The VBM process uses financial planning models to measure expected change in shareholder value, given alternative strategies and operating plans. We will look at the usefulness of VBM and then at ways to implement it across the enterprise.

 

A Unifying Process
When all functional units together participate in the long-term planning, a firm can forecast how much financing will be needed to support operations. Besides giving the ROI-acid test to alternative business case scenarios, the process gives the finance team time to fund strategically.

 

Another advantage of VBM is that by examining projected change in shareholder value under various circumstances, management can target compensation bonuses across the enterprise.

 

The firm gains efficiencies by testing scenarios rather than by paying for mistakes. The VBM process can create a sense of fair play across functional units: From product idea to possible provisioning plan, and from IT system upgrade proposal to new employee benefit plans, ideas can be shared, weighed and tested in an equal fashion.

 

VBM, like EVA ("Economic Value Added," which targets value added in a given year), focuses on managing free cash flow. Investors no longer determine value simply on earnings per share, but rather on the strategies of long-term planning. Analysts serve up the ratios online, allowing shareholders to track and benchmark.

 

When senior management presents VBM proposals from the perspective of the business case and of free cash flow, board members will see an aligned company. Indeed, the continuous application of VBM provides the foundation for evaluating potential mergers and acquisitions.

 

From the 10,000-foot perspective, VBM's continuous forecasting gives management more time to change course if operating results or revenues are not on target. When targeted objectives are met, everyone understands achievement in terms of economic growth. But, how can such financial and economic strategizing be pushed to all functions to ensure accurate, inclusive planning, without sending everyone to finance class?

 

To implement VBM, finance teams have become the consultants and coaches to other functional units, providing the language and tools of planning.

 

VBM Implementation
VBM is a long-term proposition. The longer the period in which the enterprise projects and adjusts forecasts, the more accurate it will become. Many business units within companies are open to the VBM process because they are used to providing goals and metrics toward a balanced scorecard. VBM is another form of "pre-active" planning that fits right in. But, aligning operating goals into business cases requires a common language between the finance and accounting team and the various functional units.

 

As the internal communications manager of a 30,000-page intranet in a telecommunications company, I was given the opportunity to support the processes that can disseminate VBM practices across the functions.

Knowledge management is critical in such a high-turnover environment, but I hasten to say that simple posting of information to a financial site would be futile unless accompanied by a rollout strategy.

 

Prior Executive Launch
Let us assume the executive team has announced and established a cross-functional planning team of financial analysts, decision support specialists and representatives from various functional areas.

 

Next, let us assume that, under the guidance of the finance and accounting departments, the team has already set a course of action.

 

First, the team initiated the building of a company-specific business case process over a minimum dollar cost or a percentage of the department's budget. This includes forms, templates, feasibility criteria, tracking, and approvals.

 

Next, they created a communication plan that included:

Coaching Colleagues
Once the VBM program is launched at upper levels, the financial analysts and decision support team members' roles will be as coaches, teachers and communicators.

 

Some ideas for these roles include the following:

The VBM process breaks old mental habits of viewing the budget as a legacy entitlement ("We spent this amount last year, so it must be the cost of doing business for this year").

 

The ongoing department-specific discussions avoid the usual transfer of learning problems that occur when principles of accounting and finance are taught separately.

 

Today's economy is seeing many a wild ride. Those rides operated by value-based financial leaders and inspected by VBM-oriented investment analysts are apt to be the safest and most enjoyable.