The Value Quadrant is something I have been writing about here for a few years now and I wanted to flesh out the principles a little further.
I first started to use this in the early part of the 21st century. Maybe 2002 I think. I started to realize that as a consultant I was either helping clients to define the impact of what they wanted to do, or trying to show the value of work we had recently done.
This often became very difficult for a couple of reasons.
Clients tended to be focused on improvement without any form of quantified statement to back it up, and results statements often suffered from the attitude of "well you would say that wouldn't you".
Neither flattering nor useful...
So I started to think about all of the reasons why companies embark on asset improvement projects. After a while it became very clear that it revolved around one of the four areas now a part of the Value Quadrant Approach.
Every time. Without fail. Regardless of the industry, country, issues faced, or cultural norms. (really good to find something constant by the way)
If you think of the London Underground, for example, the things that really get management attention are issues like headlines in the newspapers, stories on the news, or huge cost blowouts.
But all of these are flow on effects of some other cause. Something closer to the hear of what is going wrong, and something that can be described as either a revenue issue, a cost issue, risk or corporate knowledge issue.
Once I started to use it I noticed that not only were there 4 specific areas, but there was also a difference between the right hand side and the left hand side.
On the right hand side there was a very clear link to the corporate Profit and Loss statements. Impacts that would be felt, often in the short term, either on the top line (revenues) or on the bottom line (costs).
That much wasn't really a surprise. What was a surprise was the left hand side. people, consultants and clients alike, had been trying to quantify the impact of LHS elements for decades. (Knowledge and Risk)
It wasn't until I saw an RBI consultant trying to claim over $1 billion in benefits via risk mitigation that it really became obvious to me.... Risk and Knowledge are not quantifiable in cashable terms!
You can quantify risk, but quantifying it in terms of costs or revenue is rubbery to say the least, and out and out wrong in most cases. (Aside from the fact that $1 million in lost production is very different from $1 million in lost life, no matter how you scale it!)
And no matter how many times I worked through it, or how many people I spoke to about it, there was nothing but wild ass guesses when it came to quantifying the cash impacts of increasing corporate knowledge.
I once did an RCM project for a company in the middle east. They used mainly workers from India and the Philippines. While this reduced their workforce costs one of the impacts was rapid turnover. And another impact was that knowledge continued to walk out the door.
In fact, their main driver in getting me involved was to ensure that the knowledge that these people had in their heads was able to be codified into usable data.
Regardless, companies still require these two issues to be clearly dealt with, so the value quadrant needed to include them and to provide companies with the ability to quantify, measure them on completion.
Once you see the value quadrant the normal reaction is to assume that everything is all about increasing revenues. Nothing could be further from the truth.
The classic case study here revolves around several discussions I was having with mining industry clients towards the end of the last resources boom.
When our conversation started he was telling me how they had no issues paying a few more dollars for each tonne of production. Demand was through the roof. They were working like mad men trying to fill orders. And as a result the prices that were being paid were well in excess of what was expected during lower demand periods.
In short, even though they were spending more on spares and repairs they were still more profitable than they had ever been in the past.
Within three months the picture had changed dramatically....
Demand had collapsed, prices were under significant pressure and reducing, and suddenly producing unsaleable product was not the king of all requirements. Suddenly, it was costs!
There are more examples. Right now, after what happened in the Gulf of Mexico, I imagine that risk is pretty important to BP.
Just as asset data, corporate knowledge, is important to any asset intensive company working in a financially regulated market. (Where they need to tightly justify their CAPEX maintenance spending.)
ON completion of the project or analysis it helps to quantify the results, and to report back based on what was expected in the first place.
But it has grown quite a bit since I first started to use it:
The Value Quadrant Approach is now an integral part of all the training and every engagement that we are involved with. We have developed integral steps to help companies to:
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This often became very difficult for a couple of reasons.
Clients tended to be focused on improvement without any form of quantified statement to back it up, and results statements often suffered from the attitude of "well you would say that wouldn't you".
Neither flattering nor useful...
So I started to think about all of the reasons why companies embark on asset improvement projects. After a while it became very clear that it revolved around one of the four areas now a part of the Value Quadrant Approach.
Every time. Without fail. Regardless of the industry, country, issues faced, or cultural norms. (really good to find something constant by the way)
If you think of the London Underground, for example, the things that really get management attention are issues like headlines in the newspapers, stories on the news, or huge cost blowouts.
But all of these are flow on effects of some other cause. Something closer to the hear of what is going wrong, and something that can be described as either a revenue issue, a cost issue, risk or corporate knowledge issue.
The 4 Areas
The 4 areas I ended up identifying were;- they want to increase their revenues,
- they want to reduce their costs,
- they want to decrease their exposure to risk, or
- they want to increase the corporate knowledge they have in house. (Corporate information = electronic data + experiential knowledge)
And that is all there is to it. There is nothing else.
I have been using this now for almost a decade and I have yet to come across a situation where it does not apply.
Once I started to use it I noticed that not only were there 4 specific areas, but there was also a difference between the right hand side and the left hand side.
On the right hand side there was a very clear link to the corporate Profit and Loss statements. Impacts that would be felt, often in the short term, either on the top line (revenues) or on the bottom line (costs).
That much wasn't really a surprise. What was a surprise was the left hand side. people, consultants and clients alike, had been trying to quantify the impact of LHS elements for decades. (Knowledge and Risk)
It wasn't until I saw an RBI consultant trying to claim over $1 billion in benefits via risk mitigation that it really became obvious to me.... Risk and Knowledge are not quantifiable in cashable terms!
You can quantify risk, but quantifying it in terms of costs or revenue is rubbery to say the least, and out and out wrong in most cases. (Aside from the fact that $1 million in lost production is very different from $1 million in lost life, no matter how you scale it!)
And no matter how many times I worked through it, or how many people I spoke to about it, there was nothing but wild ass guesses when it came to quantifying the cash impacts of increasing corporate knowledge.
I once did an RCM project for a company in the middle east. They used mainly workers from India and the Philippines. While this reduced their workforce costs one of the impacts was rapid turnover. And another impact was that knowledge continued to walk out the door.
In fact, their main driver in getting me involved was to ensure that the knowledge that these people had in their heads was able to be codified into usable data.
Regardless, companies still require these two issues to be clearly dealt with, so the value quadrant needed to include them and to provide companies with the ability to quantify, measure them on completion.
It's not always about production...
Once you see the value quadrant the normal reaction is to assume that everything is all about increasing revenues. Nothing could be further from the truth.
The classic case study here revolves around several discussions I was having with mining industry clients towards the end of the last resources boom.
When our conversation started he was telling me how they had no issues paying a few more dollars for each tonne of production. Demand was through the roof. They were working like mad men trying to fill orders. And as a result the prices that were being paid were well in excess of what was expected during lower demand periods.
In short, even though they were spending more on spares and repairs they were still more profitable than they had ever been in the past.
Within three months the picture had changed dramatically....
Demand had collapsed, prices were under significant pressure and reducing, and suddenly producing unsaleable product was not the king of all requirements. Suddenly, it was costs!
There are more examples. Right now, after what happened in the Gulf of Mexico, I imagine that risk is pretty important to BP.
Just as asset data, corporate knowledge, is important to any asset intensive company working in a financially regulated market. (Where they need to tightly justify their CAPEX maintenance spending.)
Using the Value Quadrant
In the first instance the Value Quadrant is meant to be a guide for clients and consultants/ or internal champions to help them work out what is important to their company, and then plot the value of the initiative accurately.ON completion of the project or analysis it helps to quantify the results, and to report back based on what was expected in the first place.
But it has grown quite a bit since I first started to use it:
The Value Quadrant Approach is now an integral part of all the training and every engagement that we are involved with. We have developed integral steps to help companies to:
- Define what is really important to them.
- Several formula, approaches and techniques to help them quantify the benefits they require, as well as quantify the impact they have achieved, or will achieve.
- Reporting techniques and mechanisms for telling the tale after an analysis is completed.
And a range of other methods and approaches. Moreover, the Value Quadrant is now a tool that is used by literally hundreds of professionals when they work to try to justify their improvement initiatives.
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