The Valuable Language of Value

Copyright 2022 Red Sail Advisors LLC

There are lots of ways to talk about value. The most straightforward would be to cite the formula: quality divided by cost. This is useful as it demonstrates the relationship between quality and the costs associated with achieving that level of quality. The higher the quality and/or lower the cost, then the higher the value. Makes good sense.

You could also get more complicated, as the Federal Government has been inclined to do when it proposed and then implemented the various value-based purchasing programs now in effect. These formulations include a whole variety of measures and are weighted together relative to industry benchmarks and performance. Though complex, this also makes sense.

But I’m operating at a more basic level in this discussion. How do you and your organization define value? How do you measure it? How do you talk about it? How do you debate relative value as you are making critical financial, operational, and strategic decisions?

I’ve learned that most organizations utilize some type of value language in these situations. The language begins in top down fashion and generally emanates from the personality, interests, and experience of top leadership. For financially oriented leaders, the language is highly weighted toward the numbers. For mission oriented leaders, the conversations are frequently more qualitative in nature. Value language tends to directly shape and deeply influence how decisions are made. This language gets up under the skin and into the bones of those cultures and ultimately is reflected in its identity and performance. As such, value language matters.

I have observed just how much value language can vary from organization to organization and I would not argue that there is one correct or optimal form of such language. I will say that consistency across the organization does seem to matter as understanding how value is considered and determined will drive predictability in decision making and that tends to be a good thing.

I like to think in terms of “The Four Values“, which I’ve written about in my book. The four values are financial, mission, strategic, and portfolio. In short, financial value relates to current and projected operating margin, while mission value connects to the organization’s stated purpose. These should be determined carefully and reported consistently. Strategic value is derived through partnerships, key relationships, payer dynamics, and other similar strategic variables. An example is when a referring entity needs (or requires) you to perform a service that you would not otherwise; you discontinue offering it at your peril because of the risk of losing the referral partnership. Portfolio value is determined when you are engaged in an activity that, in and of itself, would not score highly in any other value, though it does complete your offering in such a way as to make it more compelling or it drives business upstream to other profit centers. Loss leaders are classic examples.

Speaking the language of the four values, across the organization’s leadership team, can generate great benefit as it affirms that all of these factors can create value, promotes a strategic investment instinct across the team, and helps to assure deeper thinking when it comes to long-term planning.

I like to to use the above matrix when evaluating programs, services, companies, and decisions. The items in question are plotted into one of four quadrants based on financial and mission value. Their plot points are sized based on the degree of combined strategic and portfolio value. Doing so can help facilitate important and sometimes very difficult subsidization, divestiture, and investment conversations. Teaching those responsible for managing budgets to use this language will, in my experience, ensure more thoughtful and balanced deliberations when trade-off decisions are being made.

Again, there’s no right or best way to discuss value. I like to use The Four Values for the reasons stated here and have seen that, over time, leaders begin to instinctively think – and speak – in terms of financial, mission, strategic, and portfolio implications.

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