The Financial Crisis Exposes the Problems of Current Management Methods

By Harry Greene

The actual business is not understood today, because the business is not managed

You may wonder, how can a business incur billions and billions of dollars in losses, without being aware of the possibility and actuality of loss. The problem is that actual business losses are hidden under structures laid over the business, which are used to manage the enterprise.

Over the past year, many news items related to the credit crunch and financial institution problems exposed the difficulty financial and other enterprises have in understanding the business, and the obstacles to rescue efforts and mergers because businesses are not understood. These problems are wide-spread and are now emerging as a world-wide financial crisis.

The actual business in “investments in capital as solutions of worth utilized for costs and effectiveness of performance to produce value and quality in results” has never been defined, organized, or managed. In actual business management, investments in capital as solutions of worth are organized and managed, to know the return to date and current worth of all investments in capital assets of positive worth and capital liabilities of negative worth as assessed on an ongoing basis. Capital utilization in performance to incur costs and produce results is organized and managed, so that all performance costs are known and charged against the value of the result produced and result value-added is managed across the business to be always positive. Economic output results are managed to know the value-added by and quality of all results produced, including income results from utilization or non-utilization of capital assets; plus the result value-added contribution to the return on the capital solution investment and future capital solution worth. The problem is the actual business cannot be managed today because 20th century management structures used to organize and manage the enterprise are laid over the business.

Actual business problems are hidden under structures laid over the business that do not relate to the business

20th century management lays structures over the business for the enterprise organization, corporate strategies and plans, business processes followed, product and service result configurations and pricing, charts of accounts, administrative functions, cost management, quality management, performance management, risk management, compliance reporting, and on and on. Each structure describes the enterprise in different terms in different information systems and are managed independent from the actual business and often independent of the other structures.

The actual business problems such as poor return on capital investments due to low result value creation, diminished worth of capital due to reduced value of future results, high costs for result volumes produced from poorly-utilized capital, ineffective performance producing low quality in the output result, excessive low-value results and under-utilized capital, missing results and capital solutions needed for business improvement, negative value-added by results produced in a chain reducing the value of the final result, etc continually fester in the business. But these problems are never reported to management, because they are hidden under the structures laid over the business that are used to manage the enterprise.

New product results often are poorly understood and managed because result value, costs, and value-added are not managed

One of the problems faced by financial institutions is the proliferation of new loan products that are not understood or managed properly. All products and services provided by the business are results that are produced by a chain of other results. Each result has attributes in the value of the result the customer is willing to pay, quality of the result from performance effectiveness, the risk of a low value-quality result in performance uncertainty, volume of the result produced utilizing capital capacity in performance, the value-added to the result after the total performance costs for all capital solutions utilized, goals for results to be produced within a time period, symptoms of performance problems in producing the result, and other result descriptors and metrics. All results are part of a chain or set of business results with several levels and many inter-relationships. The past value-added to the result contributes to the return on investment in the solutions utilized and the future value-added expected from the results confers worth on the solutions to be utilized over their remaining useful life. If the value-added by results is negative, there is a loss return on the investment in solutions utilized and the capital worth of solutions utilized declines.

None of this is understood in 20th century management, which identifies and manages only a few product and service results. These results are understood and described only as separate isolated entities, and result management depends on how well or poorly the results are defined. The results in the chain producing the product or service delivered result are not understood clearly. Most capital solutions utilized to produce the result are not identified with the result and many are unknown or are classified as intangible assets. The value of the result and the performance costs incurred in producing the result are never captured.

“Asset values” are unknown because result value and related capital worth are unknown

Many financial institutions talk about unknown “asset values” and reduction in “asset values” as the cause of current credit crunch problems. “Asset value” is a misnomer, even within 20th century management. Acquired or developed capital has worth derived from the attributable portion of value added over costs in results produced by utilizing the capital solution in performance over the life of the solution.

The result value less total performance costs is the value-added which contributes to the return on investments in capital assets and the worth of capital assets utilized. The total net worth of the enterprise business consists of the total worth of all tangible and currently intangible capital assets of positive worth plus the total worth of capital liabilities of negative worth. All investments in financial and non-financial capital solutions can be justified only by the planned capital worth in the added value-added to results attributable to the investment over the solution life or investment payback period. The total acquisition, development, implementation, and improvement costs for a developed capital solution adds to the total investment in the solution, which must be amortized as performance costs against the results of value produced from the utilization of the solution, as solution worth declines over the solution life. Solution worth can be increased by additional investment to replenish or improve the solution. The solution worth at any point in time is the attributable portion of realistically evaluated result value-added for results to be produced over the remaining useful life of the solution. The current solution worth less the unamortized investment balance is the gain or loss on the solution investment, which should be monitored on a continuing basis.

Again, all this is unknown in 20th century management. Much capital is developed and never recorded as capital or is considered as “intangible assets” that do not have to be managed. Tangible facility equipment is given a worth in investment costs incurred that depreciates in performance costs over the life of the solution. Other capital solutions that are recorded may be given some arbitrary worth that is not related to utilization of the solution to create value in business results. There is no disciplined method to monitor and update capital worth. Reductions in capital worth come to light only when the asset must be liquidated, and if the worth has fallen significantly, large capital write-offs are required and sudden losses appear. Today, it is generally-accepted that accounting principles fail to record much capital of actual worth, and the worth of capital recorded often is arbitrary and inaccurate. Assets acquired or accepted as collateral may end up with a worth based on excessive acquisition investment costs or speculative market growth for future asset sale, rather than a managed worth based on the value of results that must be produced by the utilization of the solution. Most of the actual performance costs incurred in the utilization of capital are unknown and known costs are charged to centers, activities, etc rather than against the value of results produced through the utilization of the solution.

Now is the time for financial institutions and other enterprises to wake up to the unsolvable problems of 20th century management

The 20th century management problems that caused the credit crunch and business failures mostly have been known, but unsolved, since the start of business and remain unsolvable using 20th century management improvement methods. The same problems caused the savings and loan crisis of years past and were never solved. It is time to wake up to the problems inherent in 20th century management, to prevent certain re-occurrence of the same problems in the future.

Whenever problems arise, new 20th century management structures are devised and laid over the business. Measures taken tend to be negative in more regulations and compliance reporting, rather than positive in solving the actual problems. We devise new structures for enterprise reorganizations to split profitable and non-profitable parts of an enterprise or to merge enterprises, for IT architectures and data reconciliation to reassemble inconsistent enterprise information, for changed business processes to institute new work flows and responsibilities, for auditing and compliance reporting to follow new rules, and on and on. Laying new or improved structures over the business only increase business and information complexity and can never solve the fundamental problems in the unorganized and unmanaged business.

The only solution available is Result-performance Management (R-pM) to organize the business for 21st Century Management

Result-performance Management (R-pM) provides the complete methods, procedures, and instructions to organize and manage the actual business in “investments in capital as solutions of worth utilized for costs and effectiveness of performance to produce value and quality in results”.

All enterprises or conglomerates, no matter how large and complex can be simplified and structured as businesses including results produced by organized and managed sub-businesses. Specific business organization capital solutions and human personnel capital solutions are implemented to be responsible for managing and producing defined sets of results.

R-pM clears away all structures laid over the business and organizes, plans, directs, controls, and governs the business through the current business structure and result goals and performance expectations by period to reach the approved strategic business structure.

R-pM provides new 21st Century Management conventions, definitions, and standards for consistent communications, common services and solutions applicable to any business or an industry, simplified business collaboration and outsourcing, supplier and customer integration, cost-effective management consulting, performance benchmarking, and optimizing cost-effective capital utilized in performance to produce high value-quality results.

R-pM and 21st Century Management is documented in the R-pM Toolkit, which is available for download today. Subscribe to the R-pM Toolkit, plus all new advances and updates sent to your R-pM Community member email address, at result-performance-management.com.

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