Monday, March 11, 2013 1:24 PM
View other posts by Tim Klahs
Your organization has a lot of moving parts. Your team is always looking for new opportunities and investments that make economic sense. You are driven to create additional value as an important part of this dynamic enterprise.
And to bring your best game, you want to be fairly rewarded for delivering that value. In many organizations, the concept of Economic Value Added™ (EVA) plays an important role in evaluating employee and managerial performance. You have assets to work with, and your financial results are charged with an average cost of capital for use of those assets. The net result is considered to be your EVA. As long as you’re a good performer in a division with an average line of business taking on an average amount of risk with average funding needs, you’re probably all right with this backdrop for your organization. But what if you realize there is no average setting, no average day, and no average set of opportunities? Suppose, in a certain division, a venture much riskier than the organization’s existing line of business is proposed and accepted. The project meets with success but is only charged with a cost of capital that reflects the organization’s historical average. Do you want to be underwriting that risk with lost incentive compensation? What is the message that sends to the rest of your organization?
You need to understand that EVA is an evaluation tool that must be used at the margin, that is, for what is about to occur, not what has occurred. The question is, what is this particular project or business costing your organization in capital, not what has been the average cost of our previous endeavors?
This course will enable you, as part of a flexible and adaptable organization, to understand how EVA can be used productively. You will see the advantages of creating an environment that accepts the heterogeneity of the different levels of risk that exist across businesses, divisions, and investments within an enterprise. You will be able to apply the concepts of using marginal capital cost in the EVA framework for making decisions and evaluations. This course will also give you the steps for developing an improved incentive structure that will incorporate risk adjusted costs to improve financial performance.
Does an EVA system that does not look at creating marginal value added really add up to the total value creation picture? Accenture Academy’s course Creating Marginal Economic Value Added (EVA) can help you learn how to use this powerful methodology more effectively by applying it in the real world of continuous risk-adjusted capital pricing.