“Shareholder value” is defined as the value of the shares of an enterprise. It is more than simply shareholder equity on the balance sheet, since it includes non-financial assets such as brand value, customer goodwill, the recurring nature of revenue streams, the efficiency of processes that generate revenues and other non-financial components.
How Do We Create Shareholder Value?
Creating value for one’s shareholders is the hallmark of capitalist society. It starts with creating value for one’s customers, who pay for the enterprise’s operations.
Profitability Measured by Customer
Fundamentally, enterprises must shift from a focus on the profitability of their overall product and service lines to measuring their profitability on a customer-by-customer basis. This allows pricing of goods and services based on actual fully-allocated costs. Cost-based pricing also promotes greater visibility into the decision whether to provide services to individual customers and certainly addresses the financial drag of bad customer accounts.
Profitability Measured over Lifetime of the Customer Relationship
Further, measuring the value of a customer relationship over the life cycle of the customer relationship helps an enterprise create and retain shareholder value. Customer acquisition costs generally are high, so that loss of a customer should result in an assessment of root causes. Where the root cause involves overcharging, non-competitive pricing, poor service or other complaints, the enterprise should review the business processes involved in servicing that customer. The review may result in a business process transformation with new methods of service delivery that could include insourcing, outsourcing, captives or shared services.
Profitability as ROI
Income statements reflect transactions, including the sources and uses of funds. Assets on the balance sheet reflect the value of those expenses. On a customer-by-customer basis, activity-based costing (under modern principles of cost accounting) can identify whether assets invested for an individual customer or customer class are generating revenues that meet the enterprise’s hurdle rates for investment of its own capital. Sourcing strategy takes such ROI considerations into account in resolving the Sourcing Dilemma.
Improving Resource Utilization
In view of the capital costs of owning the means of producing a service, sourcing strategy needs to develop tools for improving resource utilization. Outsourcers that have automated business processes can provide a service more cheaply than an enterprise that does it the “old fashioned way.” Once the enterprise identifies resource utilization as a goal, it can optimize the utilization through technology investments and human capital investments. By comparing the ROI on such investments against the costs and risks of outsourcing, an enterprise can define the financial expectations necessary for a cost-effective outsourcing. If the service provider can improve resource utilization more efficiently or at lower cost than the enterprise does, then outsourcing would be a solution, in the absence of specialized considerations such as intellectual property and risk management.
Profitability of the Customer’s Supply Chain
Service providers need to understand that the enterprise customer only cares about the profitability of its entire supply chain and integrated service delivery processes for its own customers. The service provider will add value to its own shareholders by helping the enterprise customer add value to its shareholders. Metrics of “customer satisfaction” and even “customer profitability” are fair game for discussion in contract negotiations relating to service levels and pricing.
How Do We Account for “Shareholder Value”?
Adding value to the shareholders therefore requires an analysis of each business function that the enterprise performs, or has performed by others. As a matter of cost management, cost accounting and process design have evolved to the point where each individual business function is measured and accounted for separately.
In designing service level agreements and allocation a scope of work to a service provider, the enterprise customer thus needs to identify parameters of performance that generate shareholder value for itself and its customers.
What Do We Tell the Shareholders about Sourcing Strategy?
As a matter of disclosure to shareholders how their value is being increased, the securities laws care only that there is a sufficient disclosure of material risks and other factors that figure into the decision whether to buy, sell or hold the shares.
Legal Careers
Among the most senior attorneys, few outsourcing lawyers started in outsourcing. However, today, outsourcing law has begun to attract young attorneys eager to learn the skills of this niche in the law.
A legal career in outsourcing might achieve the best equilibrium by concentrating on outsourcing after acquiring extensive knowledge of related legal disciplines. The skilled outsourcing lawyer assembles those disciplines and applies them for the protection of the client’s interests. In doing so, the lawyer should understand clearly how the client views certain legal issues.
A career in outsourcing law also requires an ongoing integration of the laws of multiple jurisdictions. International business law permeates the outsourcing environment.