THERE IS A GROWING IMPATIENCE BY TAXPAYERS, citizens, and governance boards with waste and inefficiency that is leading to demands for evidence of outputs, outcomes, transparency, and accountability. Terms like “doing more with less” and “value for money” are prevalent and aimed at governments at all levels – federal, counties, cities, municipalities, villages, and towns.

A key word in the second term is “value.” This book is about how governments can increase the value to their taxpayers, citizens, and all stakeholders. The authors refer to this as “value-based management” (VBM).

Most governments have all the money to do something. However, they do not have all the money to do everything. This means they need to better prioritize and embrace productivity, effectiveness, and efficiency. They need to react. However, the longer they wait, the bigger will be the pain.

HISTORY AND THE AUTHORS' BROADER VIEW OF VBM

The idea that organizations seek to create stakeholder value, and consideration of how that value is increased and ideally maximized, is a relatively recent evolution in management theory and practice. The industrial revolution dates back to the end of the eighteenth century and the age of “Scientific Management” began with the industrial engineering luminaries Frederick Winslow Taylor and Harrington Emerson in the early twentieth century. Yet various approaches for calculating financial value, such as return on investment (ROI), discounted cash flow (DCF), capital asset pricing model (CAPM), and others, did not develop until the twentieth century to advance the discussion of the elements of value. Not until 1986, however, when Alfred Rappaport authored the book, Creating Shareholder Value,¹ did the concept of value begin to enter the management lexicon. The first use of the term “value-based management” comes from Jim McTaggart in his 1994 book, The Value Imperative: Managing for Superior Shareholder Returns.²

While the term “value-based management” has been with us since 1994, universal agreement has never been reached on its meaning. Moreover, the term has largely been used in relation to shareholder and owner value in commercial sector companies. With the dawning of concepts like risk-adjusted return on capital (RAROC) in the 1970s, activity-based costing (ABC) in the 1980s, and enterprise performance management (EPM) methods such as the balanced scorecard in 1992, the stage was set for a broader, more meaningful discussion of what it means to manage value. Unfortunately, VBM has become mired in its history and remains largely focused on financial shareholder value for commercial private sector companies.

This book seeks to present a much broader view of VBM. Understanding the concept of value to support decision making related to every human endeavor expands VBM to a fundamental management concept, not some narrow concept focused on financial management of private sector companies. This broader concept, which seeks to integrate considerations of results to be achieved, resources to be effectively and efficiently consumed, and risks to be appropriately accepted, is a universal management model that applies in every situation. VBM applies from selecting any individual decision at the operating level up to managing the very largest organizations. It is from this vastly broader concept of VBM that we share how any organization – public sector, private sector, or not-for-profit – can better achieve its full potential to create and increase value.

SOME THOUGHTS ABOUT “VALUE”

Value is “in the eye of the beholder.” One individual or family will evaluate the value of a particular automobile differently than another individual or family. Parents may have different sets of criteria in determining value, as will the various children of the family. Similarly, organizations evaluate the value of the choices before them. However, while individuals make these decisions to support their self-interests, organizations must make decisions to maximize the value delivered to a much broader and potentially more diverse set of stakeholders.

Stakeholder interests in private sector companies must be considered and balanced as a whole, as many such interests – sometimes in conflict with one another – can be key to the organization's success. For example, shareholders seek a good return on their financial investment; customers seek value for money in the products or services they purchase; regulators seek compliance with laws and regulations; and employees seek competitive compensation, working conditions, and potential for advancement.

However, as diverse as these various stakeholder interests may be, public sector stakeholders in government can be considerably greater in number and even more diverse. Public sector agencies seek to meet citizen and taxpayer expectations, meet the needs of beneficiaries of particular services, comply with guidance from legislative bodies, and respond to many other stakeholder demands. Moreover, stakeholders of a public sector entity can have very divergent interests and expectations, thereby resulting in very different perceptions of what constitutes “value.” Just a single government agency at any level (e.g., federal, regional, municipal), for example, may have to deal with multiple funding or oversight committees with very divergent interests and definitions of “value.” This makes the articulation of overall value for a government agency's combined portfolio of products and services typically much more challenging in the public sector than in the private sector.

OVERVIEW OF THE BOOK

The book's chapters are organized into eight parts:

• Part One introduces the subject of VBM. It begins with an essay chapter regarding dissatisfaction by citizens, taxpayers, and stakeholders with their governments. The second chapter describes VBM, including the need to balance what is referred to as the three Rs: risk, results, and resources. The concluding chapter describes the component methods that, like gears in a machine, should ideally be seamlessly integrated.
• Part Two describes the process of identifying key stakeholders, evaluating what those stakeholders consider to be of “value,” and establishing strategic goals and objectives to be pursued in delivering that stakeholder value.
• Part Three describes the shortcomings of enterprise performance management (EPM) as practiced to date, and how this book proposes an improved role for EPM.
• Part Four contains three chapters that describe in depth the three Rs with a chapter devoted to each R.
• Part Five contains six chapters that describe progressive management accounting practices and systems. It includes effective planning and budgeting, plus techniques to quickly implement these systems.
• Part Six describes the role that information technology (e.g., software and databases) has as an enabler to inform and operationalize VBM.
• Part Seven describes behavioral change management. Its premise is that resistance to change is human nature. People are comfortable with the status quo. There is need to overcome resistance and gain buy-in from those impacted by the changes required to achieve the full vision of VBM.
• Part Eight describes the future of VBM that the authors envision with adoption of the VBM methodology and mindset.

BALANCED VBM BUT AN UNBALANCED BOOK

Part Five, involving resource and cost management, is unbalanced in terms of the number of pages in the book compared to the other two Rs in Chapter 6 on risk management and Chapter 7 on results management. This is because author Gary Cokins has substantial experience with management accounting methods and practices, including writing several books and many articles on this subject.

Part Five discusses the full spectrum of management accounting not only for measuring past period consumption of resources and their resulting costs but also the forward-looking future view of budgeting and “what-if” trade-off analysis.

The extensive length of Part Five is intended to educate practitioners (including consultants) on the “how,” not just the “why,” to design and implement progressive management accounting in organizations. If you are not directly involved with the CFO's department, then the authors suggest that perhaps you read only Chapter 9 of Part Five and share the entire Part Five with accountants whom you care to influence to implement what is covered in this Part.

CONCLUDING REMARKS

The authors believe that taxpayers, citizens, and stakeholders will be substantially better and more economically served if governments embrace VBM and implement the methods and technologies that support VBM.