailing process waste resources? What results can be achieved when available
resources are best used?
Getting Data About Resources
Data about resources not going to be easy
Getting data about resources may not be easy. The key is to get as much data about resources in
the community as possible, and to have these data organized so as to have some utility. A lot of
personal and corporate wealth has been accumulated because there has been misinformation
about resources … making data about resources transparent may not be popular!
About Local Resources
People are the most important
A reminder about people
The role of people was highlighted in the previous sector … a reminder that people are the key
resource for progress and success. People … the human resource … are absolutely central to
everything. People are the reason why a society exists, people are the society, and people are the
resource that may be used to produce much of what is valuable for society. Without people …
what is the point? But with people there can be goals that are worth achieving and a resource that
helps get to the goal.
People need other resources … and must get organized so that the critical resources can be
mobilized.
Organization is a resource
Success is determined by the ability of people in the community to organize and get resources
deployed for the benefit of the community … to build value for the community. Organization is
very important … it gives a framework for doing things. Organizational structures and the
framework of law and regulation are enabling resources or constraints. Organizations are a key to
making it possible for all sorts of resources to be mobilized and used in an effective way.
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Natural resources
Natural resources are important … natural resources are enablers of activities that have value, or
the natural resources, or lack of natural resources may be a critical constraint. Nature … the
physical environment … is a key determinant of what is possible. Getting organized with some
planning makes it possible to use natural resources in ways that benefit the community.
Production resources
Material resources of various sorts are important … in many cases machinery and equipment,
vehicles, etc. are needed to have a productive society. The per capita use of energy has been used
as a proxy for progress … as a proxy for the amount of machinery being used.
Infrastructure
Infrastructure is a resource … again, the infrastructure is another determinant of the productivity
of the community.
Knowhow
Knowhow is important and it may be associated with people or it may be associated with
organizations. Knowhow can facilitate progress or it can constrain progress. Education and
training are activities that helps to build knowhow and the capacity to do things.
Money … loans and credit
Money helps … but money in a vacuum does nothing.
Resources are another way of thinking about means.
Success is a function of people … and how people organize themselves so that the resources that
are available get used for the benefit of society.
Analysis About External Resources
Using external resources may be very bad
Who gets the benefit?
The use of external resources has the potential to have bad outcomes for very many reasons.
Most external resources come with conditionality whether it is simply about how resources are to
be used, or whether it relates to the way the resources made available are to be repaid.
ODA performance is appalling
Too much of the wrong measures
Official Development Assistance (ODA) is appalling … but the institutions engaged in the
funding and implementation of ODA have been able to avoid any accountability for the appalling
performance by “spinning” the data so that tiny progress is accorded an inordinate amount of PR
and hype.
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World Bank and the disbursement proxy
The World Bank has used disbursement as a proxy for progress in its projects for most of the past
fifty years. This is an easy number for the World Bank to calculate … but that is about the only
advantage of using this as a measure of anything.
Many ODA agencies use activity as proxy for impact
Many ODA agencies use activity as proxy for impact, and this is almost as bad as disbursement.
In order for there to be development progress, there have to be development activities … but
progress, that is impact on the community, may or may not come from activities. Reasons for this
may be simple or complex … it does not really matter. If the goal is progress or impact on the
community, then this is what should be measured.
Malaria
Since 2000 there has been a rapid scaling up of the fund flows for malaria control interventions.
By 2008 the annual fund flow might have been as much as $2 billion with only minimal
performance reporting about these fund flows. One statistic that has been widely used is the
“bednet coverage achieved” … a measure of activity, and not a measure of impact. What is
worrisome is that the link between bednet coverage and reduction in the burden of malaria is
based on rather small studies with quite mixed results. Worse, the studies ignore the potential
side effects of the emergence of resistance to the active chemicals over time and the cost of the
program over time. Malaria control performance ought to be based on the cost of the
interventions over time and the value of the malaria burden reduction over time … and in this
light the spending to date has performance has probably been very weak.
Foreign direct investment (FDI)
Foreign direct investment brings an inflow of investment, brings an increase in jobs, brings some
improvement to infrastructure, brings perhaps some improvement to health and education … but
at a price. The price is that the investment is used to exploit something of local value like natural
resources (for example timber or minerals) which are finite and eventually are depleted. The
local employment remuneration is usually very small compared to the value of the exploitation
of the resources and small relative to profits that are exported from the area. In some cases … too
many … the exploitation leaves massive long term pollution that is ignored totally in the initial
investment proposal presentations. The improvement in infrastructure is usually modest … or to
the extent that it is significant mainly of use to move exploited resources out of the area. Social
welfare assistance is usually small compared to the scale and value of the resources being
exploited.
The business model that has been used for Western FDI for the past fifty years has been almost
all bad … worse, in fact than much of the mercantile investment of the colonial era. The modern
corporate FDI may, in fact be described best as corporate colonialism.
Humanitarian relief
Official Development Assistance (ODA) has not grown as fast as humanitarian relief during the
past three decades … it is more “popular” with donors and easier to get taxpayer support. But it
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is rarely structured to support a development agenda and merely serves to help people survive
rather than being part of an agenda to help people to progress.
The best way to describe the humanitarian relief sector is to say it is a global economic welfare
system … and sending all the wrong signals to developing countries now for about 60 years.
Donor fatigue has been a problem for a very long time … and donors move on to something
more fashionable or more suited to donor country taxpayers' fancy rather than staying with
funding initiatives that are good but “boring” and might possibly get result and delivery serious
progress. Good development is long term … in fact inter- generational. Nothing of sustainable
significance can be achieved in a two year time span … or even five years.
The project form of organization is one of the core problems of the ORDA sector. There is little
that is right about this form of organization for development. The project form of organization
has its history in the building of large civil engineering works likes dams, canals, railroads and
highways … but is totally unsuited for support to health, education and small-scale agriculture.
Worse the project is a vehicle for fund control by donors by-passing the local Ministry of
Finance that ought to be providing oversight control to funds flowing through government into
projects. Whatever happened to the idea of “single treasury account” for the control of
government moneys?
Projects that are funded by outside agencies like the World Bank, USAID and others usually
have employment terms that are way better than the local civil service … and totally
unaffordable within the local economy under non-project circumstances. This makes it easy to
recruit good staff … but what happens at the end of the project. The international project staff
walk away and go on to another project somewhere else. The local staff become unemployed …
and likely “mad as hell”!
Problems With Rule of Law
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009101500#sthash.mrcPMeQy.dpuf
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10-16 BEHAVIOR OF COST AND VALUE
Cost and Value Behavior is Complex
Cost behavior
Well understood by good business managers
Optimizing performance requires understanding of the behavior of both cost and the value ...
neither of which is simple. An optimization model that incorporates the many variables that are
normal in human society and in sectors such as health is very complicated ... and does not work
well unless there are large quantities of reliable data.
However, some of the behaviors are easy to understand ... but even the simple behaviors are not
being documented well and knowledge about cost and value is primitive. It need not be ... and
the TVM initiative in conjunction with initiatives like IMM will help to change this aspect of
performance metrics.
Good managers use the available data to achieve the best possible results. Good managers
respond quickly to what they see is happening way more quickly than an ex-post factor academic
study.
What something costs is determined by technical considerations. A physical item is made up of
materials that are processed in some way. To do this required people and production facilities and
equipment … all of which have costs. It is a mechanical process to add up the costs of the
various production activities to come up with the cost of the item.
Every element of cost varies in different ways with volume. Some component parts of the item
will have a lower unit cost when the volume increases, but other parts might have higher costs as
volume increases. Using less material may not reduce the cost when the production process is
more difficult with a small item than a larger one … scrap may change the unit cost for the
completed product depending on production capabilities and required quality.
Understanding the behavior of costs is the key to making program performance optimum.
Matching the behavior of cost with all the other dimensions of operational performance makes it
possible to get better results than might otherwise be expected. While elementary analysis is
often based on simple relationships, efficient cost accountancy shows how low costs can be
matched with high impact values for best results.
The behavior of cost is determined mainly by the system or process ... that is, the underlying
science and technologies, and by the competence of the people involved and the decisions they
make. Most students of cost accounting know about fixed and variable costs and know the
simple breakeven chart ... but in practice everything varies, and the variations can be substantial.
Some elements of cost are a function of time. Staff are usually compensated based on a time rate
… a monthly salary … an hourly wage. Some costs are based on some measure of activity …
fuel consumption per mile for example. Some costs vary depending on external conditions …
heating and air-conditioning costs vary depending on the weather.
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The cost and profit of software applications
If a software application costs $1 million to develop plus $100,000 to deploy the first unit ... the
unit cost is $1,100,000 million. If the second unit deploys for $50,000 then the total cost is
$1,150,000 and the unit cost drops to $575,000. If the next 8 units cost $25,000 each to deploy
the total cost becomes $1,350,000 and the unit cost drops to $135,000. After this the deployment
cost drops to $100 each, and by the time 100,000 have sold the total cost is $11,349,000
($1,350,000 plus $9,999,000) at a unit cost of $113.49. This is not an extreme case ... it is the
basic business or economic model that has made modern IT such an important source of profit.
Very little … maybe nothing … is linear. Each element of cost has a different cost behavior …
and together add up to an overall cost and value consumption behavior. The individual element
behavior is a great help in understanding cost and the behavior of cost.
In TVM, the basic approach is to understand the way the system or process works, and use data
to determine how costs relate to the system at a specific state ... and work from their to determine
how costs are going to change as the system changes.
Value behavior
Maybe more complex than cost
Value usually has a different behavior. A medical intervention for a critical health condition that
makes death likely without treatment has a value that is huge. How huge is subject to debate, but
the value in social value terms is big. A medical procedure that makes one look a little more
handsome is not in the same league as the one that saves life. And value may not relate simply to
the way costs are incurred ... preventative care does not have immediate impact ... but in time its
value emerges. This is addressed within TVM by the use of value chain analysis that links a
series of costs with a series of values.
Value behavior is complex because most value is a function of many different elements … and
the subjective aspect of value adds further uncertainty to the behavior. The important thing about
this is that value has more impact on quality of life than anything else, and accordingly should be
taken into consideration in every aspect of doing socio-economic activities of any type.
The complexity arises in part because each sector is dependent on other sectors, and value often
only arises when several sectors together are needed for enabling improvement in value. In other
situation the activity my take place with substantial money flows but not actually improve the
situation to create the value. At the same time there is value associated merely with paying for
the interventions. This health example illustrates this:
Health example
If I am ill and undergo some medical treatment and get better … the value situation improves
substantially, while if the medical treatment does not make me well, the value increment related
to my health situation is zero. Meanwhile there is value flow associated with the income and
profits related to the medical interventions which may be substantial for the medical sector but
pulled from the entities that that funded the interventions. True Value Metrics aims to understand
all the value flows associated in any form of socio-economic activity.
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Education is an important sector. Much of the value of society is derived from education and the
ability to process knowledge … but the value behavior is complex. It costs money funds to
educate a child … and many years. An educated person has better career prospects than someone
without education and this is of great value to the individual if the individual is able to locate a
job and gets the remuneration. In the case where there are little or no opportunities to use
education, the value of the education is very much reduced relative to the situation where a job is
available.
Education example
With no education or skills a person cannot do a well paid job. Without a job
opportunity an educated person cannot do a well paid job. To get value for the
individual there has to be the education and skill development and there has to be
job opportunities … both!
Value chain behavior also complex
The value chain behavior may be considered to be a derivative of cost and value behaviors. The
factors that go into value chain decisions are related to costs and profit potential. With the
application of TVM the value dimension should also get taken into consideration.
Outsourcing
Lower costs … a nearly same product or service … going into the same market … and the
outcome is likely to be higher profits. This business model has been popular in the United States
and other high wage countries for many years and is now the norm for multinational business.
The value chain for this business model has a good profit profile … but the TVM value profile is
poor because of worker impact and value destruction associated with losing jobs. There is value
adding associated with the outsourcing enterprises … but the impacts associated with gaining
jobs and losing jobs is part of the analysis.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009101600#sthash.J10bKS5T.dpuf
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11-1 THE REPORTING ENTITY … REPORTING BOUNDARY
The 'Reporting Boundary' may be the single most important key to enabling a system of
reporting that includes the 'externalities' that are presently ignored by the prevaling GAAP
financial accounting metrics.
Many years ago I was the CFO of a modestly sized US based international
company. Though we appreared to be a single company to our customers,
suppliers and so forth, we were in fact the consolidation of more than thirty
separate legal entities ... and from an operating standpoint we had performance
accounting about some 26 different operating units. We reported as a single unit,
but we made decisions based on the data from 30 or 26 different subsidiary units.
For this company, everything associated with these subsidiary units was internal
to our performance.
For all of my career ... about 50 years ... the reporting boundary that is used almost exclusively
for financial reporting is the legal entity that is at the 'top' of a group of companies and 'quoted'
on a stock exchange or used otherwise as a financing vehicle.
It is, for example, Exxon Mobil, the company, that is the entity around which a financial
reporting boundary is drawn. In this situation it is only the money costs that are included in the
accounting for the performance of the company, and in this reporting, there are substantial profits
that are reporting.
Let us take a different boundary for reporting. Let us include not only the Exxon Mobil corporate
entity, but also the various places where Exxon Mobile extracts petroleum from the ground or
under the sea. When the boundary includes these places, there has to be an accounting for the
fact that the places have depleted resources at the same time that Exxon Mobile is reporting huge
profits for its investors.
Sometimes people argue that we keep discovering more and more oil, and therefore there is
nothing to get concerned about. This may be true in terms of the next year or two or ten, but it
begs the question. The fossil fuel resources are a finite resource that took multi-million years to
create, and we have consumed a big proportion of the known fossil fuels in the past 200 years,
and in the next 100 years we might easily consume the rest. What happens then? In geological
terms, the consumption has been instantaneous relative to the creation of these resources.
One way to set the reporting on a better path would be to have all entities that use natural
resources to incluce within their reporting boundary the consumption of the resource. Using the
idea of 'replacement cost', then the costs of fossil fuels then has to include the cost of
replacement using the best available renewable ... and, of course, this changes everything.
Place ... Community
If the reporting boundary is applied to a place, or a community, then all the economic activities
in the community should be included.
The place is something that does not change over time.
I grew up in Okehampton, a small town in Devnshire in England. It is an old town
already settled in 1066 and details of the town are recorded in the Domesday
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Book commissioned by William the Conqueror to inventory the country he had
conquered. The modern census data may be compared to the old Domesday Book
data to get some idea of changes over time
In the context of modern socio-economic performance metrics the State of the place at a point in
time may be compared to the State of the place at another point in time to determine the Progress
of the place.
It is to be expected that some thing will improve, and some thing will not. State is something that
includes everything that has impact on the socio-economic situation for people, place and planet.
Economic activities that are implemented by an organization may be associated with the
organization for its own consolidation. The same data are used for the consolidation or roll-up
into the organization that are used for the consolidation or roll-up into the place / community.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009110100#sthash.RMNN8qrt.dpuf
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12-1 THEMATIC ISSUES ANALYSIS
Thematic issue analysis is not the primary focus of TrueValueMetrics, but it remains and part of
the overall framework. Issues are important, in large part because people identify with issues and
become passionate about them. This energy is valuable in order to promote action associated
with progressing an issue provided, of course, that the pursuit of this action has a favcorable
impact on people, place and planet as indicated by the core analysis that addresses this.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009120100#sthash.mvTOyic7.dpuf
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12-2 ANALYSIS OF WEALTH
The conventional way of measuring wealth is all to do with material possessions ... how much
stuff we own, and the size of our financial holdings.
Such a measure misses almost everything that is of truly great importance. It misses everything
to do with my value as a person, and the value of my family and friends.
Such a measure ignores the value of my connection with community and the shared value of the
commons of the place.
Such a measure also ignores the huge value of the resources of the planet that are shared with
everyone else on the planet ... a huge wealth yet finite and easily capable of getting wasted by the
profligate socio-economic system we think is the norm.
Source of wealth ... material wealth, that is!
All wealth has its origins in the distant past, and the greatest wealth of all is the fact of life itself.
Another great wealth is our access to solar energy, without which nothing we know would exist.
Some of the resources we have today are the result of solar energy and natural life that has
created the fossil fuels we are consuming to support our modern wasteful world.
Other mineral resources originated with the formation of our planet, and are a finite resource that
cannot be replaced.
Land is another source of wealth ... not so much because it can be bought and sold for money,
but because it is a vital part of a sustainable world.
Water and air are resources of huge value ... without these resources life cannot exist.
The money wealth associated with ownership of material property and money all has its origin in
these real wealth elements. Some people own more than others
Real wealth versus perceived wealth
It used to be said that the UK was a nation of shopkeepers ... a sort of back handed compliment
meaning that everything could be found somewhere in the shops in Britain.
In fact, it was manufacturing and trade that made the nation's wealth ... and a very aggressive
spirit of enterprise and willingness to make investments. Much of Britain's wealth was generated
from end to end value chains that added up to deliver profit ... and a growing pool of capital to
invest. The value chains were global, even though, compared to today, the technologies of
transport and communications were primitive.
The industrial revolution also created wealth in United States ... in some ways bigger than in
Europe ... but the country was still relatively small. Certainly bigger than say, the UK, but not
bigger than the British Empire. The pound sterling was a much bigger international influence
than the US dollar.
Modern macro-economic measures do not differentiate adequately between the GDP at the
manufacturing level and GDP at the pre and post manufacturing stages. With the prevailing
system of metrics the sneaker contributes more to the global economy while it is sitting on a
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ship, or on trucks or in warehouses and retail stock-rooms than during the manufacturing
process. This is patently absurd.
Where does wealth come from?
Modern economics does not seem to address this key question. My impression is that economists
who have a platform for their views on organizations like for example Bloomberg News think
that wealth can be enhanced when a Central Bank like the Federal Reserve 'expands its balance
sheet' and does 'quantitative easing'.
If we go back to basics I argue that all wealth has its origin in the 'big bang' that started the
universe. Our wealth started off as minerals that make up our planet, and has increased over
billions of years through a process involving solar energy and nature's life. Bottom line, we are
wealthy because of the amazing multi billion year history of our planet, and the miracle of nature
and life.
Without human consumption, solar energy and natural resources will add 'wealth' to our world
for a very long time.
With human consumption the 'wealth' of the world declines … the faster the consumption the
faster the decline. In the prevailing Adam Smith style money profit laissez faire market economy,
the conventional wisdom is that wealth is about having more and more no matter how much of
the 'wealth' of the planet is 'consumed'.
This is ridiculous.
If people were smart … or perhaps if our leaders were smart, we would be running the world in a
very different way.
We need money 'to make the world go round' … but money is not a measure of either wealth or
economic performance.
Using an automobile analogy … money is the lubricant, but it is gas (petrol) that
provides the energy and it is a speedometer that tells us how fast the automobile
is going.
The way the world works looks like a combination of Newton's Laws of Motion, the Laws of
Engineering Thermodynamics and Darwin's Theory of Natural Selection.
Adam Smith in the 'Wealth of Nations' concluded that the market and the invisible hand resulted
in an optimum use of resources and optimum benefit for society. Adam Smith, it seems to me,
was in awe that the market miraculously balanced supply and demand, and goods got produced
and needs got satisfied, without any controlling overlord!
I argue that we should accept that the resources we have are finite, and that we should be figuring
out how best to get a decent quality of life from this finite sources or wealth … not only for the
next couple of generations, but for ever.
In modern times it is common for 'free market' supporters to cite Adam Smith and his invisible
hand as the foundation of the modern economic system. But in this, these people, often with high
level responsible jobs or high profile media platforms, are just fundamentally wrong.
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Modern economics is now a massive construct of money and financial investment vehicles that
have little or no connection to the real market that Adam Smith observed.
The system can be described as a huge 'bubble maker' that can be 'gamed' to produce money
wealth for some at the expense of everyone else … a classic zero sum game.
While the monetary economy goes from bubble to bust, the underlying real economy is trending
more steadily. Everyone talks about the monetary economy, but except for the investor and
executive community, it is really inceonsequential.
As I write this, I am in my 70s. When I 'completed' my academic studies more than 50 years ago,
the total of knowledge was way less than what exists today. It has been said that the total of
knowledge doubles every ten years, and on this basis there is more than 32 times the knowledge
today than when I was young. This is probably a low estimate … and maybe the total of
knowledge is 100 times more than 50 years ago.
Applied knowledge … or technology … has progress even faster. As I understand it, the famous
Moore's Law postulates that every 18 months power doubles and cost halves. So in areas of
technology where Moore's Law applies, we have a cost/power improvement that is multi-million
fold better.
I think this is awesome.
Sometime in the last fifty years the capacity to produce everything that we need for a decent
quality of life for everyone became possible.
This should change everything … but almost nothing has changed. Why?
The answer is, of course, that the money profit laissez faire capitalist market system being used
draws its inspiration from Adam Smith's ideas based on a shortage economy of the 1700s, This
model optimizes to maximize money profit for 'me', ignoring everything else. This model cannot
work to allocate resources in ways that optimize quality of life … and, bluntly put … the this
model has outlived its usefulness.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009120200#sthash.t0f2Arik.dpuf
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12-3 ANALYSIS OF COST
ELEMENTS OF COST
The elements of cost most discussed are material, labor and equipment ... but they are only part
of the cost. There are very substantial costs associated with research and development, creation,
design and engineering, marketing, distribution and rewarding capital.
Cost accounting is boring
Yes ... cost accounting is boring if it is defined as simply the recording of the basis
data. But cost accounting is exciting when it helps to understand the behavior of
costs, and all the factors that influence these costs. Boredom is usually some
reflection of the individual, more than it is cost accounting per se.
Materials, Labor and Equipment
Materials, labor and equipment are the elements that go into most production activities ... and
determine costs. These items also determine the behavior of costs and how costs can be
improved. The interaction of these three elements can be optimized with respect to cost, and
there is a large body of literature that helps decision makers optimize cost.
Optimizing cost may have a secondary impact on quality and value. This is one reason to talk of
optimizing cost rather than minimizing cost.
Organizations like the IMF and the World Bank refer to “economic classifications”. In the
corporate environment the phrase “elements of cost” were also used. What they are called
matters less than understanding what they are and how they behave.
Working with other languages
The idea that the semantics of word meaning is important gets minimized when
the work is being done in a foreign language. I have worked a lot in English ... my
native tongue, and in French, which I have studied over many years. The
differences in the meaning of the language, and the understanding of the
underlying concepts gets interesting ... but much more interesting when the
language is quite different from my native language. Try explaining the concepts
in Lao, or Russian, or Arabic! At the limit it is only the big concepts that move
from language to language and culture to culture.
Materials
Materials are a critical element of most economic activity. The availability of material has been a
driver and a constraint on economic progress.
• Iron and steel industry
• Pulp and paper industry
• Electricity generation
• Construction
• Consumer products
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• Automobiles, trucks and buses
South Korea
I have always held the view that man industries owed their success to the easy
availability of all the required raw materials for production. This was true in all
industries, but very much a constraint for the automobile industry. Over the years
automobiles have used more and more plastics ... engineered materials ... and
until the 1980s these were not available in South Korea. When Dow Chemical
started production of this type of material the groundwork was in place for
international standard cars from South Korea.
Labor
Labor ... potentially both a contributor to production and a beneficiary of production. Labor is an
important element of cost, also a source of creativity, imagination and productivity, and also the
reason for industry and pursuit of happiness. In classical economics people were producers and
people were also consumers ... more recently people have been both, and sometimes referred to
as “prosumers”. The trend for people to be in all aspects of the economic pot is continuing.
Location of industry – labor
Labor is an important cost in most products ... not all. It can be minimized in
some products by moving the production to a “low wage” country ... and further
reduced when the low wages are linked with good productivity and good quality.
This is good news for the company doing the manufacturing ... costs are reduced
and profits increased ... but is it to everyones advantage. While there are jobs
gained in one place ... are there offsetting jobs lost in another place? Maybe ...
but not necessarily. The analysis needs to be done carefully.
What other impacts are there? Are workers' rights respected ... do they exist at
all? If the ONLY driver is enterprise profit, then labor is likely to be exploited ... if
the driver is a more inclusive set of socio-economic progress metrics, there may
be very valuable worker benefits and progress.
One of the techniques used in optimizing corporate performance
is to look at the resources available to the company, and to try to
organize the
Labor – labor
Labor is an important cost in most products ... not all. It can be minimized in
some products by moving the production to a “low wage” country ... and further
reduced when the low wages are linked with good productivity and good quality.
This is good news for the company doing the manufacturing ... costs are reduced
and profits increased ... but is it to everyones advantage. While there are jobs
gained in one place ... are there offsetting jobs lost in another place? Maybe ...
but not necessarily. The analysis needs to be done carefully.
What other impacts are there? Are workers' rights respected ... do they exist at
all? If the ONLY driver is enterprise profit, then labor is likely to be exploited ... if
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the driver is a more inclusive set of socio-economic progress metrics, there may
be very valuable worker benefits and progress.
Applied common sense
Estimating costs
Figuring out how much somethings costs starts out as a theoretical exercise ... but it can be done
very accurately when people know what they are doing.
People who work in any area ought to know what things cost ... if they don't, then there is
something wrong. Good people will also know something about the behavior of cost ... that is
how costs vary depending on the prevailing conditions. Unit cost tends to go down as volume
increases ... but then will increase if the production requires overtime pay or weekend pay ... or if
there are shortages of raw materials that require higher cost procurement. Good people know this
stuff ... and a good cost system lets these details into the analysis so that good decisions can be
made.
Estimating Costs
One of the most effective measures of organizational competence is the ability to
estimate costs and get it right. The World Bank is reported to have had 300% cost
overruns on the rebuilding of its headquarters building in Washington ... and the
IMF had a similar experience. What does this tell you about two key
organizations in the international relief and development sector
Bureaucrats have no concept of cost behavior - I
I have never found a bureaucrat that had anything but the most simplistic view of
costs and cost behavior. One of my pet peeved is the idea that costs are low when
they are under budget ... especially when I have listened in on the budget process
and know how the numbers were negotiated.
Bureaucrats have no concept of cost behavior - II
This is typical. A colleague sat in at a high level UN audit meeting and heard the
explanation that a big project ... actually a computer installation and upgrade ...
had not cost anything because all the staff were on salary (and if I remember
right this was maybe 50 people for 2 years!).
Integrated cost accounting
The idea of integrated cost accounting was to make it possible to discipline cost
analysis within the double entry framework of accountancy. This was important
when analysis was manual and not easy to check in detail ... less important now
that computer spreadsheets and relational databases are everywhere.
There is increasing evidence that since this discipline was discontinued, the
understanding of operational cost behavior has deteriorated and instead some
system that is quite superficial and dangerous. I cannot pretend to understand
how some of the accounting works.
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BEHAVIOR OF COST
Fixed and variable costs
One of the simple classifications is between fixed costs and variable costs. The corporate
business that has success is usually one where there is a good understanding of how all cost
behave and optimizes accordingly.
Making fixed cost variable
Part of my success in the corporate world was my simple view that fixed costs
were, in fact, variable and a big job of management was to change them so that
they were optimized.
Getting to change fixed into variable meant changing established ways of doing
things ... changing to different ways of thinking. Outsiders would do it very
quickly in an acquisition setting ... we wanted to do it as insiders and have a
positive outcome for the company. My job was to help make it happen ... and do it
in weeks or months and not years.
Making variable costs fixed
My impression, early in my career was that more senior people had deep legal
training than had accounting or technical training and big decisions were made
with very limited understanding of cost behavior. This sometimes translated into
an unwillingness to have fixed costs ... even though this would end up reducing
the unit cost and increasing profit. There was some risk ... but that is what gives
enterprise the ability to drive progress.
Most of the Board of Aerosol Techniques were in this mindset ... and also too
many at Gulton Industries. This was a serious problem at Gulton, an early
pioneer of microelectronics which completely failed to enter the second phase of
circuit integration because of the high fixed costs of the required production and
testing gear and disappeared from contention.
Breakeven
When costs are thought of as being fixed and variable, and revenues are thought of as being
directly related to quantities, in a profitable activity, there is a mathematical point where
revenues equal the sum of fixed and variable costs. This is known as the breakeven point.
The idea of a beakeven point is useful, albeit simplistic since the assumptions about linearity are
rarely realistic in a real situation.
Students are taught the basics of a breakeven analysis ... with the simple breakdown of costs
between fixed and variable costs ... and a revenue that increases linearly with volume.
There is nothing wrong with the concept ... but the simplified assumptions do not take into
account much what happens in the real world.
There are much more complex changes going on that must be taken into consideration.
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In a real situation the fixed costs tend to grow ... not in the same pattern as variable costs ... but
they do grow. They tend to increase in steps ... but they do increase with scale.
In a well managed organization the fixed costs can be reduced ... can be made variable to some
extent by good decision making and thoughtfulness.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009120300#sthash.22ZgysYU.dpuf
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12-4 ANALYSIS OF PRICE
Price data
There is a considerable body of data about prices going back a very long time ... but rather less
about what these prices mean.
Learning about prices
When I became the CFO of Continental Seafoods I needed to get an
understanding of the dynamic of the industry ... I needed this to be a deep
understanding that was likely to be right ... and I needed to get this quickly. I
asked a lot of questions and did my best to mine the knowledge of everyone in the
company ... and friends of the company, and that was a good start.
I also plotted shrimp prices in the US market month by month from 1946 to 1974.
The data were available in a government produced market report ... but taking the
data out of a table and plotting it on graph paper told a story. Four weeks into my
new job, I knew more than most about shrimp prices ... and this gave me a good
insight into the potential for the company as we went forward.
This time series plot told me a lot about the long term trends ... and it told me
about price behavior month by month during the year, and how different industry
conditions impacted this behavior.
We know a lot about some prices, and rather little about other prices. Some prices seem to be
hidden from public view ... and one has to wonder why?
What prices should be
It is relatively easy to make a judgment about what something should be priced at. From this it is
reasonably easy to judge that a transaction reflects a fair price ... and is probably an honest
transaction. But that presupposes that it is possible to see the price of a transaction ... and this is
usually not the case.
A colleague had a job in one country (around 1988) where he had to review big
contract pricing to help reduce corruption and kick backs ... and he did his work
very conscientiously. He refused to OK one big contract because the pricing was
way too high ... only to have the contract resubmitted again some months later
with the price even higher. The explanation turned out to be that now it was going
to take even more bribery to get the contract approved!
These are big numbers and the temptation is huge. With very weak accounting and no
accountability it is not at all surprising that corruption is endemic and financial control a
shambles.
And even where there is publicity about prices, it is not always clear what the information really
means ... price disinformation is as common as price information.
Example
Government data about prices is often obtained using a crude system of telephone
questioning ... while it gets the information reasonably right it is not perfect by a
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long shot. It certainly does not have accounting precision.
I was not told about this until after I left the company ... but it turned out that
whenever we had a large stock of a specific item we advised the price surveyors
that this particular product was selling at a particularly high price ... and when
we had low stocks, we reported that the market price was low. In the real world
we were then able to discount the one item below market and move the product
and overprice the product we did not have, and not be embarrassed by the lack of
inventory.
It did not distort the price statistics that much ... but it certainly was a clever little
ruse to help keep product moving!
Transfer prices
Prices are critical to corporate profit ... which in turn has a disproportionate impact on value as
measured by capital markets.
But price is transient ... and just a part of the data needed to understand and record an economic
transaction. It does not matter much if one barrel of crude oil sells for $200 a barrel ... but it
matters very much if 100 million barrels of crude oil sell for this price.
In value chain analysis, the transfer price determines how the value adding is shared between the
entities in the chain it is very important. Because of its importance very little information is
available about transfer prices. The idea that the “market” determines the price assumes a high
degree of information and this is rarely the case. Transfer pricing serves those that have the
control.
Because of its importance very little information is available about transfer prices. The idea that
the “market” determines the price assumes a high degree of information and this is rarely the
case. Transfer pricing serves those that have the control.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009120400#sthash.zgmonC1O.dpuf
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12-6 ANALYSIS OF COST, PRICE AND VALUE
UNDERSTANDING COST AND VALUE BEHAVIOR
COST, PRICE AND VALUE AND VALUE CHAIN
Price has an important role in the matter of economic incentive ...
and the question of sustainability. The value chain works and is
efficient when the transfer pricing through the value chain
provides a reasonable rate of return on capital employed within
each piece of the value chain. If any of the links in the chain
become unprofitable, the value chain becomes dysfunctional.
HOW PRICE IMPACTS COMMUNITY
Price is a key variable in the performance of society. It is not as important as cost, but the way
price is used in society determines the way value is shared between the various economic actors.
The following graphic shows how an economic transactions that has costs and value is shared
between the enterprise and the client depending on the price being applied to the transaction.
For society as a whole the value adding is the difference between the value and the cost. For the
client the value adding is what is left of value adding after the enterprise has taken out its profit.
In the profit maximizing enterprise the goal is to have profit as much as possible, and the amount
left in the hands of the client is of little consequence.
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Base Case
In a lower cost case the enterprise profit increases at the same price point ... and the amount of
value derived by the client stays the same.
Lower Cost Case
If the client and the enterprise are in the same community it does not matter so much whether the
client or the enterprise has what share of the value added ... but where the enterprise is from
outside the community it matters a lot. In the case where the enterprise is external ... the case of
Foreign Direct
Investment (FDI) for example ... the value adding for the community is small because the profit
leaves the community. If the costs are incurred in the community there is some multiplier
effect ... but typically local disbursements are small and most of the costs, as for example in
mining are equipment, fuel, expatriate payroll .... with rather little value for the community.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009120600#sthash.NGow7okb.dpuf
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12-7 ANALYSIS OF IMPACT
4P IMPACT
'4P Impact' is impact on people, place, planet and profit. This is a logical extension of the Triple
Bottom Line idea which in a common form takes into consideration people, profit and planet.
TVM Value metrics adds the place or community because this is a key focus of management
potential in society, and therefore should also be a key element in the framework of metrics.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009120700#sthash.aC4OHVWb.dpuf
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12-8 ANALYSIS OF FUND FLOWS
Phantom Aid
In 2003 ActionAid, a well known UK based NGO called this Phantom Aid. Some years before
the phenomenon had been described as “Black Hole Development” implying that no matter how
much fund flow there was, the results would still be the same!
The amount of money being raised for international relief and development assistance is huge.
Fund raising in the aftermath of natural disaster is impressive, and shows how supportive many
people are of development initiatives.
But sadly the relief and development industry is less than candid about how the resources are
used and what is being accomplished.
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Value destruction
The amount of money that gets spent and the amount of good that gets done seems to be more
and more unrelated. Five decades or more of teaching MBA students about ways to maximize
profit without teaching much about society has created a very large community of experts in
profit maximization and hardly anyone that has a deep understanding of the social costs and
value destruction associated with this economic paradigm. The problem, however, is worse,
because the relief and development industry has many people well trained in various other
disciplines, but with rather little training in this dimension of economics ... and even less trained
in accountancy..
Focus on disbursement ... on activity
Metrics ought to serve the needs of society ... but the easy metric that has been important in the
Breton Woods institutions and their development clones has been disbursement. While there are
cases where disbursement is a useful proxy for results, this is not so when it is used to the
exclusion of almost anything else. Disbursement serves as a fairly good proxy for activity ... but
neither can stand in for result other than in a very controlled and stable environment.
Development, when it is successful, is not stable, but progressing ... and the only metric worth
having is a measure of the results.
Sovereignty ... anything goes
The idea of sovereignty that embraces the independence of a people from a foreign power is
good ... but the use of the idea of sovereignty to allow a regime of “anything goes” is not. People
are being treated abominably by governments and elite leaderships ... and external interference is
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constrained by the idea of sovereignty. At what point does doing right become the driver of
meaningful action?
Weak financial controls
Weak financial controls has been endemic and as a result all sorts of resources have gone missing
... stolen money ... stolen inventory ... over invoicing ... under delivering. Embezzlement of all
sorts ... petty corruption and grand corruption.
Everything is complex
In 2005, Save the Children UK highlighted the complex structure of the relief and development
industry and the complicated fund flow from funding sources to those in need.
The following is the same graphic but presented to have a fund
flow from left to right.
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While Save the Children made a good point, the situation was really very much worse.
Save the Children identified 9 sets of organizations or structures between the funding and the
community level households. There are many more in the real world. The structure on the donor
side has hundreds of organizations ... with functions that overlap, work in parallel and work in
series. The structure on the south side is also complex, maybe more so.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009120800#sthash.fsJmTrQa.dpuf
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12-9 ANALYSIS OF PROCESS
The project form of organization accentuates the problem of cost effectiveness at the same time
that it causes problems of social and economic impact in society.
Procurement dysfunction
The F line subway station at Lexington Avenue and 63rd Street in Manhattan is
an interesting example. It is a new subway station opened around 1990 serving a
deep subway with multiple sets of escalators. Almost every week some of the
escalators are broken down and awaiting maintenance. ... these are Otis
Escalators, a reputable product, but in this situation they are always breaking
down. Though almost impossible to prove, it is likely that the contractors who
installed the original equipment did not do the work right ... and that the
inspectors and contract oversight engineers did not do their work right either. It
is pretty clear that something went wrong, and in the best of all worlds, we should
know what is was and be able to hold the people responsible to account. Almost
certainly something like over-billing and under-performing was involved ...
payments for favorable inspections ... and so on. It is pretty obvious this is what
happened ... but there is no practical way to find the facts and hold people to
account.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009120900#sthash.TFZbliK2.dpuf
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12-10 ANALYSIS OF VALUE CHAIN
VALUE CHAIN ANALYSIS
Value chain
The value chain has been a critical factor in organizing development, production and marketing
around the globe. The value chain has been structured to maximize profit for the involved
organizations with little regard to the optimization of community value. The results have been
predictable with favorable profit optimization largely offset by value destruction for society.
Transfer prices
Prices are critical in economic analysis and the determination of profit and value to any entity.
Transfer pricing is used to put a value on goods and services as they move from one sub-entity to
another within an organization, or between controlled entities. They are a tool that can be used to
move profit between entities and may have inappropriate consequences.
Transfer pricing is a central component of value chain analysis ... but it is not easy to get right.
Ford was one of the first companies to have a vertically integrated production organization, but
transfer pricing caused all sorts of problems. Was it the steel mills or the engine plant that was
making money for the company? Big questions, with no easy definitive answers.
The value chain adds a level of complexity to cost analysis and understanding the behavior of
costs.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009121000#sthash.Ukpdxpr4.dpuf
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12-11 ANALYSIS OF PRODUCTIVITY
Cost, productivity and impact on society
Cost, productivity and impact on society are all related. Cost is a very important parameter of
economic performance. Cost is a derivative of productivity. If cost is low ... it is a proxy
indicator that productivity may be high ... but not always.
Productivity is the single most important reason that modern society has potential ... modern
society can do things today that were impossible only a few years ago.
In numerical terms, I suppose this means that productivity went from one over
infinity (infinitesimal) to something measurable.
Cost has a relationship with productivity but is not a good proxy for it. There are several
elements to a cost calculation, including these:
• What was consumed
• How much was consumed
• The unit costs for items consumed
Some of the consumption may be labor, some materials, some equipment and capital.
Productivity is a function of the amounts of these things consumed for a unit of output. Cost is
the derivative when the amounts consumed are multiplied by their respective unit costs.
Low productivity low wage areas may have lower costs than high productivity
high wage areas. Corporate profits ... which are determined in large part by costs
... are maximized by focus on production in the lowest cost areas. Social value, on
the other hand, may or may not be optimized by corporate profit maximization.
Agriculture is one of the few industries where the United States has retained a
position of global competitiveness. The productivity of American agriculture is
impressive, though there may be important questions about its environmental
sustainability. That aside, American agriculture produces enough food for all of
America, and enough for massive exports and does it using only 3% of the
population. In contrast most of the countries that are poor have a large
proportion of their population working in agriculture and not very much is
produced ... not even enough to feed the country's population. This is a crisis of
productivity ... which should not go ignored.
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12-11 ANALYSIS OF COSTS
Costs
Corporate profit performance has been optimized by a deep understanding of the behavior of
costs. Cost accounting and the analysis of cost behavior has a very long history in corporate
management ... but its equivalent is practically non-existent in the public sector and in the
international relief and development arena. Understanding costs is essential ... and simply this
will materially improve profit performance in the international relief and development industry.
The TVM Value Accountancy system provides a framework for understanding the behavior of
cost. It can show what costs are in a specific set of circumstances, and compare this with what
might have been expected and what has been achieved in other places, or at other times.
Productivity
Productivity is a function of cost ...
For many years low unemployment was seen as a way to improve economic performance and
reduce poverty ... but it rarely achieved much of either. The jobs that were created were
unproductive jobs that did nothing to create incremental value, rather the work diverted people
from more useful activities to absolutely useless activity.
Cost is a determinant of productivity ... or is it productivity that determines cost. This is more
than semantics and goes to the heart of the management of society and the effective use of
science and technology for the benefit of society rather than only being used for proprietary
wealth gain. A strategy that optimizes the former may well be different from one that maximizes
the latter.
Cutting Grass When I was in Ethiopia (in the 1980s) I observed women being
employed by the government to cut grass in the public areas of Addis Ababa using
hand scissors. Very many women were paid tiny wages to do this work and did it
laboriously and with great inefficiency. One person and a lawn mower could have
done the work of 1,000 of the women. The value of the work would have been the
same.
In one case one person was the labor cost. In the other case, 1000 people was the
labor cost. In a case like this there is the potential to improve the grass cutting
productivity by 1000 times ... but the productivity gain does not become a priority.
What are the reasons?
Perhaps it is because the leadership is using employment as a measure of success ... and by doing
this ensuring that the economy remains unproductive.
- See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009121100#sthash.YkQRQyzo.dpuf
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The TrueValueMetrics Book – Section V
12-13 ANALYSIS OF QUALITY OF LIFE
Quality if life ... the pursuit of happiness ... is enshrined in the US Constitution. While the
highest priority of mankind is to survive, after that, happiness is a critical driver of what is done.
Money, as a proxy for happiness, has not done very well ... but it is money, more than happiness
that is the main metric in modern accountancy and economics. Value accounting has quality of
life and happiness as a core part of the framework of performance metrics. For people, quality of
life is a big part of what makes life worth living.
Bhutan.
It is noteworthy that the small country of Bhutan has chosen to move beyond
using GNP as its measure of economic performance to a National Happiness
Index. Imagine how things would change if China, India, Brazil and the G8 all
were to embrace happiness as the primary goal of national economic policy!
It has been said that modern capitalist market economics is simply about more and more and
more ... and there is an element of truth in this. If this is applied as the core economics of the
planet, it is a formula for disaster. Quality is as important as quantity. Value that produces
happiness is more important than mere growth and money profit. Productivity and efficiency ...
and an adequate sufficiency for everyone's reasonable needs. None of this is out of reach ... but
the metrics must help. Playing the game with the wrong scorekeeping system will not get the job
done.
Quality of life is a complicated mix of many things including:
• At a personal level:
• Health
• Family
• Friends
• Money security
• Job security
• Opportunities
• Physical security
• Level of education
• Level of skills
• At a family level:
• the same as at the personal level but applied to other family members
Friends and community are also components of quality of life. -
MULTI DIMENSION IMPACT ACCOUNTING (MDIA)
The TrueValueMetrics Book – Section V
MULTI DIMENSION
IMPACT ACCOUNTING
(MDIA)
The TrueValueMetrics Book
Section V
Analysis and Reporting
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The TrueValueMetrics Book – Section V
Table of Contents
Background.................................................................................................................................9
TO DO … Complete this paper...................................................................................................9
CHAPTER 10 - ANALYSIS AND REPORTING............................................................................10
MULTI DIMENSION … MULTI PERSPECTIVE.........................................................................10
10-1 THE PURPOSE OF ANALYSIS........................................................................................11
ANALYSIS ... UNDERSTANDING........................................................................................11
Analysis ... a step to creating value from data......................................................................11
Comparative analysis...........................................................................................................11
Analysis releases the power of data.....................................................................................11
An issue ... studies................................................................................................................11
Management of data ... making metrics useful....................................................................12
Don't sweat the small stuff...................................................................................................12
Making analysis fast and useful...........................................................................................12
UNHCR Used Really Rapid Planning................................................12
Fast Planning in a Business Setting....................................................13
10-2 SPARE...............................................................................................................................14
10-3 ANALYSIS ABOUT COST, PRICE, AND VALUE............................................................15
Cost, Price and Value ... three key numbers.........................................................................15
Money cost, money price ... money profit.............................................................................15
Cost and value......................................................................................................................15
Price and value....................................................................................................................15
Disbursement is no way to measure performance...............................................................16
What is the cost?..................................................................................................................16
Cost efficiency … how much actual was relative to standard..............................................16
Cost effectiveness … How much value for the cost?............................................................16
Quantifying Value.................................................................................................................17
Standard value is key to efficient analysis...........................................................................17
Price as a proxy for value....................................................................................................17
Value is everywhere..............................................................................................................18
Examples in every sector......................................................................................................18
Things that impact value are everywhere.............................................................................19
Good health has high value.................................................................................................19
Health in GDP is nonsensical..............................................................................................19
Low crime has high value....................................................................................................19
Efficient public transit systems have high value..................................................................19
Urban and regional mass transit systems............................................................................20
10-4 ANALYSIS OF THE VALUE CHAIN................................................................................21
Source of Profit/Value Adding..............................................................................................21
Impact in different parts of the value chain.........................................................................21
Who wins and who loses in the value chain?.......................................................................21
Powerful...............................................................................................................................22
Follow the money!................................................................................................................22
Examples … value chain for goods and services.................................................................22
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The TrueValueMetrics Book – Section V
An example … the petroleum value chain ..........................................23
From raw material to final consumer in coffee...................................23
Examples … value chain analysis between places ..............................................................24
Within community transactions add value ......................................................................24
External to the community transactions lose value ........................................................25
Profitable Value Destruction ..........................................................................................25
10-5 ANALYSIS OF SUSTAINABILITY....................................................................................27
Sustainability … the Value Proposition................................................................................27
Sustainability metrics...........................................................................................................27
Limited resources.................................................................................................................27
In fact there is progress........................................................................................................27
A widely accepted framework of metrics is needed.............................................................27
Reducing carbon footprint...................................................................................................28
Running out of oil for energy...............................................................................................28
Sustainability … money based cash flow.............................................................................28
This is only money sustainability to pay the bills.................................................................28
10-6 SPATIAL ANALYSIS..........................................................................................................30
Where? Very Important........................................................................................................30
Physical location determines many things...........................................................................30
Mapping...............................................................................................................................30
Safety … the fighting is in the “next valley”.......................................30
Comparative analysis...........................................................................................................30
WHY SPATIAL ANALYSIS?..................................................................................................30
Basic spatial metrics............................................................................................................31
Spatial metrics in TVM Value Accountancy.........................................................................31
Importance of multiple datapoints.......................................................................................31
Spatial materiality................................................................................................................31
Starvation.............................................................................................................................32
Getting results.....................................................................................32
Prices in different places......................................................................................................32
Shrimp prices in different markets......................................................32
Costs in different places.......................................................................................................32
Cost estimating for the World Bank.....................................................................................33
Productivity in different places............................................................................................33
Enabling environment in different places............................................................................33
Comparing data from different places.................................................................................33
Project performance impact by place..................................................................................33
10-7 TEMPORAL ANALYSIS....................................................................................................34
Time Series...........................................................................................................................34
One datapoint in time … or two … or more.........................................................................34
Multiple datapoints provides a time series..........................................................................34
Time series data … trends are important.............................................................................34
Multiple baseline time series................................................................................................34
Changes over time................................................................................................................35
Some important time series..................................................................................................35
Market prices.......................................................................................................................35
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The TrueValueMetrics Book – Section V
Data identified the problem … what to do?.........................................................................35
Timeline of costs and values.................................................................................................36
Cost time series....................................................................................................................36
10-8 VARIANCE ANALYSIS … COMPARATIVE ANALYSIS...................................................37
Standards Reduce Workload................................................................................................37
Systems for costing are data intensive.................................................................................37
Standards for cost.................................................................................................................37
Standard costs variance analysis reduces workload............................................................37
Standard costs common in analytical accounting................................................................37
How much should have been done?.....................................................................................38
Missing Data........................................................................................................................38
Standards for value..............................................................................................................38
Using standards for value....................................................................................................38
Establishing value standards...............................................................................................39
10-9 CAUSE AND EFFECT.....................................................................................................40
Determining cause and effect ..............................................................................................40
This is not an academic exercise..........................................................................................40
Needs to be timely and low cost...........................................................................................40
Cause and Effect NOT Just Correlation!.............................................................................40
Statistics alone insufficient...................................................................................................40
Big computer or a little bit of common sense?.....................................................................41
Use location specific small datasets....................................................................................41
Operations analysis … simple common sense.....................................................................41
Data getting worse … statistical methods better!................................................................42
Capital markets all correlation............................................................................................42
10-10 DRILL-DOWN AND ROLL-UP.....................................................................................43
An average is almost always wrong.....................................................................................43
Must have place and time specific data...............................................................................43
THIS community is NOT an average community!................................................................43
Detail On Demand...............................................................................................................44
Avoiding data overload........................................................................................................44
The “roll up” and “drill down” framework........................................................................44
Drill-across … is value chain analysis................................................................................44
Almost everything is linked..................................................................................................44
An example … the impact of WalMart................................................45
Drill down for granular detail.............................................................................................45
Need for detailed analysis....................................................................................................45
Activity … ultimate drill down … the origin for roll-up......................................................45
Roll-Up … Accounting Consolidation.................................................................................45
Consolidation rules in the value context..............................................................................45
Roll-up activities to community............................................................................................46
Community...........................................................................................................................47
Activity.................................................................................................................................47
Community --- --- ---............................................................................................................47
Activity.................................................................................................................................47
Roll-up activities to organization.........................................................................................47
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The TrueValueMetrics Book – Section V
Roll-up by sector..................................................................................................................48
10-11 ANALYSIS FOR DECISION MAKING...........................................................................49
Why Do Decisions Get Made?.............................................................................................49
Heading for an economic train wreck?................................................................................49
Dig deep … understand the money flow!.............................................................................49
Who benefits from the decision?..........................................................................................49
Use value chain and other analysis.....................................................................................49
Causality more helpful than correlation..............................................................................49
Academy is mainly about correlation...................................................................................49
Community decisions need cause and effect........................................................................50
Walkaround Analysis...........................................................................50
Data for Decisions: Vector Control....................................................50
Bloomberg Dataflows...........................................................................................................51
10-12 ANALYSIS FOR OVERSIGHT........................................................................................52
Oversight with TVM.............................................................................................................52
The basic cycle of management...........................................................................................52
TVM oversight based on exception reporting......................................................................52
TVM is keeping score...........................................................................................................52
Oversight includes accountability........................................................................................52
Feedback, Oversight and Accountability.............................................................................53
A system with no feedback is a waste of time.......................................................................53
Implement … with operational reporting.............................................................................53
This is process … that includes measurement......................................................................53
Measure, Analyze and Report..............................................................................................53
Good data facilitates good implementation.........................................................................53
M&E almost worthless!.......................................................................................................53
10-13 ANALYSIS FOR PLANNING..........................................................................................55
The Big Challenge................................................................................................................55
Main focus is the community perspective............................................................................55
Essential to avoid imposing decisions.................................................................................55
How to make “bottom up” real!..........................................................................................55
The NIH factor.....................................................................................................................55
Planning is part of a process................................................................................................56
Multiple perspectives...........................................................................................................56
From the national level........................................................................................................56
From the sector perspective.................................................................................................56
From the organization perspective.......................................................................................56
At the activity level...............................................................................................................57
Non-place communities........................................................................................................57
Planning “Lite”...................................................................................................................57
Having the basic data about the community........................................................................59
Key issues and priorities of the community.........................................................................59
Available resources … priority sectors … opportunities.....................................................59
Main constraints … limiting factors....................................................................................59
Prioritize things to do..........................................................................................................59
Mobilize resources … get organized....................................................................................60
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The TrueValueMetrics Book – Section V
Implement … assess progress...............................................................................................60
10-14 ANALYSIS OF NEEDS...................................................................................................61
What Are The Needs?...........................................................................................................61
Needs start with people........................................................................................................61
Needs are one thing … wants are another!..........................................................................61
Basic needs in the modern context.......................................................................................61
A dysfunctional socio-economic system...............................................................................61
Middle class needs and wants..............................................................................................62
Luxury wants........................................................................................................................62
Matching resources and needs.............................................................................................62
Capital flows … hot money..................................................................................................62
Little or no investment in the future.....................................................................................63
What mechanism for community investment?......................................................................63
Unmet needs.........................................................................................................................63
Upgrading people capacity..................................................................................................64
10-15 ANALYSIS ABOUT RESOURCES..................................................................................65
Resources are an Asset.........................................................................................................65
Resources of the community ... No ... not so quick...............................................................65
Not simply money.................................................................................................................65
Importance of local resources..............................................................................................66
Resources are being wasted.................................................................................................66
What are natural resources used for?..................................................................................66
How are human resources used?.........................................................................................67
Organizational infrastructure..............................................................................................67
Physical infrastructure.........................................................................................................67
Using resources for net value adding...................................................................................68
Financial resources..............................................................................................................68
Know-how............................................................................................................................69
Management.........................................................................................................................69
Making the best use of resources.........................................................................................69
Getting Data About Resources.............................................................................................69
Data about resources not going to be easy..........................................................................69
About Local Resources.........................................................................................................69
People are the most important.............................................................................................69
A reminder about people......................................................................................................69
Organization is a resource...................................................................................................69
Natural resources.................................................................................................................70
Production resources............................................................................................................70
Infrastructure.......................................................................................................................70
Knowhow..............................................................................................................................70
Money … loans and credit...................................................................................................70
Analysis About External Resources......................................................................................70
ODA performance is appalling............................................................................................70
World Bank and the disbursement proxy..............................................................................71
Many ODA agencies use activity as proxy for impact.........................................................71
Malaria.................................................................................................................................71
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Foreign direct investment (FDI)..........................................................................................71
Humanitarian relief..............................................................................................................71
Problems With Rule of Law..................................................................................................72
10-16 BEHAVIOR OF COST AND VALUE..............................................................................73
Cost and Value Behavior is Complex...................................................................................73
Cost behavior.......................................................................................................................73
Well understood by good business managers.......................................................................73
The cost and profit of software applications........................................................................74
Value behavior......................................................................................................................74
Maybe more complex than cost............................................................................................74
Health example....................................................................................................................74
Education example..............................................................................75
Value chain behavior also complex......................................................................................75
Outsourcing..........................................................................................................................75
11-1 THE REPORTING ENTITY … REPORTING BOUNDARY.............................................76
Place ... Community.............................................................................................................76
12-1 THEMATIC ISSUES ANALYSIS.......................................................................................78
12-2 ANALYSIS OF WEALTH..................................................................................................79
Source of wealth ... material wealth, that is!........................................................................79
Real wealth versus perceived wealth...................................................................................79
Where does wealth come from?............................................................................................80
This is ridiculous..................................................................................................................80
I think this is awesome.........................................................................................................81
12-3 ANALYSIS OF COST........................................................................................................82
ELEMENTS OF COST.........................................................................................................82
Cost accounting is boring...................................................................82
Materials, Labor and Equipment.........................................................................................82
Working with other languages............................................................82
Materials..............................................................................................................................82
South Korea.........................................................................................83
Labor....................................................................................................................................83
Location of industry – labor................................................................83
Labor – labor......................................................................................83
Estimating costs...................................................................................................................84
Estimating Costs.................................................................................84
Bureaucrats have no concept of cost behavior - I...............................84
Bureaucrats have no concept of cost behavior - II.............................84
Integrated cost accounting..................................................................84
BEHAVIOR OF COST.........................................................................................................85
Fixed and variable costs......................................................................................................85
Making fixed cost variable..................................................................85
Making variable costs fixed................................................................85
Breakeven.............................................................................................................................85
12-4 ANALYSIS OF PRICE......................................................................................................87
Price data.............................................................................................................................87
Learning about prices.........................................................................87
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What prices should be..........................................................................................................87
Example...............................................................................................87
Transfer prices.....................................................................................................................88
12-6 ANALYSIS OF COST, PRICE AND VALUE....................................................................89
UNDERSTANDING COST AND VALUE BEHAVIOR ........................................................89
COST, PRICE AND VALUE AND VALUE CHAIN..............................................................89
HOW PRICE IMPACTS COMMUNITY...............................................................................89
Base Case.............................................................................................................................90
Lower Cost Case..................................................................................................................90
12-7 ANALYSIS OF IMPACT....................................................................................................91
4P IMPACT..........................................................................................................................91
12-8 ANALYSIS OF FUND FLOWS.........................................................................................92
Phantom Aid.........................................................................................................................92
Value destruction..................................................................................................................93
Focus on disbursement ... on activity...................................................................................93
Weak financial controls........................................................................................................94
Everything is complex..........................................................................................................94
12-9 ANALYSIS OF PROCESS ................................................................................................96
Procurement dysfunction.....................................................................96
12-10 ANALYSIS OF VALUE CHAIN......................................................................................97
VALUE CHAIN ANALYSIS..................................................................................................97
Value chain...........................................................................................................................97
Transfer prices.....................................................................................................................97
12-11 ANALYSIS OF PRODUCTIVITY....................................................................................98
Cost, productivity and impact on society.............................................................................98
12-11 ANALYSIS OF COSTS ...................................................................................................99
Costs.....................................................................................................................................99
Productivity..........................................................................................................................99
12-13 ANALYSIS OF QUALITY OF LIFE..............................................................................100
Bhutan...............................................................................................100
CONTACT...............................................................................................................................102
Founder / CEO … TrueValueMetrics............................................................................102
Mailing Address: ..........................................................................................................102
Internet/communications footprint................................................................................102
Print on Demand Books: ..............................................................................................102
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The TrueValueMetrics Book – Section V
TrueValueMetrics
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The TrueValueMetrics Book – Section V
See more at:
http://www.truevaluemetrics.org/DBadmin/DBtxt001.php?
vv1=txt2009121300#sthash.4QKfaTCA.dpuf
4
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The TrueValueMetrics Book – Section V
CONTACT
Founder / CEO … TrueValueMetrics
Peter Burgess
Mailing Address:
204 Seaham Court
Bushkill PA 18324 USA
Internet/communications footprint
Telephone: mobile: 212 744 6469 landline 570 431 4385
Twitter: @truevaluemetric @peterbnyc
Blogs: http://truevaluemetrics.blogspot.com http://communityanalyticsca.blogspot.com
Email: peterbnyc@gmail.com
Skype: peterburgessnyc
LinkedIn for Peter Burgess: www.linkedin.com/in/peterburgess1/
Print on Demand Books:
Search Peter Burgess at www.lulu.com
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