Tuesday, September 7, 2010


I’m not a great rugby fan. But I am interested enough to watch the big games and let out a yell of despair when some or other local Bok hero knocks the ball forward. Not many of today’s younger fans can remember the days when a try was worth three points and not the five it is today. It makes me wonder what the game would be like if we changed the scoring system to 5 points for penalties and drop kicks, and only three for a converted try. At best, we would have 15 Morne Steyns on the field. At worst, the game would disintegrate into nothing.

Measurements certainly have a huge impact on the way any game is played…not only in sport. Yet, we are all acutely aware of how inadequate measurements are and how many things of value in life are immeasurable. We will remember highlights of a game far longer than the final score: like Joel Stransky’s winning drop kick in the world cup, or Jonty Rhodes’s diving run out in a world Cricket series. Like The Gucci slogan says: “Quality is remembered long after the price is forgotten.”

Why change the rules and scoring of any game? Is it for the benefit of the players, the coach, or the administrators? Obviously not. The ultimate customer of any sport is none of these parties; it is the spectator. What makes for good play in any game is what the spectator finds exciting and attractive. A scoring system that doesn’t pander to this need will destroy the sport itself. And surely what we choose to measure and how, should support the real purpose of that activity? If the purpose of a business is to add value to people’s lives, then that must be the real performance indicator and driver in a business. Profit has a very important role as a “sub-score”, like winning line-outs or scrums; relying on it as the most important driving score in a business is highly questionable. Despite the growing clamour against the profit motive, few have fully challenged the profit measurement itself or offered a viable alternative.

This deficiency has meant that every good reason to question the short-term profit motive merely becomes an irritant to be accommodated. We have seen laudable efforts such as Norton and Kaplan’s Balanced Scorecard abused and manipulated simply to fit the ultimate profit measurement. People-development and corporate social responsibility (or corporate social investment) are components of the Triple Bottom Line. But that line is seen as a chore, a burdensome “have to have” rather than a real “want to have”. TBL in any case tries to achieve the impossible of merging qualitative measurements with quantitative ones. Trying to combine all these measurements or actions merely detracts from the effectiveness of the conventional single-purpose profit-measuring exercise, and none of the three sits comfortably with the others.

Getting this right is probably going to be costly and therefore reduce profit. In the meantime, compelling as the arguments may be in favour of people-development and corporate social investment as ways of ensuring sustainability or longer-term survival, the devil is at work on business reporting in general: we’re seeing increasing emphasis on short-term profitability and ever-shortening cycles of performance reporting.

There is good news, however. It is to be found in the measurement dimension of added value. It addresses all of these problems and many more.

In the very beginning there was value-added. As well as being the oldest business concept known to humankind, it was the founding principle upon which all subsequent economic development was based, and it’s by far the most important. No amount of manipulation, trading shenanigans, corruption, insider trading, speculation and other misdemeanours can destroy the validity of value-added as (a) the only true generator of prosperity and (b) an inducement for people to behave in a values-driven way.

clip_image002The accompanying illustration shows that it is both remarkably simple and comprehensive. Let’s say a caveman found an already sharpened and shaped stone, as well as a stick and a length of vine or animal sinew, and assembled them to form a crude axe. The difference between the completed axe and the three loose items would be value-added. This would have entailed the use of time, effort and all things to do with the mind such as creativity, imagination, knowledge and experience. At this stage it’s a subsistence item, intended exclusively for personal use. So it was that for centuries most economic activity was purely for subsistence and therefore immeasurable. The axe, for example, couldn’t be given a single universal value because its usefulness might differ from creature to creature. Some could have found it useful for hunting, others for cutting wood and others again for getting married (hopefully by using the blunt end!). Living in social clusters from very early times meant that humankind had a propensity for exchange. Initially it might have been a spontaneous reciprocal activity among members of a family, group or tribe; in time it would have developed into a crude barter system where values were slowly becoming measurable. It was only with the development of a widely accepted and single medium of exchange that values became more accurately measurable.

If we stretch our imagination slightly and say that our caveman had to buy the stone, stick and sinew from someone for R10, then transformed the loose items into a single axe and sold it for R20, we can accurately and neutrally put the value of the time, effort, and creativity at R10. Of course an additional resource was applied in this instance because he needed money (or a form of it) in order to buy the loose items. So there is a fourth factor: capital. The illustration is a simpler interpretation than the academic one of how the factors of production are applied in economic activity. The simple accounting formula for value added is income minus outside costs.

But it is more profound than that. As an illustration of the root of exchange it proves that, for value to be established at all, there has to be a process of trading going on. Why did the caveman produce the axe in the first place? Why not leave the stone, stick and sinew as they were? Clearly it was because of the usefulness of the axe as compared with the three loose components. And if the item is to be traded, then we have to ask: To whom is it useful? The axe is intended for use not by the maker himself but by another human being. In other words, its worth depends on the contribution it makes to the good of someone else. The ultimate and exciting point about value-added is that it’s the one measurement in accounting that measures contribution. It is also the only one that does this. In accounting terminology, the term “value-added” is synonymous with “wealth created”. What this means is that wealth or prosperity is directly and exclusively linked to the contribution you make to the good of those around you. It applies at all levels: individual, company and country. This is tangible wealth. Other forms, such as speculation, debt, investment, etc have their place but have to be ultimately rooted in or at the very least linked to tangible wealth creation otherwise they simply create froth and a cappuccino economy.

We can go yet another step further. Examining our illustration again, we see that after the sale our man has R20. He brought an initial R10, and he now has an additional R10. Where does this go? To whom does it belong? Obviously it goes to himself as the one who added the value or made the contribution. This is his reward. So there is a clear and direct link between contribution and reward. I repeat: value-added is the only measurement in accounting that shows the clear link between contribution and reward; the only one that measures both at the same time. The order is important: contribution brings reward – not the other way around. This simple arithmetic confirms the prophetic teaching that “if you give you will receive”. And it was there long, long before prophets and profits were heard of! Equally important in the current wave of labour unrest is the realisation that you cannot share wealth before it has been created. You cannot divide a cake that has not been baked; distribution depends on creation! Conflict destroys wealth, never increases it!

The linear equation for this is simple: value added = wealth created = contribution = reward = prosperity. I can think of no more powerful way of saying that the universal values of generosity, care, compassion and love create both inner abundance and outer wealth and prosperity. Values do create value, even in the accounting world.

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