Kendall Scheer

CHAPTER FOUR:
Value Realization Methodology (VRM)

Overview

This chapter is written for those of you who have some degree of responsibility to successfully develop and direct business transformation. Value Realization Methodology is a unique methodology that is being deployed in a wide variety of situations, each time leading to successful transformations with measurably improved business metrics.

Businesses always change, either from coercion (competition, disruptive technology, regulation, economic shifts) or from strategy. Changes that companies undergo can be categorized as either haphazard or strategic. For example, from the perspective of a company acquired in a hostile takeover, it undergoes haphazard change because the transformation is neither planned nor expected. From the perspective of the acquiring company, the change is strategic because the transformation is planned.

Interestingly, case studies on failed acquisitions abound, proving that strategic (planned) change is all too often unsuccessful. The anticipated financial performance never materializes – a result of the value being underachieved or the cost of change ultimately exceeding the value. Well executed VRM-based transformations do not suffer this same fate.

This chapter will help you to:

• Pragmatically discover the “critical few” areas of business improvement potential.
• Determine the true costs of achieving business improvement.
• Express program initiatives in financial terms that are understood by the C-level executive suite, the board and the shareholders to obtain buy-in and continued support for program initiatives.

What is VRM?

VRM identifies and quantifies both the value of and the costs associated with transformational change. In experienced hands, VRM determines the business transformations that will yield the greatest value. It also identifies expedient paths for getting there. For those who might doubt how important that path is, think about going to see your neighbor to the east via a westerly route. It simply makes no sense. Many projects fail not because the end state has been mistakenly defined, but because the path mapped out to get there is wrong.

VRM is a collection of techniques and tools utilized to diagnose the health condition and growth opportunities of a business. Consider your business a patient and VRM as a set of medical practitioners. Some businesses are sick, meaning they are losing money, market share or customer loyalty. Some are average; they may be getting by, but not as well as the best-in-class firm in their industry segment. Some are at or near best-in-class, but still desire to improve further.

Family physicians see all types of patients. It is their job to first learn why the patient is there. For a sick patient, the goal is for the patient to return to a state of normal health. For the average patient, he or she may seek preventative services – to get a checkup so that early detection may prevent a potentially serious disease from becoming fatal. For the healthy person – an athlete perhaps – it might be to discuss an alternative diet that provides greater stamina. Regardless of the reason, a physician’s first job is to understand the patient’s motives for seeking the consultation: “Why are you here?”

A physician’s second job is to learn the patient’s base condition. This is accomplished with structured questions (essentially a guided interview), observations and tests. With increased understanding of the problem or motive, the doctor can begin to consider various treatments. Interview answers, observations and test results serve as the doctor’s basis for an accurate diagnosis so that an effective treatment plan can be developed. Diagnosis is critical in this respect. If a doctor misdiagnoses a patient, proper treatment cannot be delivered. The patient will not only fail to get better or reach the desired outcome, he or she may get worse, and the doctor may need to call his malpractice insurance carrier.

Like the physician in a doctor’s office, VRM enables decision makers to make informed choices on spending and benefits, compatible with a specified risk tolerance (program or project level). VRM also sponsors buy-in for transformation and sets proper expectations for returns.

VRM is deployable either alone or in conjunction with other projects and initiatives. It focuses on improving top and bottom line metrics, such as:

• Profitable sales growth
• Operating income
• Cash flow from operations
• Cost of Goods Sold (COGS)
• Productivity and efficiency
• Indirect and overhead cost
• Working capital
• Inventory and carrying costs
• Accounts Receivable
• Earnings Per Share (EPS)
• Other metrics unique to a company’s Balanced Score Card

VRM Deliverables

For most people, VRM is easiest to learn by simply getting familiar with its deliverables. The exact number of deliverables from a VRM project varies, but the minimum is seven for a standalone project and ten when VRM operates with other initiatives (e.g., Lean, Six Sigma, ERP blueprinting, etc.). For every VRM project, the actual number of deliverables is specifically spelled out in a Statement of Work (SOW). A selection of seven common VRM deliverables is discussed below.

Project Kickoff Materials

At the outset of a project, making your people aware of the changes to be made and obtaining their input is critical to success. Typically, there are four main documents circulated prior to making any change:

• Sponsor Letter: for client sponsor to inform and engage client team.
• Survey Questionnaires: questionnaires for participating regional offices, departments, plants, etc. These involve questions of a functional and financial nature to learn about current processes and performance.
• Shelf Data Request: a solicitation for materials that may already exist within the company, thus reducing the time involved in learning critical elements of strategy, issues, architecture(s), etc.
• Kickoff Presentation: a standard presentation that can be modified for specific client engagements.

An example cover letter that introduces the project and the information packet is included as Figure 4.1.

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