Point Estimates of Value: Accenture's 'Latest' Concept

A few weeks ago, in the Wall Street Journal's weekend edition of October 27-28, an article in their special section associated with MIT, entitled, "The Future Is Now," appeared.

The piece is the fruit of work by the Accenture Institute for High Performance Business. Essentially, it retraces valuation work done over a decade ago by allocating the current value of a company between current financials, and all else, which, according to the authors, must be 'future value.'

My own research, which, ironically, had some of its early roots at Andersen Consulting, Accenture's predecessor, has demonstrated the lack of validity that any point-estimate approach to valuation has for strategic or long-term investment applications.

Back in the mid-1990s, I led research in the financial services practice of Andersen Consulting which addressed the question of linking strategy, performance, and valuation for our client companies. My work was sufficiently advanced to become a funded worldwide industry program for our segment, with marketing support to implement it with clients.

Then, in 1995, Andersen reorganized its major axis of management from industry to geography. The new head of our practice was a partner from Texas, who eschewed any type of intellectual property-related work, in favor of raw IT-style consulting. It was then that my managing partner, who remains a senior executive at Accenture even today, and I agreed that my ability to pursue my work at Andersen had reached an end. Shortly thereafter, I became the first director of research for then-independent Oliver, Wyman & Company. At that time, OWC was a financial services consulting boutique, spun out of Booz, Allen Hamilton.

I continued to develop my ideas and research at OWC, and thereafter. Upon completing extensive research on both financial services and the S&P500 companies, I contacted my former managing partner at Andersen to ascertain the firm's interest in my work.

As it happened, they were attempting to do something conceptually similar, though far more primitive. Further, they were, as usual, trying to do it using spare time from idle junior staffers, managers and a consulting partner.

Even back then, in the late 1990s, I had realized the importance of measuring corporate performance through time. As I stressed in my presentations for the consulting application of my work, point-in-time valuation methods had a number of serious flaws. For one, they had no normative prescriptive component. With just a single number, or a few numbers which deconstructed a single time value number, nothing could be said of the result with any confidence.

Second, a snapshot made any subsequent analysis victim to a particular point in time which might not be representative of the recent past, or imminent future, of the company's market performance, either technically or fundamentally.

For instance, the Journal piece describes the Accenture approach thusly:

The Objective: Executives who are managing with the goal of increasing shareholder value need to be able to analyze their company's future value -- the portion of the share price that isn't based on the earnings from current operations or products.

The Process: A relatively simple mathematical formula can be used to determine how much of a company's share price is based on current value and how much on future value. Those proportions can then be compared with those of competitors and can be monitored for signs of changes in how the stock market is evaluating the company's prospects.

The Payoff: A clear picture of both the current and future components of a company's share price can give executives a better sense of whether they have struck the appropriate balance between short-term and long-term goals.

If the method involved looking at total returns through time, I'd say it might be more valuable. As it is, Accenture's old-style approach of capitalizing income streams and assigning values to debt and equity is needlessly complex and, to some extent, indefensible. It is quite similar to Stern Stewart's outdated 'EVA-MVA' approach, which suffers from similar point-in-time measurement weaknesses.

I don't believe a management "need(s) to be able to analyze their company's future value -- the portion of the share price that isn't based on the earnings from current operations or products."

Rather, it is simpler for a company to simply measure its total return, relative to the S&P500, in step with its fundamental performance over time. It is the change in value of the company, or the total return to shareholders, that matters, not the value of the assets, per se.

My own work along this line, for consulting applications, has resulted in much simpler, but more powerful diagnostics of corporate performance. Benchmarks have been developed, irrespective of industry or time. And they are related to the simplest, yet most important and powerful of all performance measures, total returns through time, relative to the market.

After I read this piece by the Accenture-related authors, it took me a while to understand how such an antiquated, simplistic view of valuation could result from a putatively leading consulting firm's 'institute.'

However, in discussing it with my business partner, we agreed that Accenture's work must be seen as having value to its clients. And clients who look to Accenture, and/or its Institute, for guidance and ideas, are bereft of their own.

In short, Accenture can't really serve up the very latest, leading edge valuation concepts to managements that are, typically, mediocre. If the managements were better, they'd be able to realize that methods like the ones described in this article were dated, rather ineffective, and have dubious value in application for strategy.

Rather, what Accenture has to sell is what middling managements will buy. And that won't be something normative.

In fact, this article, and its relationship to my own work, takes me back to a conversation I had at the end of my second involvement with Andersen Consulting, circa 1997.

The Financial Services Global executive for Strategy, Mike May, had originally seen, and become interested in, the work I presented to my former MD, Steve Racioppo. Mike had put me in touch with his Chicago practice partner who was heading their internal effort. That partner expressed relief that he would soon be able to hand off the effort to me, get back to consulting, and stop trying to solve the problem I already had, with a team of underpowered junior consultants.

At one point, May even solicited my interest in licensing my approach to Andersen on a global basis, for his segment.

Then a curious thing occurred. A few months later, May, his lieutenant, and I had a breakfast meeting in New York. While his junior partner silently sat and watched, May reversed his stand and told me he was no longer interested in my work.

He stressed that, at the time, in the late 1990s, strategy consulting in the financial services segment was growing 'faster than we can staff it.' Andersen had projects in backlog so far they were evidently worried about being able to staff everything they had sold.

In that environment, May told me, my technique had become an unnecessary minor item. A product whose revenues would be lost in the rounding error of his major strategy engagements, and whose door-opening value was not needed at that time. Products, May told me, were of little actual value to him anymore. Their return was too small in his current situation of mega-strategy projects for large financial services clients.

In conclusion, May told me something which, in hindsight, was a gift, although it took me a few days to realize it. He said, in effect, to paraphrase his words,

'This is an excellent tool for measuring valuation and return. It's without question the best I have seen. It will enable us to assure a client that the recommendations we have for them are, in fact, going to improve their performance, and are the best recommendations.

However, we have so much work we don't need it. Furthermore, our clients don't really care whether we can prove to them that our advice is right. They'll hire us and listen to our conclusions, whether we know those conclusions are going to improve the client's total returns, or not.

So I really don't need your technique to prove that our advice is the best thing for our client. They'll do it anyway, just because we say so.'

And that is one reason why I abandoned consulting applications of my research soon after, to focus on equity management.

When the largest consultants in the business- Andersen/Accenture, McKinsey, Mercer/OWC- didn't worry about demonstrating the actual value creation of their work, it was obvious my approach, which focused exclusively on improving a client's total returns over time, would never be competitive.

As I reflect on my equity strategy work, which is the other, non-consulting application of my research over the past 20+ years, I realize that Mike May did me a big favor. Had I licensed my work to Andersen/Accenture, I'd probably have spent years in a far less satisfying type of work than applying my research to equity management.

So, reading about Accenture's latest valuation concepts in the Journal last month brought a smile to my face. The technique they espoused isn't even close to being as powerful as what Andersen, and I, were working on over a decade ago. But, then again, I believe what the Accenture Institute folks are doing will be well-received by middling managers of struggling companies the world over. It won't tax their minds too much, and it dispenses with any promise of actually improving anything.

It's a perfect tool for a large consulting firm.