I have often had heated discussions with professionals who believe that a business enterprise not (yet) making money is not creating value. Proponents of this view go as far as saying that employees who work for such an enterprise are paid 100 % above what they should be remunerated. Basically saying that if a company is not making money everyone involved is just wasting time. I disagree. I believe that the purpose of an enterprise is value creation. Value creation is mostly defined by monetary profits, but not every time and not in all enterprises.
Value creation in an enterprise is defined by the stated goals of the enterprise, usually articulated by the business owner(s) and or management or stated by legislation (in the case of some public/government-owned enterprises). A non-profit enterprise (e.g., a non-governmental organization) creates value without exchanging goods or services for monetary gain. Therefore, monetary gain cannot be pre-requisite to value creation in every enterprise.
There are various stages in the lifecycle of an enterprise. This is most obvious in the case of a ‘startup’, a special type of enterprise (or stage in the lifecycle of an enterprise?). Startups face high risk and uncertainty, notable startup success stories of this generation: Facebook, Google, Amazon and many similar enterprises did not become ‘profitable’ until after many years, in some cases remained unprofitable for up to 10 years or more after commencement of operations.
At the earliest stage in the lifecycle of a startup, the ‘value’ that is created is simply the ‘idea’ or ‘purpose’ that the startup has brought to the financier. This idea or purpose can actually be given a monetary value, an estimate of the future stream of income (valuation) that the startup could bring during the life of the enterprise. However, at this stage in the life of the enterprise almost everything is abstract.
Even in the ‘operation’ or ‘producing’ or ‘transactional’ phase of an enterprise (or project), when there is direct monetary gain or ‘profit’, an enterprise could change strategy to sacrifice short-term monetary profit for longer-term profit and viability. This is frequently the case when an enterprise cuts the price of its goods or services in order to gain more customers – greater market share. The stream of new loyal customers is indeed ‘value: ’New customers can be charged a higher price in future resulting in more money profit for the enterprise later. This type of strategy could be life-saving for the enterprise, as failure to do this could leave the enterprise irrelevant in the market.
So, an enterprise can create value without producing monetary gain. Value is determined by what the owners of the enterprise desire to be accomplished not only when the enterprise is in ‘operational’ or ‘producing’ or ‘transactional’ phase. In addition to the overarching goal of the enterprise (its ‘mission’), at every phase in the life cycle of an enterprise, the accomplishment of the goals of a specific phase results in value creation for the owners of the enterprise.
“People make it happen” is a popular refrain stressing the importance of human resources if the goals of an enterprise will be achieved. Some enterprises have tried to tie employees’ remuneration directly to the impact the employees make to the bottom line (profit). This is possible only when the nature of the employee’s job description allows for his or her daily or monthly or annual work results to be measured accurately. A salesperson can be remunerated based on a percentage of the sales of goods achieved. However, not all job tasks can be so easily analyzed to give such a direct quantitative value. Most job tasks are carried out within a team and separating the specific quantitative value created by each team member would be almost impossible. This would imply that the value created by an employee in such a team could be mostly abstract. A particular employee could simply be an ‘ideas’ woman, known for creative and strategic thinking. Another employee could be known more for being an ‘implementer’ with valuable project management skills, taking an abstract idea and bringing it to reality.
Probably the best and most reliable way to measure employee value creation is through the use of key performance indicators (KPIs). KPIs can be established for each employee during annual business planning sessions. KPIs can also be established for each business unit/department and for the enterprise as a whole. KPIs are developed based on agreement between management and the entity whose performance will be measured. KPIs established during annual business planning should also be integrated to enterprise risk management (ERM). This integration of KPIs and ERM ensures that during the execution of day-to-day activities, the employee will intentionally manage risks: minimize threats to accomplishing set targets and maximize every opportunity presented. This will ensure that value is created by the employees at every stage in the life cycle of the enterprise.
Ultimately, value is not in the eye of every beholder but in the eye of the shareholders: The shareholders state what they want the enterprise to achieve.
Uyiosa Omoregie
Omoregie is a petroleum economist
