A look at India’s successful companies clearly points out that apart from several health matrices of the business, shareholder value creation has emerged as the strongest indicator for success.
Economic Value Added (EVA) is one such measure that assesses the organisation’s performance from a lens of shareholder value creation thus requiring profit performance above a company’s cost of capital. When implemented well it can positively influence the performance orientation with the organisation by:
- Improving capital allotment and overall business performance
- Encouraging greater entrepreneurial behaviour among employees
- Making business outcomes more predictable
- Avoiding “undesirable short term behaviours” seen in the multi-step variable plan that exists in most companies.
- Greater alignment among various functions and alignment to the vision of the organisation.
As the organisations adopt this new lens of measuring business performance, there is also a need to mirror the philosophy and rigour in the internal processes that will aid profitability and create superior value for internal stakeholders as well. This requires a change in approach pertaining to their understanding of EVA, its implications in their work roles and how each of their Key Performance Indicators is directly linked to the EVA achievement for the organisation.
At one of the large packaging companies that had its manufacturing sites in multiple countries across the globe, business performance measurement through EVA took shape for every department and unit within the organisation with the help of a unique simulation called E^X^ (Everything else is complex). E^X^ demystifies the concepts of EVA and ensures there is a shared understanding of profitability drivers across the business. Through this two-dimension simulation that replicates an end to end cash cycle, more than 2000+ people right from CEO of the company to the last person standing on the shop floor were trained to align understanding of their decisions and their impact on the business. The EVA parameters were further broken down and integrated with operations in form of daily production reports, MIS reporting, CAPEX proposals, Costing, Transfer Pricing and Production planning, using Balanced Scorecard as the base. The process was further integrated with rewards in form of enhanced performance pay and long term incentives linked to Delta EVA creation.
Over years of rigorous implementation, monitoring, creating a shared culture of improving profitability and managing costs, the company was able to measure substantial improvements in Debt:Equity Ratio, Profit After Tax figures and an overall market capitalization that ensured increased returns to every possible stakeholder associated with the company. The company continues to measure its business performance on EVA number after a decade of its implementation.
Bringing in Hi-performance culture through EVA is built on a few important pillars:
- Buy-in from every stakeholder that EVA should be the single parameter being measured across the organisation.
- A simple yet effective cascade process i.e. E^X^ simulation that broke down EVA for every function within the organisation in a language that they understood.
- Integrating it with the culture – Every decision including reduction of inventory, material value engineering, renegotiation of vendor terms, changing the hiring pie mix taken was measured in terms of its impact on EVA thus improving performance orientation and alignment with larger goals
- Collaborative work practices – Shared goals, clear dependencies and understanding of the collective impact on EVA ensured the teams chase one common parameter instead of their individual departmental goals.
- Clear linkage to Performance incentives, ESOPs and rewards in form of opportunities to gain more with Delta improvement in EVA.
Does this present an opportunity for you to consider building a high-performance culture differently within your teams? Reach out and we will be happy to share more.
Best Regards
Dr. Srinivas Chunduru
Founder- VANS Group
Investments | Skilling & Advisory
Mobile – 91-9324146704 | Email: [email protected]
www.vansskilling.co.in
Chief Advisor – Crowdera | Board Advisor – Snackamor | Advisor – Mindful E-commerce | Ex Senior Advisor – OLA | Member Of Board – AF Capital | Partner – Successroute And YNOS (IIT Chennai Incubated) | Advisor – Happiness Consulting | Advisor – Ozone Education Consultants.