Value network modeling and analytics are in the forefront of non-financial business reporting. The Value Networks data model is fully XBRL enabled and it is the only scalable business modeling methodology that systematically links business activities with both financial and non-financial scorecards and intangible asset management. We follow trends in this area closely and the recent financial crisis has only served to intensify the call for expanding business reporting to include management practices and intangibles.

50% to 70% of business value is being ignored.

Most estimates place intangible value – such as reputation, social capital, and human competencies at 50-70% of company value and activity. The work of Baruch Lev and many other experts have shown that the “intangible value gap” between book value and market value easily can run to 80%. This held true since the mid 1990s until the recent financial crisis. In January 2009 Intellectual Asset Magazine reports that corporate intangible values in the US have collapsed over the last 12 to 18 months, but with the recovery of the stock market may again range from 50-70% of Business Value.

Business leaders are aware of this value – they just don’t know how to deal with it. As reported in The Real Value of Intangibles by Denise Caruso from Booz & Co. strategy + business issue 52, Autumn 2008, in 2004, “the (Economist Group’s) Economist Intelligence Unit conducted a survey of senior managers on intangibles. A whopping 94 percent of respondents said that managing intangible assets or intellectual capital is important. More than one-third ranked it as one of the top three management issues. In fact, nearly half of the respondents said they considered intangibles to be the primary source of long-term shareholder wealth creation for their companies. But when asked about the systems they used to measure the performance of this important class of assets, 95 percent of the executives surveyed said they did not have such a system in place.”

Lack of Standards and Consistency

The Booz & Co. report goes on to note that “more than a dozen approaches have been developed to measure and report intangible assets. But according to a 2005 report on intangibles by Rob McLean for the Value Measurement and Reporting Collaborative, a multinational organization of accounting bodies, the results derived from one approach have virtually nothing in common with results from another. Some models, including the balanced scorecard framework, link intangibles to performance by measuring key indicators, such as reductions in the cost of safety management or in customer complaints. Others use value drivers, such as sales growth or gross margins, or various “capitals” (such as human, intellectual, or social capital) to value intangibles. And although all approaches (except traditional accounting, of course) recognize the importance of broader context in setting a value, each has developed its own way for dealing with and representing that context. Such fundamental differences derail the potential for each approach to inform a broader economic conversation about intangible value. Nonetheless, the best of them seem to be tremendously useful to the companies that deploy them.”

The Benefits of XBRL

XBRL (eXtensible Business Reporting Language) is gaining momentum as an open data standard for financial reporting. XBRL allows information modeling and the expression of semantic meaning commonly required in business reporting. XBRL is XML-based. It uses the XML syntax and related XML technologies. As reported by David McCain in CFO.com, August 24, 2009, after years of development, data tagging using XBRL may be set to transform internal finance operations. The premise is that tagging information in financial and other IT systems in a standardized format would make it easier for companies to share data across units and departments. That in turn would improve internal reporting, the argument goes. Notably, companies would be able to view performance as reflected in various line items on a continuous real-time basis, rather than waiting for the end of a reporting period to get the full picture. Higher quality business decisions then could be made more quickly.

Former Securities and Exchange Commission chairman Christopher Cox staked much of his reputation on the investor benefits of XBRL. Others claimed it would streamline international accounting convergence and render differences in financial statement presentation all but moot. And it may yet do all of those things. The SEC has, after all, mandated that all U.S. public companies file data-tagged financial reports by 2011, starting with the 500 largest for periods ending after June 15 of this year. Now, advocates are pointing to a completely different area that may benefit from XBRL: internal management reporting.

Signs of Movement

In August 2009 a major industry group, the Institute of Management Accountants, formed an XBRL Advisory Committee to build awareness that data tagging can do more than satisfy compliance requirements. Gartner Group, an IT advisory firm, recently issued a report that urged companies to work toward internal use of XBRL.

The current status was summed up for CEO.com by John Van Decker, a research vice president with Gartner Group. He states that “Right now organizations are only funding projects they see as strategic. An XBRL initiative actually would be strategic, because it could improve management reporting, but I don't see that most companies understand what it can provide.” A Gartner survey of 256 companies portrayed the low demand: less than 5% said they currently plan to use XBRL for internal reporting purposes. About half of the surveyed companies were privately held, and they were even less likely to report interest in internal usage, Van Decker says, though he notes that the benefits would be equal for public and private entities.

Gartner's Van Decker went on to state that “Companies are waiting because the ERP vendors have not seen the demand.” Both Oracle and SAP, he notes, have formed partnerships with UBMatrix, an XBRL taxonomy firm. However, he says, “The XBRL capability they've inserted has been primarily for external reporting. They've tacked it on to the financial consolidation as opposed to building taxonomy values into the ERP and general ledger systems. The management reporting perspective is pretty much being ignored.” (Emphasis ours.) Aside from regulatory reporting, there are essentially no legal requirements for management reporting. This is a likely reason why XBRL adoption outside of financial statements is low.

In The Business Case for XBRL by Charles Hoffman, CPA, Bryce Pippert, and Phil Walenga, it was stated that “The need for something like XBRL is fairly obvious if you exchange information with others which are external to your organization. If you cannot control another organizations IT infrastructure, organizations have to come up with some agreed upon format for exchanging data. Over the years 100s of different formats have been tried with varying degrees of success. Each option has its set of pros and cons. Until now there has been no standard that everyone has agreed on.”

Now, XBRL is standing out from the pack. Denise Caruso affirmed in the Booz & Co. report that for external reporting “Whether companies’ reasons for avoiding the intangibles issue are valid or not, they may not be able to bar the door from disclosure much longer. In part that’s because investors are exerting increasing pressure on executives to provide them with performance indicators for these assets. Thus it is to no one’s advantage for there to be a lack of reporting standards or audits for intangibles and for disclosure to remain voluntary.”

The stage is set.

Pushed by the SEC and other governmental agencies, worldwide XBRL tagging for external reporting of intangible asset value can be seen as set for general adoption. With XBRL adoption as a backdrop, for management who understands the paradigm shift from process to networks and from tangible to intangible value, the benefits for internal reporting focused on intangible value and value creation capacity is obvious. Widespread adoption of methods for visualization and analysis of intangibles for internal reporting require a well understood taxonomy (with XBRL tagging capability), software that eases adoption and use, and integration capability with business intelligence platforms from major vendors. This is exactly what is being offered today with the value networks methodology and analysis software available from http://www.valuenetworks.com. We have been following these efforts closely since 2003 and believe that the recent financial crisis is a key driver for alternative business, financial, and economic models to gain increasing support. Our application is fully XBRL compliant and automatically generates intangible asset management analytics along with other powerful indicators for monitoring and predicting value network performance.

Also of interest: 

The Strategy+Business article Inside the Kraft Foods Transformation is well worth a careful read for anyone who is involved in organizational restructuring. Eleven of the top leaders from the largest food and beverage company in the U.S. talk about their three-year turnaround to reorganize for growth.

The Kraft Foods Organizing for Growth (OFG) initiative came about as an effort to become more nimble and responsive after previous efforts to centralize. The effort involved essentially replacing the existing organizational matrix with a more decentralized structure, a return to making key Business Units more autonomous and accountable. At the same time certain key roles or functions needed careful coordination and integration across multiple business units. Although value network models are not explicitly addressed in this article the visual depiction of the new structure is a high-level value network model. Three key roles are defined (Corporate Core, Business Units, and Shared Services) with very clear and specific deliverables defined between the roles.

Additional insights into Kraft’s focus on networks and collaboration come from Gary Conte, VP of human resources and a leader of this initiative, who expresses the typical balancing act of many large corporations. Note the focus on cross boundary collaboration and networks around key strategic activities.

“We always believed that some things needed to stay at the corporate level entirely — governance, for example. We just wanted to be sure that the things we defined in that way were very few and were of the highest priority. At the same time that we wanted to get closer to the markets, we couldn’t forget that at Kraft Foods, big is beautiful. We needed to continue to find ways to use our scale to our advantage. So as we developed these accountable business units, we also gave a lot of thought to the collaborating mechanisms that would help us take advantage of our size. Our corporate functional experts are one such mechanism; these people work across our businesses to build capabilities and disseminate best practices. Another coordinating mechanism: the councils and networks we’ve established to pursue market opportunities that cut across business units or categories. Corporate strategic planning is a third mechanism, involving the identification of strategic platforms that business units must address in their own strategic plans. Health and wellness is an example of a strategic platform that started in corporate and is now important across our portfolio.”

A huge undertaking? Absolutely! CEO Irene Rosenfeld said, “When I talked to investors about it, they were often concerned…but I knew in my heart that this was going to be a big enabler for us.”

Is it working? Rosenfeld says, “Three years later we are delivering. We had an exceptionally strong year in 2008, on both the top line and the bottom line, despite the challenging macroeconomic environment.” She sums up the results by simply noting, “It is a fundamental human desire to be in control of your destiny and to make the necessary decisions that will affect your performance. When we tapped into that desire it took us to a whole new level.”

Part 1 of this series discussed the benefits for non-government organizations (NGOs) in using value networks to activate informal social networks. Part 2 discussed the new network paradigm, the production of intangibles, and value optimization managed through networks. Part 2 ended in noting that NGOs do not understand intangible value creation within the context of network potential. And NGO funders generally do not have tools to assess intangible value or its generation capacity.

This third and final part of the series acknowledges the role of the social entrepreneur and his/her relationship to complex network environments, and how entrepreneurial success may ultimately be dependent on understanding and managing intangible value and value creation capacity within the intersecting social networks in which the entrepreneur interacts.

A social entrepreneur is someone who recognizes a social problem and uses entrepreneurial principles to organize, create, and manage a venture to make social change. Whereas a business entrepreneur typically measures performance in profit and return, a social entrepreneur assesses success in terms of the impact on society as well as in profit and return.

Successful Social Entrepreneurs Must Know Their Networks

Recognized or not, social entrepreneurs operate within complex network environments. Entrepreneurial success may ultimately depend on understanding and managing intangible value and value creation capacity within the intersecting social networks. A key activity of social entrepreneurs is managing these complex relationships and interactions.

Jeffrey A. Goldstein and James K. Hazy note in their article Complexity and Social Entrepreneurship that at the heart of social entrepreneurships “lie innovative organizational and partnership forms which aim at ameliorating social and communal values so that they truly embody an increase in social capital which emerges from the cooperative interactions of social networks. This understanding of the added value accrued by social networks and the collective/cooperative effort that comes from their interactions set the stage for innovation and emergence.”¹

Goldstein & Hazy go on to recognize that “all there really is anyway is a vast web of social networks, at small, midsize, large sizes and every scale in between. What we mean by social entrepreneurship projects are all the varied organizational forms which increase social value through the multitudinous interactions making-up such networks.”

Kevin Kelly, author of New Rules for the New Economy, observes that are very efficient at disseminating information (call it bits, data, or knowledge) and, by extension, power and wealth. By definition a network is decentralized, with no hierarchical authority. As such, they tend to undermine authority structures, shifting individual allegiance from traditional social entities (companies, families, neighborhoods) to networks of peer groups and interest groups. The effects of networks on dissemination of wealth are “not about economies of scale, they are about value that is created above and beyond a single organization – by a larger network – and then returned to the parts, often unevenly.” Networks create an environment for new opportunities from a collective, ever-changing “whole” that has vastly more potential than its individual parts. Networks enable people to make new connections, see new possibilities, and cultivate new relationships.

According to Open Cultures and the Nature of Networks by Felix Stalderit, it is out of relationships (between concepts, ideas, and human interaction) that new products, services, and intangibles are spawned. Networks are about intangible value and, for the entrepreneur, intangible value creation capacity. Networks favor intangible things – ideas, information, and relationships. Because of this, they tend to influence our perception of self and others, in that through networks meanings of words are altered to fit the emerging ideas, markets, and societal change.

What these authors and www.valuenetwoks.com CEO Verna Allee (The Future of Knowledge: Increasing Prosperity through Value Networks) point to is a paradigm shift for NGOs, social entrepreneurs, and their funders, in understanding what constitutes value and what tools can be used to activate and manage value creation capacity within their networks.

Cracking the Code on Measuring Impact

One last and critical point is that using value network methods and available software from www.valuenetworks.com means that monitoring and measuring network value dynamics does not need to be cumbersome or expensive. Value networks have “cracked the code” on the very tough problem of measuring network impact.

As pointed out in Developing the Field of Social Entrepreneurship: A Report from the Center for the Advancement of Social Entrepreneurship (CASE), a report from Duke University, The Fuqua School of Business, June 2008, “We need to crack the code on social impact… Reliable, timely, and cost-effective measures of social value are crucial for demonstrating success, providing better information to the financial markets, and informing the strategic decisions of social entrepreneurs. Yet, social value is notoriously difficult to measure and to attribute to a specific intervention… Many of the most important ways in which social entrepreneurs can make the world a better place are long-term, intangible, qualitative, not easily reduced to any single common metric (such as money), and hard to attribute to a single cause. Systemic impact can be particularly difficult to measure. When you talk about social impact, most funders only want to talk about direct impact. You have to ask yourself, are you mobilizing resources to [serve] the right long term goal?”

A long-time issue at the center of the field can now be addressed with Value networks. As noted in the CASE study, “Overall, there is no sound measurement system that allows people to compare and contrast organizations… Along with the inefficiencies of the financial markets, this is the most commonly mentioned problem, despite all the work that has been done to develop new and better approaches to performance measurement, including Social Return on Investment (SROI), the “triple bottom line,” balanced scorecards, “blended value” propositions, and even “randomized” trials of social innovations… Some saw this as an area for greater academic contributions. However, the social sector has long had evaluation consultants, usually academics or Ph.D.s in social sciences, but they do not seem to meet the expressed need for reliable, timely, cost-effective, comparable, and informative measures that social entrepreneurs and their funders are calling for… And, “Measurement is at the heart of a disciplined approach to creating social impact and demonstrating the value of the field. If you add up all of the social entrepreneurs and have no idea of impact–what they have done–the field cannot advance. You really need numbers to support the idea of impact.”

Simply stated, we strongly believe that Value Network Analysis (VNA) bridges this critical requirement gap with cost-effective visualization and analytical tools that bring understanding to network value and value creation capacity. VNA provides reliable, timely, cost-effective, comparable, and informative measures, albeit not the ones that social entrepreneurs and their funders have traditionally been calling for, which typically are lagging indicators. VNA offers leading indicators for how the networks are being activated to optimize and sustain value creation. These measures bridge NGOs, social entrepreneurs, and their funders, to the new network paradigm and provide a direct way to better manage complex networks.

¹ This work and many other fine articles can be found in Complexity Science and Social Entrepreneurship: Adding Social Value through Systems Thinking, the ideas and insights of which are an outgrowth of the First International Conference on Social Entrepreneurship, Systems Thinking, and Complexity held at Adelphi University, Garden City, New York, April 24-26, 2008.

Other topics in this series: 

We are in the midst of a deep, long, cultural transition, profoundly related to the incorporation of networked media technologies, wired and wireless, into virtually all aspects of our daily lives. This trend assures that the growth of networks and our roles within them will be steady and self-reinforcing. It is through network relationships (between concepts, ideas, and human interaction) that new products, services, and intangibles are spawned. The necessity is for NGOs to adopt both a network perspective and management tools that will allow them to seize this opportunity.

Network technology has created a larger sense of community and supports new forms of collaborative work and civic responsibility. These principles are being transferred onto the plane of human communication and production at large. The result is a social benefit based on volunteering, free cooperation, and a gift economy.

The Center for the Advancement of Social Entrepreneurship (CASE) reports that NGOs recognize the need to use existing networks as platforms for knowledge creation, learning, and shaping the external environment in favorable ways, including:

- Designing gatherings to better serve practitioner learning needs (depth)

- Offering more opportunities for building extended networks to include other key ecosystem players (breadth)

- Helping their social entrepreneurs develop their skills for “leveraging their Rolodex” (their contacts, including weak ties)

- Improving communication mechanisms and learning opportunities across global networks, perhaps organizing sub-groups around specific fields or topics of interest

- Developing common learning programs and curricula across different formal networks, in which the members have similar needs

- Enhancing the cooperative and gift economy characteristics of their networks to shape contributions toward specific goals and objectives

Value Networks can help social good organizations readily obtain these results.

First, one needs to understand that network dynamics are not random; they have discernible patterns which can be enhanced and supported. Even small contributions can trigger significant results. Value network patterns can be visualized and analyzed, to better understand generation of tangible and intangible value. Change can be predicted, influenced, and managed for more positive outcomes. Desirable exchanges and interactions can be activated even in very complex networks. Emergent and self-organizing characteristics of the network can be identified to open up opportunities earlier and more effectively. Role identification and activation brings forth a collective intelligence that far exceeds the capacities of individual contributors.

Non-government organizations (NGOs) have launched a multitude of community directory and social networking sites aimed at helping to connect NGOs, businesses, governments, and individuals. These sites address the central issues of our day: climate change, poverty, the environment, peace, water, hunger, social justice, conservation, human rights, and more. The potential of these sites is self-evident – focused worthy causes, tapping the activist nature of social and political leaders, activating the collective intelligence of the group – all fueled by the energy of volunteers and the connective force of the Internet. The Obama political campaign gave a first glimpse of such possibilities.

Yet, these sites almost never achieve the full potential of connecting and activating the network. Why is that?

These networks are for the most part simply contact directories. Whether focused internally on employees and volunteers or externally on communities of interest, they typically are not even effective as social networking sites. How can they morph into the “activated” cause-based networks that they are meant to be?

Most networking sites do some kind of profiling and listing of affiliations and contracts. Some provide network-like visualizations that provide an overview of connections among people and organizations. Visual overviews allow a rough interpretation of the value of linkages but stop short of providing the analytics necessary for understanding network capabilities. Some networks, such as Wiser Earth, utilize social network analysis and/or tie to Google analytics and similar programs, but these analyses do not provide insight into the nature of the links and connections.

At a very basic level, networks are activated around the roles that people need to play to execute specific activities. Roles are key in turning informal social networks into active cause-based networks. Simply adding role descriptors and interests of people who could fill the roles to the database – provides the basic data necessary for value network visualization and monitoring with the ValueNetworks.com application. Then network supporters can readily activate the required roles and interactions to meet changing needs.

Without role data, network visualizations and analytics fail to provide information and alerts that can actually activate these networks. Without role data it is impossible to structurally support purposeful self-organizing activities or to provide the project planning, governance tools, or other necessary business processes to enhance network activity. Thus, while NGO websites bring forth and promote purposeful causes they struggle with activism.

ValueNetworks.com is an important tool for moderators or change agents to understand roles and intangible value exchanges so they can more consciously facilitate the creation of sustainable networks. Realizing a cause-based network as a value network can align activities to the deeper purpose of the organization, social network, or project. And value networks allow a true collective intelligence to emerge that can better embrace purpose and evolve towards higher order complexity. The potential for generating social, economic, and environmental good by building active cause-based networks is immeasurable. Our ability to activate this kind of collective intelligence and action may well be the determining factor for the future we will create.

The CFO has significant fiduciary responsibilities for reporting the firm’s financial results. In reporting results CFOs have typically worked with:

- Business indicators that are lagging rather than leading.
- One size fits all (GAAP) instead of indicators tied to mission, vision, and values.
- Financials that generally ignore non-financial measures, as ties to critical success factors are considered unclear.
- Reports that are periodic and standardized instead of custom and on-demand.
- Focus that is on historical rather than real-time data and future trends.
- Books that are cost-basis versus value-based.
- Financial indicators that guide decisions without comprehensive measures.
- Forecasts that are backward-looking, not forward -looking.

Companies create sustainable economic value by developing and executing superior strategies which guide the organization towards delivering valuable products and services. In order to support effective management control the CFO must be concerned with business indicators that define value creation, value preservation, and value realization.

The CFO recognizes that a broad range of financial and non-financial measures are useful for managing the company. In determining the true value drivers of the business an understanding of financial and non-financial information is essential, as is an understanding of tangible and intangible value (intellectual and competitive). And, an effective communication of value to the public and investors is critical, as differences in perceived value based in information gaps can have a significant impact on company market value. However, effective tools for accomplishing this aspect of the CFO's mission are generally lacking.

Value networks provide a powerful way to visualize, analyze, and manage tangible and intangible value drivers that are crucial for comprehending and improving company value creation. Shifting to a value network-centric perspective helps a CFO to more effectively balance and structure the financial funding options, resources, and risks of the business. Not only does operational transparency significantly improve, but the probability of predicting potential risks and breakdowns is increased.

With value network-based scoring systems, business performance can be assessed more reliably. The causes of variance at various levels of the organization, such as financial or operational performance, can be better understood. Monitoring internal and external facing value networks enables a CFO to improve approaches for managing cash balance management, liquidity, cost of capital, capital expenditure, and strategic investments.

Implementation of the value network perspective in financial environments is typically based on linking the ValueNetworks.com intelligence to the business data warehouse and key transactional systems. The configuration is accomplished based on historical data analysis and targeted surveys and interviews to understand how operational performance is achieved. Analytics reveal value flows as they occur and ensure that these are funded appropriately, instead of through existing funding channels where there are often high levels of value leakage.

Other topics in this series:

Networks are everywhere. Everyone, it seems is engaged in social networking and linking up. Now you can more easily activate a social network to be a purposeful value creating network!

Roles are the key for networks to generate specific social or business outcomes. Networks create value when people in the network begin to define and organize according to the roles people want to play in the network.

With the ValueNetworks.com application you and your colleagues can define the key roles in your value networks, identify the people who play those roles, and then quickly negotiate how you are going to work together to create the outcomes you want. Whether you are organizing an event, starting or growing your business, or activating for a social cause, value networks are the most natural way to organize to achieve results. 

With the ValueNetworks.com Professional Edition Group feature you can share your networks with your friends - and even merge networks with just the push of a button! All you need to do is purchase a Professional Edition license - and invite your friends to join you.

Contact info@valuenetworks.com to learn more or simply go to our purchase page and select Professional Edition for a powerful and fun way to organize your network!

Workspace design is rapidly becoming a critical issue for organizations as they seek to not only optimize the use of physical resources (e.g., office building, office layout, and infrastructure), but also find more effective forms of organizational design. These questions have been addressed in recent research into network structure and mobility programs, that clearly demonstrates workspace design is not keeping pace with the changing nature of work.

Value networks provide an effective perspective for evaluating workspace and designing new solutions in order to answer the questions (a) How can I reduce the infrastructure cost per employee, and (b) How do I design workspace to support the way work gets done?

In combination with The ValueNetworks.com Online Survey solution (including dynamic organizational network analysis capability) and location tracking, Valuenetworks.com enables organizations to design workspaces to optimally support how the work naturally settles into roles and relationships. This approach provides valuable insights into how to increase organizational performance within traditional office environments, across multiple sites, and for mobile workers as well.

Data required for this use of the ValueNetworks.com application includes input from the online survey, a location tracking widget (based on floor plans and site maps), and value network strategy blueprints modeling business operations. Finally, traditional workspace design tools are used to achieve optimal workspace design.

This perspective is of specific interest to workspace design agencies seeking to integrate network perspectives into their offerings, organizations planning to introduce or optimize mobile worker solutions, and for IS consulting organizations supporting clients in optimizing IT costs.

Other relevant links and topics in this series: