Traditional costing allows to classify and cost activities that adds value against all other, but doesn’t allows to know the true value added by an activity or resource, sometimes leading to misinterpretations or incorrect decisions. If the costs of the activities your IT department that actually adds value increases 10% in the last 6 months, is this something good or bad? That depends on the impact of that gain on the value added for the company.
Knowledge Value Added (KVA) is a methodology facilitated by
GaussProfit that allows any organization to calculate the economic performance at the sub-corporate level by providing an objective way to allocate revenue to core processes within the organization. The principle is that value is proportional to the knowledge required to produce the outputs of each process. If we use a knowledge framework to describe all outputs in common units, we can allocate value (revenue) to each process based on the number of common units produced. This provides a price per unit of output metric that can be used to compare across company outputs as well as a benchmark comparison across a given commercial sector.
On the other hand, using costing techniques, we can also calculate cost per unit of output for each process. Allocating revenues and cost per process, we can estimate the profitability of all core processes, functional areas within the company. This new source of raw economic data allows the use of all other common financial analyses at the sub-corporate level. We can also include new ones such as Return on Knowledge (ROK), return on knowledge assets (ROKA), return on investment (ROKI) and return on IT investment (ROI on IT).
Using GaussSoft software, in the following picture you can see a profitability model created with KVA for the Mission Support Center (MSC) process of the Special Forces for the Iraqi Freedom operation. In the first level, we place the resources (Commander, Officers, Analysts, and IT). In the second level, we have the processes (Receipt of mission, Recommended course of action). Resources have knowledge that is used to produce the process outputs. Each output has been produced by the “knowledge in use (in the employees and IT)”, that has a value calculated using KVA
This is a model with a defined array of inputs: Cost of people, revenues, resources; and a predetermined set of Outputs (Missions, Profits, Returns), used to make strategic, tactical and operational decisions in any organization. Such a model can include historic KVA data taken from the commercial sector. This data source provides the comparable benchmark price per unit of output derived from KVA data gathered from for-profit organizations. This permits the monetization of revenue for non-profit outputs based on data gathered from comparable commercial sectors.
With this information you can do analysis such as discounted cash flows, risk and uncertainty estimates allowing the use of complimentary methodologies such as Real Options. Gauss’s results can be used to create multiple scenarios, pivotal results, alternative comparisons, and projections.
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