Rotating Toward a Value Orientation

Wise companies focus first on the issues that matter the most to them. And there are very few organizations for which BPM's biggest opportunity isn't its ability to enhance the company's value. A BPM project with a clear orientation toward enhancement of corporate value makes the new software and processes instantly useful. A focus on value also serves as a simplifying construct for the application of performance management.

In very simplistic terms, the price of a company's shares represents its overall value. An increase in share price represents an increase in corporate value. We're assuming that the market takes the company's earnings into account, then applies some factor representing expectations of its future performance -- essentially its price-to-earnings, or P/E, ratio -- to determine the share price (see exhibit 4 below). For most companies, the P/E ratio is substantially influenced by the market's assessment of the quality of its corporate strategy and estimation of whether the management team will be able to execute on that plan.

The key, then, to corporate value management is getting enough information to the company's managers that they can make sound decisions when setting and executing on strategy. We are all too familiar with the struggles of companies that fail to gain in-depth knowledge of what drives their earnings. Organizations have spent billions of dollars on enterprise resource planning (ERP) and other financial management software, yet in truthful moments, business leaders will tell you they don't have sufficient insight into their earnings. Of even greater concern are the companies that don't have an in-depth understanding of why the market is assigning them a P/E ratio that is vastly different from their competitors'. Because these businesses don't have a handle on what they are doing to deserve their current value, they have no idea how to increase shareholder value.

Let's look at the case of a young company in the medical-device field. The company initially grew organically; it developed strong core businesses that way. For a time, it reinvested its earnings in acquisitions, but it later decided to spin off those side businesses because they were not core to corporate strategy. Proceeds from the spin-offs have been reinvested in acquisitions of companies that are a better match for the organization's strategic plan. The resulting company is in a position to do very well in key market segments, but it has been held back because it consists of 12 operating companies, each with its own business model and data model. Its management team is eager to drive value, and its investors want to understand its past performance and future prospects across multiple dimensions. Does this sound familiar?

The company needs one consistent approach to managing performance. It has an enviable P/E ratio compared with its peers, and managers have to work hard to maintain that premium. To determine the information, processes, and software they need to accomplish that goal, the company first has to articulate the drivers of its value. The bottom section of exhibit 4 shows the company's value drivers.

The company already has a solid understanding of its revenues, expenses, and margins. It can break these figures down by division, by market, by product, and by reportable segment. But some of the drivers of its P/E ratio are not so clear. In order to further delineate its performance management needs -- and determine the benefits it can expect to achieve when it has implemented the right BPM system -- the company needs to articulate the factors that influence each of its value drivers. For illustrative purposes, consider two of the more straightforward drivers of this company's value: its ability to leverage its customer base and the expansion of its service offerings. Exhibit 5, below, shows a mere starting point of the knowledge base the company wants to build to optimize the impact of value drivers on the business.

Identifying the primary drivers of its P/E ratio and then figuring out which business factors most benefit each value driver's impact on P/E calculations is a good way for a company to generate a list of the pieces of information managers should have available when they plan, monitor, and gauge the progress of the business. The trick is to make sure everyone has access to all the relevant data on a consistent, timely, and reliable basis.