Early in my tenure as a CIO, one of the C-Suite conversations I found myself ill-equipped to participate in was value creation.
I believe I am not alone, as many technology leaders are challenged by this conversation. Technology leaders often spend their formative career years in technical paths that aren’t exposed to senior leadership discussions. As I like to help others on their journey, I am sharing what I’ve learned about this important C-Suite topic.
CEO’s, CFO’s, and their peers are expected by shareholders and investors to create value, meaning, “I give you something of value and expect something of greater value to me in return”. Value creation has traditionally been associated with return on investment.
That view is now evolving to include additional stakeholders.
At a 2019 US Business Roundtable event, 181 CEO’s from leading companies expanded on the purpose of a corporation by signing an agreement to commit to “lead their companies’ for the benefit of all stakeholders – customers, employees, suppliers, communities, and shareholders”.
The above definitions are simplistic but can be much more complex in the C-Suite.
Breaking this down to better understand the common components of value creation, we see the role that value drivers, value pathways, and an organization’s health play in generating successful outcomes for stakeholders.
I believe simple equations help us recall concepts when we need them. The below represents how I believe most CEOs think about value creation:
Value Drivers * Value Pathways * Alignment/Org Health = Value Creation for Stakeholders
When discussing value drivers – the building blocks that create value – most CEOs will identify three components with a common objective of balancing value creation across customer, investor, community, supplier and employee stakeholders: Growth, Operational Efficiency and Service Enhancing, and Financial.
Growth variables and related growth goals are most often defined in financial goal and outcome measures. Quarter-over-quarter or year over year revenue, earnings and EBIDTA (earnings before interest, depreciation, taxes and amortization), and margin expansion are common investor growth value creation measures. These measures are frequently reported in financial disclosure reports to investors and, if the firm is publicly traded, filed with the FTC. You may also hear reference to operational measures that show scale or indicate growth is occurring by way of number of customers acquired, or retention of existing customers with an expansion in revenue per customer.
A scaling measure could be cited indicating cost per unit of manufacturing is lower, while the average selling price remains flat – indicating margin growth expansion. Be ready to talk about these growth measures in the context of IT, speaking specifically about how your team supports them strategically and through programs you execute or products you support and maintain.
Employee stakeholders inside of a growing company often benefit from value creation. Where value creation is growing, companies typically have more capital to invest and move people to positions of greater responsibility. Communities benefit too as job creation creates economic expansion adding to the corporate tax base. Communities also benefit from the community support in the form of employee engagement in volunteer efforts or corporate philanthropy.
Operational Efficiency and Service Enhancing
Digital leaders have traditionally been relied upon to find operational efficiencies via automation and process workflow optimization. As a result of this focus, most CIOs find operational efficiency and service improvements as areas they are comfortable conversing about. However, translating the operational efficiency results into value creation conversations CEO’s and CFO’s identify with can be elusive.
Challenge yourself to know and represent how much a penny of earnings per share is worth on an operating expense savings basis or the value associated with cost savings a basis point (.01%) of margin. Engage in operational efficiency value creation conversations with your finance team leaders. Educate your team on how much savings it takes to realize a penny of earnings growth or a basis point of margin expansion on behalf of your company. Give yourself and your teams an EPS or margin basis point expansion goal, even if that is a fraction of a penny or slight basis point improvement goal.
For customer stakeholders, improvements in service or operating efficiency can mean shorter cycle time to value creation in the eyes of the customer during customer support requests. These forms of operational and service efficiency result in customers being more satisfied with the service they receive from the company correlating to customer retention and willingness to expand business relationships that create value.
Financial drivers focus on managing capital and operating expense that can be used inside an organization and are typically driven by the treasury and finance team. As capital and operating expense investment levels are determined, proposals are made to consume capital and operating expense. Often a finance-led capital committee will determine how much capital will be available and from what sources capital will come from – borrowing, stock, or organic free cash flow. The capital committee may also review and decide which investment proposals will and won’t be funded.
The goal of the capital investment decision process is to prioritize investment proposals that results in meeting goals set with the board of directors, who represents the shareholders. The review of proposals and the subsequent awarding of investment monies is typically a spirited conversation supported by return on investment, complexity, risk, and confidence analysis.
Capital committee allocation categories of compliance, run, innovate, incubate may also be added for further capital allocation and decision clarity. Capital investments are typically aligned to categories such as plant, building, equipment, new product development, product maintenance and enhancements, acquisitions, manufacturing plant investments, and safety.
As referenced in the 2019 Business Roundtable, a more expansive use of resources to additional stakeholders is trending with the inclusion of communities, suppliers, customers, and social justice program investments. It’s important to understand how this process works inside your organization, what your organization identifies as a priority, and the funding levels in the categories.
As a technology leader, it’s important to write proposals, influence, and participant in this process. You would expect your team to be engaged in many of the funded initiatives, so work to establish yourself as a key stakeholder and influencer in the decision-making process.
This summarizes the common value drivers most CEO’s and CFO’s would identify inside organizations they lead.
I encourage you to use your next 1:1 time with your financial leadership and CEO to explore the above topics and to begin to discuss how they view value drivers inside your organization. Armed with that knowledge you can better engage in value creation conversations and governance.