“beauty is in the eye of the beholder” Margaret Wolfe Hungerford stated in her book Molly Brown in 1878.
Is value as subjective as beauty?
The classic failure to consider subjective value comes from Karl Marx the labor theory of value. Marx introduced the subjectivity of value from its objectivity based norm.
Wikapedia states that the subjective theory of value is a theory of value which advances the idea that the value of a good is not determined by any inherent property of the good, nor by the amount of labor necessary to produce the good, but instead value is determined by the importance an acting individual places on a good for the achievement of his desired ends. The modern version of this theory was created independently and nearly simultaneously by William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century.
The holy grail and universal challenge is how to define value. Here are a couple of definitions to help us start to view value;
- the regard that something is held to deserve; the importance, worth, or usefulness of something
- principles or standards of behaviour; one’s judgement of what is important in life
- estimate the monetary worth of
- consider (someone or something) to be important or beneficial; have a high opinion of
Michael Porter developed a model that is used throughout the procurement industry
He moved away from organisational departments focusing his value chain on systems, and how inputs are transformed into the outputs purchased by consumers.
Simply put, all the value that is created and captured from an organisation is described as the margin. This can be defined in the following formula;
Value Created and Captured – Cost of creating that value = Margin ( mindtools.com)
Organisations are built up of formal and informal teams. Collaboration is key but how do you build consensus of what value is? The norm is to develop formulas and/or statements to enable the different groups to formulate a common understanding. Financial Management is full of formula to capture the common ground; Return on Investment (ROI), Return on Capital Employed (ROCE) to name a few ! All based on fiscal value.
However value can include, Social, Environmental, Economic , Ethical and Customer. How do we gather all these elements and deliver clarity and consensus?
There are many organisations offering tools and programs in building consensus. Below are a few examples should you want to take a further look;
Benefits realisation management as defined by the Project Management Institute is;
a “Collective set of processes and practices for identifying benefits and aligning them with formal strategy, ensuring benefits are realized as project implementation progresses and finishes, and that the benefits are sustainable—and sustained—after project implementation is complete.”
Driven from finance departments this approach was to measure outcomes of the project investments made primarily at its evolution from Capital based projects.
The project requires needs and outcomes to be developed both tangible or intangible. Once documented through stakeholder consensus a set of measurements are determined. Projects are delivered. Post implementation reviews are designed to measure the outcomes and benefits derived through a post implementation review (hence benefits realisation)
Value Procurement has been something I have been interested in for a long time. I spent 4and a half years researching supplier value.
Aas stated previously in my blog on the future of procurement and supply chain 50-70% of an organisation spend is through third party suppliers. Extracting value from this relationship is key to business success.
My research was prompted by the need to understand if there is a common set of value characteristics chosen by organisations to determine key supplier status. My aim was to uncover (if applicable) correlation between countries, tenure within procurement and determine the importance of these characteristics when entering into key supplier relationships.
Could the determination of value be influenced by culture, the market dynamics, the economic environment, individual’s drivers and motivations or the organisations objectives?
I achieved something unique, consensus (correlation) between Australia and New Zealand Public Sector Procurement Professionals. After much testing, regression testing and statistical analysis ( thank you IBM SPS tool) here is the Value model I developed;
Figure 2 Public Sector Supplier Value characteristics
This model creates insight into suppliers and their propensity to deliver value prior to entering into a contractual relationship. A great tool to help give clarity for areas of due diligence for shortlisted suppliers. The key is in how you prepare the questions embedded within the tender documentation and extrapolate their responses.
This is only one of the possible elements that derives value proven through correlation of two jurisdictions.
Porter developed a value chain methodology that is commonly used in procurement. There are many formulas that are associated with delivering value from the lens of the finance department. As illustrated with my supplier value model you can clearly see that defining value is complex.
Fundamentally Value is like beauty “in the eye of the beholder!” Gaining consensus on any definition is the key element of capturing value.
To deliver Value Procurement it is mandatory that participation in setting strategic business plans within an organisation is a priority. Sitting on the side line is not appropriate – clear participation delivering input, ideas and design is.
Enabling value through developing trust within the whole executive team is a key skills for all procurement professionals.
A trusted advisor must deliver what the stakeholder requires. Being a friction free influencer is a priority competence, however that does not always mean doing everything the exec team think they need or want. A key part of Value procurement is an advisory that mitigates risk through ethical and transparent behaviour.
Emails and phones alone cannot build a trusting relationship. Face to face, time, consistency and delivering on expectations are key elements for building trust.
What rings true here is the old adage “People buy from people they like and trust.” So how are you liked and trusted within your organisation?