Updated: Jul 15, 2021
We all know the definition of enterprise value. It's the market cap + cash reserves - debt. It is always something that people keep discussing in a boardroom. But what about the enterprise strategic value (ESV)? Can we put a number to it? Do we know where we stand? This metric actually will be a deciding factor of the organisations longevity.
ESV is a function of 5 things. Lets see what they are in an IT/ITES organisation -
As an organization, you should strive to increase the value of the first two and reduce the last 3. Now let’s take a close look at what each of these means in the services world.
Pricing power in the service industry would be the premium customer is willing to pay for you compared to the competition. Geography plays a very important role along with various other things like target segment and branding. In a cluttered market our pricing power may not be as high as in the market where competition is less. Companies like Accenture, Infosys, etc find it very difficult to get customers to pay the premium for their services in India than in the USA. Hence their pricing power is much higher in the USA and to increase the ESV it would be better to focus more on that geography.
Sales growth is the kind of business growth the company experiences — in other words, the demand of the brand. It also increases with a higher Target Addressable Market(TAM) and resources in hand(big delivery and sales team) and strategizing depending on one’s pricing segment (like premium, popular, or discount). A lot in the IT world are niche players hence their TAM would be much smaller and the growth, not a big number — but to increase the ESV the IT companies needs to cater to end-to-end products/service for a particular vertical or a domain (like cloud, security, AI, etc)
Cost is the COGS in this case. In a service industry while we always have to strive to reduce the resource cost it might have a negative impact on the actual/perceived quality of delivery. Hence a thorough analysis needs to be done while benchmarking with the industry leader.
Too much reduction of Infrastructure cost(hardware, software, services from OEM, etc) might not increase the ESV. Finding the optimal spend and using something like the TPM practice in the manufacturing world to find the best utilization is what will help the most.
“Having effective selection of top leaderships and building a superior team with the right deployment of people will drastically reduce the manpower cost.”
Risks here are a combination of various risks that the organization faces which need to be mitigated as much as possible. Be it a risk when the organization enters a new market or launches a new product or the risk if the organization isn’t innovating with the changes in the market — all three have to be reduced. This is one of the most crucial tasks of the organization. Each of these has its own set of risks and a thorough plan needs to be made with contingencies.
Time here is not only the time to market an idea but also the time taken to implement the enterprise objectives and plans. This is the single most important factor as all achievements in the business world are w.r.t time. We have all seen the first-mover advantages and that same swiftness needs to be carried on in every aspect of the organization to truly increase the strategic value of the enterprise.