When the time comes to make hard decisions about which things to spend money on, and which things can wait, companies have always struggled. In large complex organizations, requests to spend money can be wide-ranging which makes it difficult to choose the “right” projects to execute among the many diverse and dissimilar requests for funding. For example:
- Should I approve the project to increase my production?
- Should I replace that aging piece of equipment?
- Should I fund the project that will improve reliability?
To make these decisions objectively and confidently, you need to understand how each project contributes to the overall goals of the organization. This is where Value-based Decision Making comes in.
Value-based decision making can help identify the optimal set of investments that deliver the greatest “value” to the organization, while respecting funding, resource, and timing constraints. Sounds simple, and many people say they do it today, but the truth is, very few do it well.
So what does it truly take to make “value-based decisions”? It comes down to understanding how to determine “value” which requires four essential steps: Identify, Align, Assess and Optimize.
- Identify all the things that deliver value to your organization: These are called “value measures”. Some are unique to a specific department, while others can be general benefits across the entire organization. The important thing is that all benefits that contribute value to the organization are included.
- Align these measures to a normalized value scale: This is where it gets interesting. It’s essential to get agreement across the organization on the relative importance and contribution of each value measure. Without this, there’s no objective way to compare dissimilar investments (like the examples above). This typically requires in-depth discussions and agreement across the company to come to an agreed scale, but is a critical step in developing any value-based decision model.
- Assess every request to spend money using the agreed value measures: This means every request to spend money is assessed using a common “yardstick” to remove any subjectivity from the process. Every investment’s resulting value “score” is a true representation of how it contributes to the organization’s goals.
- Optimize to deliver the maximum value: In most cases, requests to spend money outweigh the available funding, labour, and/or materials. So that means some projects can be funded, while others get deferred. But which ones? Optimization is a mathematical process that determines the optimal set of projects that deliver the maximum value while respecting the funding, resource, and timing constraints. Optimization must understand how the value changes over time to make the proper decisions about which projects to defer.
Copperleaf has created two white papers to explain this topic in more detail. Please visit our resources page for more information.
About the AuthorFollow on Linkedin Visit Website More Content by Barry Quart