In accounting terms Goodwill isn’t having nice thoughts towards other people. It’s what you pay for the intangible stuff. When you buy a business you don’t just pay the book value of the tools, stock and all the things you can see and touch. You also pay for the staff’s brains, the brand, the established customer base, the intangibles.
Individually they’re unquantifiable, priceless. Mrs Jones is indispensable and everyone loves the company logo. Together, you know exactly what they are worth because you’ve just paid it.
So why don’t we do this in our business cases? It would give us a consistent way to benchmark programmes and work to a common hurdle rate or value for money ratio. It might save a lot of grief and gaming around the enabling and infrastructure programmes where the direct identified benefits are less than the costs. It might also cull a few pet projects where saying we don’t need to count anything hides the fact that there is nothing to count.
Usually, we garner the benefits for a typical public sector business case in the following order:
• Cash-releasing, the hard savings that we can tick off against the costs
• Non-cash, the efficiency and productivity gains described in money terms, not quite as good as real money though
• Public, the stuff outside our budget. “Do it online – save a bus fare!” again in money terms
• Quality, just possibly the big strategic reason to do the project in the first place. Health and happiness, that sort of thing
I dare say the private sector cases aren’t much different.
All those quality benefits sitting in a table at the back of the business case. We can’t possibly price them but they must be big because they’ve a weighted score of 852/1000, whatever that means.
We know what the programme has to deliver in RoI or VfM to meet the hurdle rate target it has been set. We have quantified the tangible benefits (cash, non-cash, public). So, the shortfall is the price of our intangible quality benefits. That’s the goodwill, the overall value we put on all the hard to measure stuff to justify our investment.
Once the quality benefits have been costed like this, we have a way to benchmark our programmes. We can set a common hurdle rate. We don’t need different rules where the mundane stuff must make a profit but the innovation doesn’t have to break even. Instead, we can see how crucial the quality benefits are to each programme. How big is the goodwill relative to the quantified benefits and the costs? Is it a figure we can live with? Are we comfortable that our quality benefits will be sufficient to justify it?
So, what gets in the way? Goodwill is the programme’s willingness to pay. To find it, you get the relevant people together and ask, “How much would you pay for X?” It’s open to anchoring, group-think and a host of other errors and abuses but it’s not alone in this. The programme cost estimates will be going through exactly the same set of biases. In this case we’re not asking, “How much would you pay?” but, “Would you pay this much?”. A much more closed and leading question.
The accuracy and consistency of the price will vary widely over time and between situations and individual opinions. The market we work in isn’t perfect. The analogy here is more the Stock Market than the Supermarket. With stocks and shares things are much more fluid and the prices are nowhere near as stable. So long as we treat our intangibles more like shares than cereal there’s no reason why we can’t put a price to them though.
I suspect that what will really get in the way is its transparency. It opens up judgement calls to scrutiny, which is not the greatest motivator.
Does anybody want to give it a try?