In the previous newsletter, we wrapped up our introduction to the eight value habits that can help enhance enterprise value and took on the issue of how to apply these value habits to the truly perplexing, real-world problems you face every day.

Using the Enterprise Value Map™ (EVM, introduced earlier) let’s evaluate a proposed investment in IT.

The real world
When you look at what your company has spent and plans to spend on IT, you can’t help but wonder: Are these expenditures delivering value?

What are we getting for our money? Do we really have to spend so much to get these benefits? (Unspoken fear: Is it possible we’re simply wasting money?)

Of course, these are difficult questions to ask, and any IT officer worth her salt can justify the spend. But can she articulate how the investments will create value?

So you dance around the issue, trying to guess if a particular initiative or investment is worth it. The IT officer tells you how it will save you money, which sounds good. But then again, rarely does anyone ever check to confirm the cost savings actually occurred. Then she talks about the intangible value of having better-quality information. That sounds good, too. Is it true? Who knows? (Maybe you really are wasting money.)

But in the end, you have to make the decisions whether to invest. So, quite often you just go with your gut and hope for the best.

Sound familiar? It doesn’t have to be that way.

If you want better answers, you need better questions. Questions that will help you learn what you really want to know, which is how the proposed IT investment is likely to affect the value of your company.

That’s where the EVM can help. It helps guide you to the right questions.

Using the EVM to help uncover value potential
When you get down to it, a primary way to measure the value of your company is as a function of its expected future net cash flows as determined by the market. These expected future cash flows are, in turn, a function of assumptions about your revenues, margins and asset efficiency, and the markets expectations about your company’s ability to sustain these key drivers in the future – in other words, the key drivers listed on the EVM.

So, moving across the EVM from left to right, you can begin to consider an investment in the context of how it serves each driver. What can it deliver in new, better processes and capabilities that will impact the driver in question?

How will it help increase revenues? By justifying higher prices, increasing volume, or both? And, if so, by how much? How much is it likely to reduce costs, directly and indirectly? What, if anything, can the investment do for the efficiency of each category of assets? What about enhancing expectations, internal and external, through improved capabilities?

For each benefit, what are the corresponding costs? Where do they fit in on the EVM?

Cutting through the fog
Working the EVM this way helps you cut through the language and cultural barriers that separate various divisions and disciplines. It can help you to get straight answers and encourages everyone to think consistently about what they do in terms of the how it enhances – or undermines – enterprise value.

Getting more specific
Assume you’re the CEO of a global manufacturing company. Your IT officer is telling you how much money you can expect to save with a new ERP system. Using the EVM, you begin to see other potential benefits.

For instance, you may find evidence that the new ERP system can be expected to provide better quality and more consistent data, helping you to price your product faster and more accurately – thereby increasing the likelihood of winning more business.

Assuming you can estimate the number of new customers it’s likely to bring in, you can calculate the likely effect on revenues, cash flow, and, ultimately, on enterprise value.

Maybe the new ERP system also will let you track material movement and asset utilization across your entire supply chain, helping you to improve the use of your facilities and equipment – thereby helping to improve asset efficiency and increasing throughput velocities. That, too, can be quantified, converted into cash flow, and used to help estimate the net effect on enterprise value.

It isn’t just Information Technology
This approach can work the same way with other functions in the company, like human resources. We’ll take that on in next month’s issue.

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Straight Talk on Enterprise Value
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