Added value at the level of the organization
Conventional accounting yardsticks have traditionally assessed the performance of a company. Ferris (1980) outlines these as aggregate profit, before and after tax, dividend rates, return on capital employed and sales per employee. In the measure of a firm's efficiency in the use of resources, these ratios, used in isolation, are largely meaningless. Added value evaluates efficiency by, measuring its inputs to its own outputs.
There is no one standard calculation, but the usual basis is the difference between sales income and the cost of goods and bought-in services, adjusted for changes in level of stocks and work in progress. An example is shown in the Table: Added Value Concept. The added value remaining therefore represents that amount available to cover wages and salaries, interest charges, rent and rates, company tax and depreciation. Any remaining net income is profit from which dividends are paid, the balance being retained by the business to cover innovation and expansion.
This is represented in the schematic: How added value is used. What will immediately be noted is the amount of the added value that goes on wages, salaries and employee cost (on an average between 50 and 60 per cent) and the relatively small percentage left for profit and dividends. In addition, by 'redrawing' the line on the profit and loss account in this way the word 'profit' is eliminated, which enables added value to be explained in less emotive terms to the workforce.
What should and should not be included in the calculation can be argued at length. For example, some people would say that rent and rates should be included under bought-in goods and services and not appear in the added value. What should or should not be present largely depends on for what purpose the data are to be used and by whom.
Added Value Advantages
The concept has a number of advantages that, whilst not replacing goal measures, would complement them.
1. Firstly the concept is easily understood by all those in the organization.
2. The measure indicates the contribution and performance of all those concerned in the wealth creation process - management, white-collar staff and direct workers. This exposition of how all employees' jobs are interdependent reinforces the collective approach.
3. The information it uses is almost always readily available and established, whether it be needed for monthly, quarterly or annual analysis.
4. The use of added value can be an important first step in encouraging and involving all employees to make a participative contribution to their work situation and increase wealth, especially if it, is linked to a productivity bonus scheme which can be geared to increases in added value. This would be applied to all employed in the organization, thus overcoming a major criticism of the goal- or output-related schemes.
5. Linked to a company's operational and control system the concept can be a valuable tool for changing employees' behavior, relating objectives and priorities to improvements in added value and hence the well-being of the company. It can therefore be used to educate employees in their role and highlight their importance in the organization.
Using and explaining a company's performance in this way can demonstrate to all concerned in the enterprise, how it will in turn lead to greater added value available for wages, growth, investment and profits.
There can never be a simple answer to the question: "how should productivity be measured?" The type of measure that is most appropriate will depend on the purpose for which it is to be used. Indeed more than one measure will probably be necessary to accord with differing perspectives.
The following recommendations may serve as guidelines:
- In view of the problems discussed, the simplest measure possible should be used, provided there is a clear understanding of the priorities for success of the company.
- Because data is distorted when collected and used for incentive schemes, this information should be avoided for use in productivity measurement.
- In addition to partial measures, try to obtain a systems measure that will take into account qualitative and strategic factors.
- If data are collapsed for the purpose of one measure (e.g. value added), the recording of them separately or regular reviews with the workforce may give valuable clues as to where problems are accruing in the organization.
- Use consultation about objectives to produce consensus.