This post explains how you can lead an intangible capital consulting engagement with your clients.
It’s also a preview of the content in our soon-to-be released course Building Smarter Companies. The course is designed for people like you: consultants and catalysts frustrated by the failure of traditional management tools to explain how their clients can be successful in the knowledge economy.
The course is based on work and workshops we’ve been doing for over a decade. I came to the study and practice of IC after a career in finance. I had founded a strategy consulting firm and was increasingly intrigued by the changes that were occurring in our economy and in the challenges facing my clients. I knew that the financials that I had learned to use earlier in my career were failing to tell the full story of the knowledge era. The more I saw, the more I learned and the more I worked to build what I was seeing into tools that helped me be a better partner for my clients. These experiences and tools are what I want to share with you.
The Smarter Companies Process (SCP)
The SCP focuses on the intangible side of business. Intangibles are more important every day. Your clients need help building, preserving and monetizing their intangibles. It’s a good business opportunity for you as well as an important mission for your firm.
This process is the result of years of consulting in my own firm and in collaboration with other consultants in the Smarter-Companies network. It's a simple but very powerful way to guide your clients to a better tomorrow--and a profitable enhancement to your consulting business.
The process is very flexible. You can do a simple version in just a few hours or do a more in-depth diagnostic in 4-6 weeks.
There are four steps in the SCP and there is a logic to the order. When I talk to people about intangible capital, the first thing they almost always go to is the issue of measurement. We address that in our course. But we also make it clear that it’s not smart to start with measurement. I’ll explain….
When you are consulting with a client, the starting point has to be their goals. What is their strategy? Where are they going? And what are the resources they need to get there?
We let the clients identify the key resources they need and, without fail, most of them are intangible. This way, they tell you that intangibles are important. You don’t want to be put in the position of selling your methodologies or having to go into a lot of theory about intangibles. Your clients will hire you because of the results they expect to achieve with your help. Start the conversation with their needs. They’ll end up making the case to you that intangibles are important. And you’ll know what to do next.
In the course, we use examples and case studies from both large public and smaller privately-held businesses. In this post, I’ll use a different example from those in the course: a bicycle manufacturer. If I were to approach this kind of company, I’d ask them where they are and what their goals are for the future, what are the problems they are trying to solve. Suppose they say it’s growth. I’d ask them what kind of resources would they need to grow. They might say, a new factory. Then I’d ask what else? Odds are they would also mention people or partners or process or strategy, and they will have given me an opening to discuss intangibles. I’d use our Index tool to help them decide the tangible/intangible split. Knowing how important intangibles are to them helps guide a discussion about how to structure the engagement and identify the ROI in examining intangibles.
Once you start talking about intangibles, the goal is to get specific as soon as possible. For example, talking about human capital is abstract. But talking about the specific competencies of a client's staff is concrete. You want to talk about your client's intangibles, not our theories. This is one of the very basic principles of our approach to intangibles--the conviction that every organization has a unique set of intangibles that lead to a unique set of outcomes. Microsoft, Google and Amazon are three behemoths hiring some of the smartest employees. But these employees are put to work inside a different culture with a different purpose and a different knowledge infrastructure. The intangibles system is different and leads to different outcomes.
What does this mean to your consulting work? You'll want to help your clients create a custom model of their intangibles. Every model will have some of the same categories of assets: people, processes, partners and purpose. But the contents of each category will vary completely. Your clients will know how to answer the questions. But no one has ever asked them the questions in the way that you will. Your work with them will leave them with a model that is a shared vision of that organization's unique set of intangibles. This approach keeps your work very relevant--it's all about them.
This customized approach also means that the SCP to can be applied in diverse situations: companies of varying size, industry and location. What you'll learn in the course is how to use the SCP framework and language to guide your clients on a journey of discovery of what makes their company unique.
Let’s go back to the bicycle manufacturer. I’d ask about what they need to support their factories: what are the specific processes you use? what are the specific competencies of your employees? who are the partners you need to succeed? what is the culture and strategy that gives logic to the system? Putting specific names to these intangibles and creating a graphic that illustrates how their system works goes a long way to making them more tangible.
Once you have an inventory, a model of a company’s intangibles, now you're ready to measure them. One of the first things your clients will probably talk about is the value question. They think that it will help them to know how much their assets are “worth.” There are situations where this is a valid question (taxes and acquisitions). In this case, you’ll usually need to use a third party valuation firm.
But in most cases valuation is not that helpful. Why not? Let me make an analogy. What if you wanted to talk about the importance of a tangible asset like a factory? What if the factory manager told you, “our factory is worth $500 million?” It’s interesting but it’s not actionable. And it just leads to more questions about how the number was calculated. Most importantly, the number tells you nothing about what it costs to run the factory, how well it’s running or whether it’s being maintained well.
Our course does include information about valuation. You need an understanding of it. But it's as or more important that you be able to help your clients develop other metrics that help them understand their costs and to measure the performance of their intangibles because the performance conversation provides the critical link to financial results.
In the course, we introduce the three measurement alternatives available to you and your clients: financial, quantitative and qualitative and how to use the three to triangulate their intangible capital. Good measures make it clear whether a specific intangible is an asset or a liability. This kind of metric provides an actionable roadmap to monetize assets and diminish liabilities—and can even be used as a form of benchmarking against comparable companies.
If we think back to our bicycle factory, each of those intangibles (the processes, the employees, the partners and the strategy) can each be measured in a number of ways. I would use financial and quantitative metrics to count what can be counted. But I would also get stakeholder feedback on the key intangibles. This produces a data set that is customized to the company, highly actionable with a clear connection to the financial success of the company.
A good set of intangibles measures will have actionable findings and can be used to inspire change. But as you and your clients take on initiatives for change, improvement and innovation—you all come crashing up against some fundamental shifts that are occurring in how companies create value and are managed. The easiest way to sum these up is the tension between the top-down and the bottom-up. With the rise of the knowledge era, organizations need empowered people and partners to collaborate, share knowledge and innovate. You can’t make this happen by ordering people to do these things. You need to attract them, communicate a purpose that includes money but also has a broader vision.
This applies to every kind of business, even the bicycle factory. Optimum results in a factory today don’t come from management fiat. They come from bottom-up innovation and improvements. So employee empowerment and engagement in the bicycle factory would be important. Growth is often also linked to more than just the product itself but also the experience of using the product. So the bicycle company would have the opportunity to position itself with consumers as a way to promote their health and wellness—as well as the health of the planet….which is a great segue back to Matter.
Your process has to end, as it began, with discussing how intangibles matter to your client, their shareholders and their stakeholders. At this point, you'll be armed with metrics, diagrams and stories to help stakeholders see the links between the company’s goals, intangibles and its final results. This step is critical to validating and communicating the impact that intangibles have on the organization’s financial results in the short run and sustainable wealth creation in the medium to long run.
For the bicycle factory, this means that I would ensure that the company’s shareholders and stakeholders could literally see and communicate how the value and success of the organization's intangibles are connected to its revenues, profits and financial valuation.
This is a quick introduction to the SCP. It is a powerful process that was developed and applied in my own business over the course of many years. It has now also been used by more than a dozen Smarter Companies partner firms around the world.
In my next post, I'll talk about how to make a tangible connection between IC and traditional management and financial metrics. In the meantime, I’d really appreciate your feedback. Could you please send me an email or share your thoughts, comments and questions in the box below?
Thanks! Mary Adams
Daniel and Verna - Our challenge is how to make it really easy, automatic for people to focus on intangibles. Some of our games and tools help. But, you're right, it's so important that we have to keep trying!
Daniel, what people also miss is that the value of money is also totally subjective, not objective in any way whatsoever. So in a way money is the biggest intangible of all. But I don't recommend you go their with your clients. :)
Dear Mary. It is a very inspiring your post. I have found that it is hard to make some people to understand that most of the company value comes from intangibles. I bet that they are aware about it, but for them is hard to articulate in that way. When I talk about it, at the beginning they think that is just like making a path full of pebbles. However, after explaining in detail, the customers see the relevance. But again, they are thinking only on production, metrics and goals. Avoiding the natural liaison to intangibles. It is a hard work to educate people, but it worth!
Great story Verna! That deafening silence is our rallying cry!!
I especially like asking them what are their goals and what resources they need. I remember an engagement with a company in India who realized in the course of our conversation that their company mission statement was 95% intangible goals and that they only had measurements for 5% (financial success of course). In another case a pharmaceutical had a fat annual report that again only had measure for the 5-10%. (I always ask to see their annual reports.) Their intangibles were "marketing" type paragraphs of text such as "we have the best scientists in the world." Really, how do you measure that? How do you manage, deploy and grow more? Deafening silence ensues.
Many thanks for this Mary. This series is serving to put real meat on the bones for those of us that have been observers on our way to implementation of the SCP in our consulting practices. Excited about the next post.