I came away from a very interesting business meeting in Belgium this week with some fresh personal reflections on risks related to “continuous improvement”.
As you look back over your business career, you will probably be able to pin-point times when you developed a certain finesse for doing something more effectively than you did previously. You may have found a way around an obstacle that used to slow you and your colleagues down. Or perhaps you developed a more efficient way to accomplish a repetitive task. You probably didn’t realise that simply implementing these personal process improvements will have very likely reduced the market value of your company.
Let me repeat that in a slightly different way. Continuous process improvement may have saved the company time, money or resources or added to the marketability or sales of your company’s products or services; but it’s still very likely that these improvements in process actually resulted in a reduction in your company’s market value.
And reducing your company’s market value;
- reduces your company’s capacity to raise fresh funds,
- constrains your company’s flexibility to further monetise its know-how
- increases the riskiness for other companies to do business with your company
But how could improving a process actually disable your company in such ways? Here’s how…
The accepted means for measuring your company’s worth requires you to look at your company through the lens of international accounting standards. These standards establish your company’s worth by balancing its assets against its liabilities.
The balance sheet adds up the company’s assets and then subtracts from this total its liabilities – leaving you with the company’s net worth. Two very important distinctions are made for this calculation;
1. A company’s “assets” are the resources that can be controlled by the company.
2. A company’s employees are not considered assets for this calculation because the company does not have sufficient control over them. They are therefore, “liabilities”.
And therein lays the clue to how improving a process can reduce your company’s worth.
If your “process improvement” has been implemented without its details being articulated first in a manner that makes it easily and consistently repeatable by others in the company when you leave, the “improvement” leaves with you. This “process improvement” materially adds therefore to the operational risks for the company (because it is not controlled by the company). This means that its implementation adds to the liabilities side of the equation rather than to the company’s assets.
So think for a moment. If you were to guess;
- How many of your company’s current processes (and sub-processes) are accurately articulated in a manner that renders them easily and consistently repeatable by others in the company?
- What would happen to your company’s worth, if you were able to identify all of your internal tacitly understood processes and have them explicitly articulated?
- In what ways would you most want to leverage this materially increased net worth?
If you would like to share some of your thoughts about this, please do get in touch. Thanks.