Ted Hull Consulting FYI

Two Sides of the Value Coin

February 12th, 2016

One of the common challenges for a board using Policy Governance®[1] is determining the at what cost component in developing an Ends policy. A board will land on what the intended results are and who are the intended recipients of those results; but nailing down that third cost/worth part seems to be illusive.

Cost and worth are two sides of the same value coin. But like a coin it’s virtually impossible to see both sides at the same time. So let’s take the value coin and look at the worth side.

Imagine you are living in a condo where at a recent condo meeting the idea has been floated (no pun intended) of installing a basic outdoor swimming pool. Obviously if this goes forward there will be an increase to your condo fees. Typically the first question you will pose is what the additional monthly condo costs will be. But we aren’t looking at cost, but rather at worth. So I want you to ask yourself, what’s it worth to me to have an outdoor swimming pool in my condo complex. Some of the factors in determining what it’s worth to you include how much you or family members or guests, such as grandchildren enjoy swimming. You want to think about how many months of the year you can use it, keeping in mind that you will be paying an additional fee every month whether or not you use it. How far will it be from your condo unit?

Now I want you to write down a dollar amount that reflects what it would be worth to you, or at least lock that number in your mind.

Notice that we haven’t begun to look at cost. What the pool will cost is irrelevant to what it’s worth to you, except to the extent to which that cost is greater, smaller or the same as the number you have identified.

The presentation of the concept of a pool has been completed, including various quotes and a cost has been identified. Now you know how much it will cost to install and maintain a pool. You discover that the cost is significantly higher than the number you wrote down. But that’s what pools cost. At the end of the meeting you vote against it.

Not long after, you receive an invitation to another pool meeting. A philanthropist has come forward. Because your condo consists of seniors or war vets, this generous person has agreed to donate an amount equal to one third of the cost of installing the pool and maintaining it for the next ten years. Now the cost of the pool is significantly lower than the market price. This is a deal! However it is still higher than that number you wrote down earlier.

The issue is not whether the price is fair, but whether the cost exceeds what the pool is worth to you[2].

When a board is considering the at what cost piece of its Ends, it is critical that it has heard from its owners to know whether the end is worth what it will cost to have it accomplished. Don’t start by asking what will it cost, but rather what is it worth.

I’m not a swimmer. I enjoy sitting by a pool and staying warm and dry, so this analogy has been somewhat coloured by my personal preference. But suppose that generous donation has pushed the cost down to an amount that is in line with what a pool would be worth to you? Now you can vote in favour of the pool.

I forgot to mention one small detail earlier, so I’ll add it in now. You know that pool that you want to have access to and can be installed and maintained at a great price? The space required for that pool is going to come at the expense of fifty visitor parking spaces. So you might want to add in the cost of losing those parking spaces. If they are valuable to you, then the worth of the pool has been inversely reduced.

So there are various considerations for a board when it looks at the value coin.

It’s important to compare the proverbial apples to apples. I serve on the board of a mission organization that is dedicated to the facilitation of church planting in those parts of the world where there are virtually no churches. I happen to know that management is spending significantly more per church planted than many other organizations. But while the results are more costly, many of the areas where the missionaries serve have a very high cost of living. To see the results achieved for recipients in those parts of the world is just plain expensive. However the owners believe it’s worthwhile because those results can’t be seen unless a huge price is paid. Like the cost of an ambulance ride, open heart surgery or a funeral, it may seem exorbitant, but considering the options, it’s worthwhile. The decision as to whether something is worth the cost is based on what we value. But it still means that given the options for each of these services, we would consider the one which will achieve the intended results while costing the least.

Like our lost parking lot spaces, a board needs to consider what results will not be realized (parking lot spaces for visitors) if other results (a pool for condo owners) are achieved. This is sometimes referred to as opportunity costs or other results foregone. If a board does this, what is it not going to do?

Every organization needs to bring value to its owners. To do so a board must first know what its owners want and how much it’s worth to achieve what they want. After that it’s relatively easy to decide whether it’s worth the cost.

 

[1] Policy Governance® is an internationally registered service mark of John Carver. Registration is only to ensure accurate description of the model rather than for financial gain. The model is available free to all with no royalties or licence fees for its use. The authoritative website for Policy Governance is www.carvergovernance.com.

[2] My assumption in using this analogy is that you aren’t looking to flip your condo or considering its resale value.



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Ted Hull Consulting FYI

Two Sides of the Value Coin

February 12th, 2016

One of the common challenges for a board using Policy Governance®[1] is determining the at what cost component in developing an Ends policy. A board will land on what the intended results are and who are the intended recipients of those results; but nailing down that third cost/worth part seems to be illusive.

Cost and worth are two sides of the same value coin. But like a coin it’s virtually impossible to see both sides at the same time. So let’s take the value coin and look at the worth side.

Imagine you are living in a condo where at a recent condo meeting the idea has been floated (no pun intended) of installing a basic outdoor swimming pool. Obviously if this goes forward there will be an increase to your condo fees. Typically the first question you will pose is what the additional monthly condo costs will be. But we aren’t looking at cost, but rather at worth. So I want you to ask yourself, what’s it worth to me to have an outdoor swimming pool in my condo complex. Some of the factors in determining what it’s worth to you include how much you or family members or guests, such as grandchildren enjoy swimming. You want to think about how many months of the year you can use it, keeping in mind that you will be paying an additional fee every month whether or not you use it. How far will it be from your condo unit?

Now I want you to write down a dollar amount that reflects what it would be worth to you, or at least lock that number in your mind.

Notice that we haven’t begun to look at cost. What the pool will cost is irrelevant to what it’s worth to you, except to the extent to which that cost is greater, smaller or the same as the number you have identified.

The presentation of the concept of a pool has been completed, including various quotes and a cost has been identified. Now you know how much it will cost to install and maintain a pool. You discover that the cost is significantly higher than the number you wrote down. But that’s what pools cost. At the end of the meeting you vote against it.

Not long after, you receive an invitation to another pool meeting. A philanthropist has come forward. Because your condo consists of seniors or war vets, this generous person has agreed to donate an amount equal to one third of the cost of installing the pool and maintaining it for the next ten years. Now the cost of the pool is significantly lower than the market price. This is a deal! However it is still higher than that number you wrote down earlier.

The issue is not whether the price is fair, but whether the cost exceeds what the pool is worth to you[2].

When a board is considering the at what cost piece of its Ends, it is critical that it has heard from its owners to know whether the end is worth what it will cost to have it accomplished. Don’t start by asking what will it cost, but rather what is it worth.

I’m not a swimmer. I enjoy sitting by a pool and staying warm and dry, so this analogy has been somewhat coloured by my personal preference. But suppose that generous donation has pushed the cost down to an amount that is in line with what a pool would be worth to you? Now you can vote in favour of the pool.

I forgot to mention one small detail earlier, so I’ll add it in now. You know that pool that you want to have access to and can be installed and maintained at a great price? The space required for that pool is going to come at the expense of fifty visitor parking spaces. So you might want to add in the cost of losing those parking spaces. If they are valuable to you, then the worth of the pool has been inversely reduced.

So there are various considerations for a board when it looks at the value coin.

It’s important to compare the proverbial apples to apples. I serve on the board of a mission organization that is dedicated to the facilitation of church planting in those parts of the world where there are virtually no churches. I happen to know that management is spending significantly more per church planted than many other organizations. But while the results are more costly, many of the areas where the missionaries serve have a very high cost of living. To see the results achieved for recipients in those parts of the world is just plain expensive. However the owners believe it’s worthwhile because those results can’t be seen unless a huge price is paid. Like the cost of an ambulance ride, open heart surgery or a funeral, it may seem exorbitant, but considering the options, it’s worthwhile. The decision as to whether something is worth the cost is based on what we value. But it still means that given the options for each of these services, we would consider the one which will achieve the intended results while costing the least.

Like our lost parking lot spaces, a board needs to consider what results will not be realized (parking lot spaces for visitors) if other results (a pool for condo owners) are achieved. This is sometimes referred to as opportunity costs or other results foregone. If a board does this, what is it not going to do?

Every organization needs to bring value to its owners. To do so a board must first know what its owners want and how much it’s worth to achieve what they want. After that it’s relatively easy to decide whether it’s worth the cost.

 

[1] Policy Governance® is an internationally registered service mark of John Carver. Registration is only to ensure accurate description of the model rather than for financial gain. The model is available free to all with no royalties or licence fees for its use. The authoritative website for Policy Governance is www.carvergovernance.com.

[2] My assumption in using this analogy is that you aren’t looking to flip your condo or considering its resale value.

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  • Why Bother Evaluating Your CEO?
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