In literature, one can find numerous sets of tools for assessing business value. The vast majority of them regard an analysis of tangible values, although they constitute less than 50% of the total sum of business value created in projects^[1]. The multitude of tools assessing only tangible value is the result of a relatively short time since intangible values began to be included in the assessment of business value. In addition, the quantification of the above assets presents significantly more formal problems, which also contributes to a limited number of ways to evaluate them.

 

Evaluation of tangible values

The assessment of tangible values is mainly focused on an analysis of financial flows, although there are also instruments in this group which qualify other material benefits. The most commonly used tools for assessing tangible values include:

• profitability indicators,
• payback period,
• net present value (NPV)
• internal rate of return,
• lifetime value.

Brief characteristic of the above assessment methods is presented later in this work. Profitability indicators “express the relation of profit calculated at various levels of business activity to achieved sales revenue or incurred costs (expenditure)^[2]“. Profitability indicators include:

• net profit margin,
• return on assets,
• return on investments,
• return on equity.

Profitability indicators are characterised by certain theoretical assumptions. These are as follows:

• specific length of the investment’s economic lifecycle,
• expected size and distribution over time of net benefits throughout the entire economic lifecycle,
• typical distribution over time of net cash flows,
• investment expenses irreversibly incurred (lack of flexibility),
• alternative to investment implementation limited to one, i.e. investment on the capital market,
• flat shape of the profitability curve throughout the entire investment lifecycle,
• positive net cash flow reinvested with a reinvestment rate equal to the discount rate,
• accumulation of net benefits used as a measure of cost-effectiveness of the method used in the algorithm^[3].

The first of the discussed profitability indicators also assess the profitability of sales and is calculated as follows:

   

Formula 1.1. Net profit margin

Source: M. Wypych, A. Bury, 2000, Enterprise finance with elements of management and analysis, ‘Absolwent’ Specialised Enterprise, Łódź p. 218.

The amount of this indicator is proportional to sales efficiency. The return on assets ratio is the ratio of net profit to total assets and it shows the ability of assets to generate profit. It is expressed by the following formula:

   

Formula 1.2. Return on assets

Source: M. Wypych, A. Bury, 2000, Enterprise finance with elements of management and analysis, ‘Absolwent’ Specialised Enterprise, Łódź, p. 218.

The higher the indicator, the higher the profitability of an enterprise. The return on investment ratio, like the return on assets ratio, is the ratio of net profit to investment outlays. In a situation where total assets are capital expenditure, the return on assets ratio is replaced by the return on investment rate. It is often used when referring to research and development projects, which are a form of investment for enterprises. It is calculated as follows:

   

Formula 1.3. Return on investment indicator

Source: M. Wypych, A. Bury, 2000 Enterprise finance with elements of management and analysis, ‘Absolwent’ Specialised Enterprise   Łódź p. 219.

The return on equity ratio is calculated according to the following formula:

   

Formula 1.4. Return on equity (ROE) indicator

Source: M. Wypych, A. Bury, 2000, Enterprise finance with elements of management and analysis, ‘Absolwent’ Specialised Enterprise, Łódź p. 219.

The high value of this indicator is an impulse for investors, as it creates the possibility of achieving a higher dividend as well as further development of the enterprise^[4].

Another indicator of tangible values is the payback period. The theoretical assumption of this tool is to determine the time after which investment inflows will fully cover the investment expenditure. Return on investment occurs when accumulated net cash flows become positive. The following formula can be used to calculate the payback period:

   

where:
t = 0 to m – subsequent periods of the economic lifecycle of investment in which capital expenditure is incurred,
t = m+1 – subsequent periods of the economic lifecycle of the investment in which positive net benefits are obtained; they are to cover the investment outlays incurred for the investment,
OZ – Return period,
I – capital expenditure,
KN – net benefits.

Formula 1.5. Payback period

Source: W. Rogowski, 2013 Investment effectiveness account. Challenges of theory and needs of practice, Wolters Kluwer Poland, Warsaw, p. 242.

The net present value is the sum of the discounted net cash flows over the entire lifecycle of the investment. The theoretical assumptions for this indicator coincide with profitability indicators. The net present value is calculated according to the following formula:

   

where:
NCF_t – net cash flow in the t period,
r – discount rate,
t – time index
n – number of years of investment duration.

Formula 1.6. Net present value

Source: W. Rogowski, 2013 Investment effectiveness account. Challenges of theory and needs of practice, Wolters Kluwer Poland, Warsaw, p. 242.

The net present value of the project is therefore the present value of the anticipative cash flow generated in the project, less the current value of the cash flow absorbed by the project^[5]. If the company’s goal is to create value for stakeholders, then the value of each project undertaken must exceed the project costs.

Internal rate of return is the value of the discount rate at which the net present value is zero. The calculation formula therefore has the following form:

   

where:
CF_t – cash flow in a year t.
IRR – internal rate of return,
n – duration of the investment.

Formula1.7. Straight-line method

Source: FK Crundwell, 2008, Finance for Engineers. Evaluation and Funding of Capital Projects, Springer, Berlin, p. 174

This method of measuring value is based on the following assumptions:

• equal discount rates throughout the investment period and
• reinvestment of positive net cash flows until the end of the economic duration of the investment at a reinvestment rate equal to the internal rate of return^[6].

Many economists question the benefits of using an internal rate of return to evaluate cost-effectiveness because for typical investments the value of this method will be equal to the value achieved using net present value. It cannot be used directly for non-typical investments^[7]. A typical investment is understood as one in which the cash flow changes the sign once from negative to positive.

The customer lifetime value (CLV), as a method of assessing value, is defined by various authors less uniformly than the above-mentioned indicators. Berger and Nasar describe it as the difference in the value of the company’s revenues generated by the customer and the cost of its acquisition, service and sales costs^[8].  Therefore, the analysis includes past and present in which the benefits and losses resulting from cooperation with a given customer were noted. Doligalski, in turn, includes in his CLV definition future financial benefits, specifying the customer lifetime value as the present value expressed in monetary values of future net benefits resulting from the relationship with the customer. This definition is described by formula 1.8:

   

where:
NCF – net cash flow,
i – discount rate.

Formula 1.8. Net customer lifetime value

Source: T. Doligalski, 2013 Internet in customer value management, Warsaw School of Economics. Publishing Office, Warsaw, p. 241.

Equation 1.8 takes into account only the benefits of cooperation with the customer, excluding the cost of acquiring, servicing and maintaining the customer. Both definitions do not seem to fully define the customer lifetime value but constitute a complementary whole.

The lack of unambiguous literature sources in defining the customer lifetime value may result from problems with estimating costs associated with cooperation with the customer. Therefore, some authors omit them in their definitions, while others, in turn, include various financial aspects of this interaction. This image shows the scale of customer value assessment problems.

 

Evaluation of intangible values

A set of tools used for evaluation of intangible values is significantly more modest compared to the tools for assessing tangible values, although reducing the assessment of business value to tangible and especially financial benefits is often impossible or burdened with big error risk. Values may appear in the distant future. This is particularly important for research and development projects, the results of which are often intangible values. In addition, ex-ante assessment of the tangible values of a project may have low precision. Therefore, and due to the fact that intangible values account for 68% of the total value created^[9], their assessment is of particular importance.

The advantage of intangible values over tangible values is also visible in the valuations of the market value of enterprises. In 2015, the market value of S&P 500 companies showed a significant advantage in measuring intangible values over tangible values. As shown in Fig. 1. this ratio has been constantly increasing since the beginning of the measurement.

Fig. 1 S&P 500 market value components

Source: Chartered Institute of Management Accountants, 2015, The Digital Finance Imperative. Measure and Manage What Matters Next, www.cgma.org, access 29 July 2016, p. 6

The following tools can be used for measuring intangible values:

• customer relationship management (CRM) tools,
• American Customer Satisfaction Index (ACSI).

In customer relationship management, the human factor, as well as processes and technology, play a significant role. They are components of an interdisciplinary, customer-oriented tool integrating a process management strategy that maximizes customer relations while covering the entire enterprise^[10]. Through the departments of marketing, purchasing, customer relations, human resource management, accounting and research and development, as well as IT, CRM aims to maximise the profitability of customer interaction. In turn, CRM provides customers with better adaptation to them through deeper knowledge and understanding of their needs. In addition, it facilitates transactions and increases their convenience. Therefore, customer relationship management brings mutual benefits to business partners, not necessarily tangible, although also visible in the long term in financial terms^[11].

Measuring value using the American Customer Satisfaction Index involves subjective evaluation of the quality of goods and services that are purchased in the United States of America by individual consumers^[12]. It is used to assess consumer satisfaction with the purchased products. It was created on the basis of the Swedish Customer Loyalty Barometer (SCLB) and then expanded with additional areas of assessment, such as customer expectations, customer satisfaction and loyalty, complaints and claims. The areas covered by the ACSI study are presented in Fig. 2.

Fig. 2 ASCI study model

Source: C. Fornell, M. Johnson, E. Anderson, J. Cha, B. Bryant, 1996, The American Customer Satisfaction Index. Nature, Purpose, and Findings, Cornell University School of Hotel Administration, http://scholarship.sha.cornell.edu/cgi/viewcontent.cgi?article=1427&context=articles, accessed on 5 august 2016, p. 8.

The following variables are subjected to evaluation in particular areas:

Customer pre-purchase expectations:

• the level of total expectations regarding the quality of products and/or services,
• the level of matching products and/or services to the needs and priorities of customers,
• level of reliability and effectiveness of a given product and/or service. 

Perceived quality (after purchase):

• total quality assessment of given products and/or services,
• evaluation of the level of matching products and/or services to the needs and priorities of customers,
• evaluation of the level of reliability and effectiveness of a given product and/or service (how often something happens not the way the customers wish it to happen).

Perceived value:

• assessment of the quality level in relation to a given price,
• assessment of the price level in relation to a given quality.

Customer satisfaction:

• total level of satisfaction,
• the difference between the expected and actual state (it can be both positive and negative),
• actual state obtained in relation to “ideal” products and/or services perceived by customers in a given category.

Customers’ complaints:

• frequency of complaints and their nature.

Customer loyalty:

• the scale of the phenomenon of re-purchases of products and/or services of given brands,
• price flexibility (examined in two ways: as a change in the level of demand as a result of a change in price by a percentage point and the level of price change in percentage points, which causes a change in the phenomenon of re-purchases by one percentage point)^[13].

Despite ACSI being a tool for assessing intangible values, it can be used to make conclusions regarding changes in financial values as well. As shown in Fig. 3, enterprises distinguished by a high level of the American Customer Satisfaction Index report above-average financial results in comparison with companies that have a low level of this index.

Fig. 3 Average market added values achieved by companies with high and low ACSI index results obtained in 1994–2007

Source: Ł. Skowron, 2011, Customer satisfaction and loyalty as a source of competitive advantage, Scientific Journal of the Poznań University of Economics, no. 170, pp. 258-268, http://totaleffect.pl/publikacje/03.pdf, accessed on 6 August 2016, p. 6.

The analysis of intangible value correlation measured by CRM and ASCI along with tangible values continues to show that investments into intangible values always result in increased company revenues. Investments in tangible values do not necessarily lead to an increase in intangible values, in particular to customer satisfaction, which seems to be an important determinant of a company’s success over the longer period^[14]. H. Kerzner also points to the growing importance of intangible values, mentioning that intangible values are now considered more important than tangible values^[15].

 

Comprehensive value assessment

Project assessment using separate tools to evaluate tangible and intangible values is neither simple nor rational. There is a risk that certain project products will be included in the assessment twice. This situation, in turn, can distort the image of reality, leading to false conclusions. For this reason, the use of tools enabling assessment of both tangible and intangible values would be a significantly better solution. Their numbers, however, do not leave much choice. Universal tools that allow the evaluation of the value created in the project are an even smaller group and those that are in it have been developed in the last century.

One of the tools with plenty of applications, regardless of the industry, are key performance indicators (KPI). They focus on those aspects of business efficiency that are most critical to the company’s current and future success^[16]. KPI focuses on future results as opposed to other indicators that focus on completed work packages and milestones achieved.  The metrics therefore provide information about past events, and KPIs use this information to evaluate future events. KPIs serve as an early warning sign of poor results and are an important component of Earned Value Management (EVM) systems. Therefore, when the KPI goals are achieved, the value of the project increases^[17].

For a given indicator to become a key performance indicator, it must be:

• predictive: KPI is able to predict the future trend,
• measurable: KPIs should be countable,
• challengeable: KPI triggers changes that may be necessary to take corrective action,
• significant: KPI is directly linked to the success or failure of the project,
• automated: such reporting reduces the risk of human error,
• in a small number: between 6 and 10[18].

Determination of metrics in a project that meets the above conditions is not a very complicated task. However, the selection of those that will comprehensively monitor the state of tangible and intangible business values seems far more difficult. This is even more of a challenge because all KPIs must be thoroughly understood by the project stakeholders. Otherwise, incorrect data may be collected and measured, and the information carried by these meters may be misinterpreted, which may result in erroneous actions.

An important feature of key performance indicators is the uncertainty of their measurement, as the goal is to predict future events, as opposed to other metrics that assess the status of a given feature on a post factum^[19] basis. KPI measurement methods include:

• observations,
• simulations,
• statistical analyses,
• decision models,
• sampling methods,
• decomposition techniques,
• judgments^[20].

Due to the aforementioned lack of measurement precision, it is extremely important to define the boundary thresholds for those KPIs that have this feature. They should reflect how much the measure is above or below the set limit. One way of doing this is to use ranges of a given feature that determine the percentage or descriptive deviation from the assumed level of the selected indicator. When analysing the data thus prepared, it is more important to observe the changing trend of a given KPI than its value alone. When the trend becomes unfavourable, corrective action may be taken. Its type and scope may in turn result from the analysis of non-key performance indicators based on assessments of given characteristics from the past.

Project evaluation using KPIs can apply to both tangible and intangible goods. It also leaves room for choosing the right KPIs. The effect of using this tool therefore largely depends on whether the key efficiency factors have been selected and whether they cover all areas of value creation in the project.

 

^{[1] Hand J.R.M., Lev B., 2003, Intangible assets. Values, Measures, and Risks, Oxford University Press, Oxford, pp 19-47}

^[2] M. Wypych, A. Bury, 2000, Enterprise finance with elements of management and analysis, ‘Absolwent’ Specialised Enterprise, Łódź p. 217.

^[3] W. Rogowski, 2013, Investment effectiveness account. Challenges of theory and needs of practice, Wolters Kluwer Poland, Warsaw, pp. 262-263.

^[4] M. Wypych, A. Bury, 2000, cited issue, p. 220.

^[5] F.K. Crundwell, 2008, Finance for Engineers. Evaluation and Funding of Capital Projects, Springer, Berlin, p.169.

^[6] W. Rogowski, 2013, cited issue, p. 368.

^[7] F.K. Crundwell, 2008, cited issue, p. 380.

^[8] P.D. Berger, N.I. Nasr, 1998, Customer lifetime value. Marketing models and applications, Journal of Interactive Marketing, vol. 12, pp. 18-19.

^[9] Chartered Global Management Accountant, 2012, Rebooting Business: Valuing the Human Dimension, American Institute of CPAs, www.cgma.org, 23 July 2016, p. 5.

^[10] I. Chen, K. Popovich, 2003, Understanding Customer Relationship Management. People, Process and Technology, Business Process Management Journal, vol. 9, No. 5, p. 672.

^[11] Z. Soltani, N. Navimipour, 2016, Review customer relationship management mechanisms. A systematic review of the state of the art literature and recommendations for future research, Computers in Human Behavior, No. 61, p. 667-688.

^[12] A. Pukas, 2015, Customer Satisfaction Indexes. Key features and use in retail trade, Marketing and Market, No. 8, p. 551.

^[13] Ł. Skowron, 2011, Customer satisfaction and loyalty as a source of competitive advantage, Scientific Journal of the Poznań University of Economics, no. 170, pp. 258-268, http://totaleffect.pl/publikacje/03.pdf, 6 August 2016, p. 5.

^[14] Chartered Global Management Accountant, 2012, cited issue, p. 2.

^[15] H. Kerzner, 2013, Project Management. A Systems Approach to Planning, Scheduling, and Controlling, Wiley, Hoboken, p. 810.

[16] D. Parmenter, 2010, Key Performance Indicators. Developing, Implementing, and Using Winning KPIs, Wiley, Hoboken, p. 4.

^[17] H. Kerzner, 2013, Project Management Metrics…, cited issue, p. 118.

^[18] Therein, pp. 124, 128.

^[19] Therein, p. 140.

[20] Therein, p. 140.