The Value Creation Index (VCI) is a tool that was designed to quantify the link between an organization’s non-financial performance and its valuation in the markets.
Traditional methods of assessing organizational performance are no longer adequate in today’s economy. The price of a stock is less and less determined by earnings or its asset base. Value creation in today’s companies is increasingly represented by the intangible drivers like innovation, people, ideas, and brand. But these non-financial factors for creating value are difficult to quantify. Also they are rarely acknowledged in accounting methods. Finally they are not adequately measured, not adequately managed, and not adequately reported, by organizations.
The Cap Gemini Ernst & Young Center for Business Innovation (CBI) has conducted a series of studies on the role of intangibles in creating value in the modern corporation and developed a rigorous, comprehensive model – the value creation index – of value creation for progressive companies, one that enables users to measure the impact of key intangible asset categories on a company’s market value. By devising a set of standardized measures, weighted according to their relative impact, managers have the tools to better drive and monitor their company’s future performance. At the same time, if disclosure rules change in parallel, investors will be armed with a more uniform, less subjective and more robust way of evaluating companies. Over time, the value creation index will evolve, continuing to identify value creation drivers, while remaining sufficiently flexible so it can adapt to the constantly changing nature of companies in the connected economy.
While the crucial non-financial value drivers vary for each industry, the value creation research team has settled upon some critical categories of intangible performance that determine corporate value creation.
Components of Value
What are the key non-financial factors in creating value for the modern corporation? We asked you that very question in a Forbes Digital Tool survey last year. The answers ranged from employees to products to company image.
Historically, most intangible asset measurements have been top-down: Investors theorize a contributing factor and then try to figure out how to measure it. Our approach was different. We applied the categories to large S&P 500 companies in the durable and non-durable manufacturing sectors. Using advanced statistical techniques, we determined the ability of each value-driver category to explain market values over and above the amount explained by traditional accounting assets and liabilities. We then combined the categories into the Forbes ASAP/Ernst & Young Value Creation Index (VCI), a measurement tool that incorporates the relative importance of each key economy value driver.
Next, we examined a wide variety of intangible asset categories, which enabled us to identify the factors that are significant in creating value. Then we weighted the categories according to their importance in explaining market values, thus avoiding the arbitrary, and often incorrect, weightings frequently used to provide an overall assessment of intangible assets. What we found was surprising. Some perceived value drivers translate into market value; others do not.
Categories of Intangible Performance Driving Value Creation
- Customer relations.
- Management capabilities.
- Brand value.
- Employee relations.
- Environmental and community issues.
As of 2002, the Center for Business Innovation (CBI) was discontinued unfortunately.Business frameworks like Value Creation Index are invaluable to evaluating and analyzing various business problems. You can download business frameworks developed by management consultants and other business professionals at Flevy here.