20th century management does not organize or manage capital
Enterprises today employ 20th century management that does not organize or manage the business. Organization and management structures are laid over the business to manage the enterprise. The business has three components that must be managed to capture actual business data and manage with actual business management information.
- Results: The economic outputs that must be produced by the business for success and profits
- Capital: Capital invested that is deployed as specific performance solutions to produce results
- Performance: The utilization of capital as specific performance solutions to produce specific results
The components of the business are not defined, organized, or managed as complete sets today. Some results like product produced, invoice prepared, revenue received, etc are managed as isolated entities. Many results produced are never defined to be specifically managed. Some tangible capital is managed as assets, employees, information technology, financial facilities, etc. Much capital is developed but never defined as capital to know costs or to manage utilization. Much capital is labeled as intangible assets and ignored. Business performance is actually enterprise performance in a collection of enterprise entities including some results and capital that are managed as part of contrived enterprise performance management.
Every type of capital has costs that must be charged to the business
Result-performance Management (R-pM) identifies capital items available to the business as individual performance solutions that can be deployed and utilized to produce results. Every type of capital has certain costs that must be charged to the business results produced to determine result value-added. Developed capital incurs costs for development and implementation that must be captured and amortized over the useful life of the capital. Some performance solutions are provided as an outsourced or internal service in which case a service cost must be incurred to cover development and provision of the service. Supply capital incurs current costs for money, supplies, energy, etc consumed. Human personnel capital incurs current costs for the personnel remuneration and support. Management may want to include current capital management costs in with the costs charged to revenue results.
Development costs must be captured against the performance solution developed
R-pM employs result-capital development to develop both performance solutions and the results that will utilize the solution. Performance solutions with related results are set up as project results to capture all acquisition, development, and implementation costs against the solution developed. Capital work in process remains a result of value until implemented to be utilized by the business. These costs are then amortized against the results produced over the payback period, or as the capital worth of the solution deteriorates over the useful life of the solution. This enables measurement of the precise return on investment for the solution.
Capital worth is the result value-added over the useful life of the solution
All capital utilized in the business has a capital worth. The worth determination can differ by type of capital and by the way management wants to manage capital. Capital worth is the future result value added attributable to the solution over the remaining useful life of the solution. Developed solutions tend to lose worth as they deteriorate or become outdated. In some cases, the development costs of new capital can be the assumed worth until the capital is independently assessed. Human personnel capital worth is the attributable result value-added expected over a past or future period being assessed for capability development, performance, increased reward, or costs incurred.
Performance costs are incurred when capital is utilized to produce a result
All capital incurs a performance cost when it is utilized to produce a result. The solution also creates attributable result value, which should be equal to or exceed to performance cost. For developed solutions, result value equal to amortized development performance cost pays back the investment. Result value added in excess of performance costs provides a return on investment. Solutions provided as a service normally incur a service charge per result produced. Human personnel costs may be charged by rule or distributed to results produced. Supply capital consumed normally has a worth equal to a direct performance cost to the result or a set-result to be allocated to end-results in the set.
The return on investment is the result value added over the payback period
The return on investment on developed capital comes from the attributable value added to results produced over a payback period or useful life. If development costs are amortized against the result, the return is the value added in excess of costs. If development costs are not amortized and for planning, the return is the actual and projected result value-added less the value-added projected for the result if the solution was not developed. The latter value-could be negative, if on-going costs would exceed result value without the solution.
Capital costs and worth can only be managed by managing the business with R-pM
Actual capital costs cannot be captured unless specific capital items are managed as performance solutions as part of the business. Development costs cannot be captured unless specific solutions are managed in development to capture costs, as may be the case today with certain fixed assets for depreciation. Capital worth cannot be assessed, if results produced are unknown and result value is not determined. Return on investments are estimates that cannot be measured or confirmed unless the attributable portion of actual result value added can be measured or assessed.
There is only one way manage capital costs and return, performance costs, and capital worth. Use Result-performance Management to organize the business for 21st Century Management. It is all explained in the R-pM Toolkit, available today from result-performance-management.com.
