Value Creation Index

Quantifying the link between an organization's non-financial performance and its valuation in the markets. Explanation of Value Creation Index of CGE&Y.

What is the Value Creation Index. Description

The Value Creation Index is a tool that was designed to quantify the link between an organization's non-financial performance and its valuation in the markets.

Traditional methods of assessing organizational performance are no longer adequate in today's economy. The price of a stock is less and less determined by earnings or its asset base. Value creation in today's companies is increasingly represented by the intangible drivers like innovation, people, ideas, and brand.

But these non-financial factors for creating value are difficult to quantify. Also they are rarely acknowledged in accounting methods. Finally they are not adequately measured, not adequately managed, and not adequately reported, by organizations.

The Cap Gemini Ernst & Young (CGE&Y) Center for Business Innovation (CBI) created a tool to quantify the link between an organization's non-financial performance, creating value and a firm's valuation in the markets. Their so called "Value Creation Index" not only quantifies the impact of non-financial performance on market value, but also identifies the specific intangibles that drive value for a given industry. Models have been created for a number of industries, including financial services, airlines, pharmaceuticals, telecommunications, and other sectors.

While the crucial non-financial value drivers vary for each industry, the value creation research team has settled upon some critical categories of intangible performance that determine corporate value creation.