Member Blogs

Some of the most interesting intangible capital stories these days come from the intersection between businesses that seem to be heavily tangible but are actually succeeding based on their intangibles.  A recent post by Workbar talked about the intangibles in the co-working industry. And this recent article by the Boston Globe shared the fascinating story of the revival of the independent bookshop. After multiple threats from Amazon to megastores to e-readers, the industry seemed doomed: 

• But then the saga of the independent bookstore underwent a major plot twist: The customers came back. Between 2009 and 2015, independent booksellers across America grew by an astounding 35 percent, from 1,651 stores to 2,227, ABA figures show. And the upsurge shows no sign of slowing.

The article quotes a recent report by Ryan Raffaelli, an assistant professor in the Organizational Behavior unit at Harvard Business School. He identified three key strategies that helped drive the change (and the intangible capitals behind them):

1. Community - strong focus on local connections (relationship capital)
2. Curation - emphasis on the value add of the staff choices and recommendations (human capital)
3. Convening - building the capacity to promote and run events (as many as 500 per year) to bring together like-minded customers (structural capital)

The first two elements were always there. But they have been elevated and emphasized in a whole new way in this approach. There are lessons here for many industries. 

Want to figure out how to apply this thinking to your business? Download our free value creation worksheet.

Photo credit: Dolf Bakker at Free Images

The World Intellectual Property Organization (WIPO) recently released its World Intellectual Property Report 2017 under the title Intangible Capital in Global Value Chains.  The key finding of the report is that “one third of the value of the products you buy comes from intangibles such as technology and branding” with roughly 47% from labor and 20% coming from tangible capital.   

This is no surprise to those who study intangibles. But it’s great to see it documented in such detail by country and industry. The report is also strengthened by its deep examination of three industries: coffee, photovoltaics and smartphones.

I recommend this as another dataset [see other data here] that helps us understand the tectonic shifts in global and local economies in recent decades. For those in our community, I’d like to share some thoughts about how this data relates to the broader intangible capital and integrated reporting communities:  

The authors use a limited definition intangible capital – Traditional models of IC (like we used in our book Intangible Capital) include human, relationship and organizational capital.  This paper was produced by economists for whom labor is a known variable.  Thus,the authors do not include human capital/labor in their definition of intangible.

Intangibles are the undefined portion of the equation – The supply chain value calculations use data on wages, employment and tangible capital asset stocks to calculate labor and tangible assets. The remainder of a product’s value was then considered intangible. This essentially the approach taken in the Ocean Tomo stock market study which subtracts tangibles from corporate value to derive intangibles. (Their latest calculation shows tangibles now down to 16% of total corporate value).

By the way, these calculations of intangibles as the unknown in an equation will continue until spending on specific intangibles is measured more carefully (see my discussions on i-capex)

This is about income from capitals, not the capitals – This is an economic study that examines the income that accrues to the three kinds of capital (a flow) rather than the capital itself (a stock). Alternative measure of capitals use stock market data (like Ocean Tomo). Hopefully some day, we'll have accounting data that differentiates between investment and cost.

Value now comes less from the manufacturing process itself and more from pre- and post-production – In the industrial era, a big part of the value in manufactured goods came from production processes. This study affirms what is called the 21^st Century smile, that is that more value in products now comes in pre-production such as R&D and design, as well as post-production activities such as branding and after-sale services.

There’s growing income from social and natural capital – For those of you interested in a fully-integrated model with six to seven capiitals, you’ll be wondering what happened to the externalities such as social and environmental footprints. You’ll be very excited to see how this approach identifies the growth in incomes for coffee industry segments where consumer demands for fairness and sustainability in supply chains is changing the ways of doing business.  And the value is showing up in these economic measurements!

The most important part of this study? It shows us a path to connecting the dots between the financial and non-financial aspects of the capitals. 

For more info on measurement of intangibles, please see Smarter-Companies Briefing Paper:

Accounting, ESG and the Intangible Information Gap

I was reading a NY Times article this morning entitled, Best Buy’s Secrets for Surviving in the Amazon Age. Of course, I couldn’t help myself and I started tallying their intangible capitals in my head.  Thought I’d share my tally and the follow-up research I did about the company’s reporting to the marketplace.

In the article, author Kevin Roose identifies five secrets to the company’s success (quotes are from his list):

1. “Price, price, price” – The decision to match Amazon’s prices was a foundational strategy (strategic capital)
2. “Focus on humans” – The company realized that customer service was something that customers couldn’t get on line.  They focused on training and engaging their sales associates (human capital) and fixed the internal search system that gave them the most trouble in helping their customers (structural capital). The wisdom of this strategy is supported by the story of Circuit City’s disastrous firing of their associates ten years ago.
3. “Turn brick-and-mortar into showcase-and-ship” – The on-line warehouse, distribution centers and stores’ inventory systems were integrated so that on-line orders are shipped from the closest, fastest source. This software is a great example of structural capital and shows how it helps leverage the return on manufactured capital (think GE’s digital industrial strategy)
4. “Cut costs quietly” – The company found creative ways to lower costs (like re-engineering handling processes in the warehouse to decrease product damage) (strategic capital) and avoided large lay-offs. Roose quotes CEO Joly, “Taking people out is the last resource…Because you need to capture the hearts and minds of the employees” (human capital).
5. “Get lucky, stay humble and don’t tempt fate” – Luck is luck.  None of us can take credit for that. Best Buy’s luck comes from their market segments (expensive electronics that people need help in buying) and the demise of their competitors. But this luck doesn’t guarantee success. The rest of this “secret” speaks to culture (strategic capital) quoted Joly again, “Once you’ve had a near- death experience, arrogance, if you had it in your bones, has disappeared forever.”

Clearly, this story has a lot to do with intangible capitals.  As I also like to do, I went to the company’s website and looked at how they tell their story to the markets. 

First destination: Investor relations site and the company’s annual report. This report is basically the 10-K with an eight-page cover letter from the CEO. In it, he talked about the success of their strategies and work to develop stronger relationships with customers (relationship capital).  As is traditional in this type of report, there is s strong focus on the financial results of the strategies.

The website has two more sections with a lot of rich information. Second destination: Sustainability. This is a very rich site with separate statements about human rights, carbon and energy, conflict minerals, chemical management, environmental and paper procurement. There’s also a full Corporate Responsibility and Sustainability Report and a report that the company was named to the Dow Jones Sustainability Index for the 7^th Year.  This is all about natural and social/relationship capital.

Speaking of relationship capital, the company’s site also has a dedicated Community Relations section that includes right now articles on support for DACA and hurricane victims, among many others.

This separation of statements is the norm for U.S. companies so it’s hard to criticize. But the thesis of the integrated thinking and reporting movement is that investors, customers, employees, managers, stakeholders and the company itself would be better served if these separate messages (about internalities and externalities not reported in the financial view) were told as a holistic, coherent story about how the company is building value today in a way that ensures/enhances its ability to do so in the future.

Learn more about this kind of integrated model:

Integrated Value Creation

I was at the FMA-NH meeting on Tuesday night talking about, what else?, intangibles.

Here's an expanded version of the deck I used and thought I would share:

MIT Technology Review just published their list of the smartest top 50 companies for 2014.

Here's the list.

http://www.technologyreview.com/featuredstory/524671/50-smartest-companies-2014/

The criteria for the list is not the typical nonsense used such as the number of patents or PhD's on staff but whether the innovation being done by the company is a game changer (a radical innovation) that will change an industry. The company at the top of the list is Illumina which is doing radical innovation to drive down the price of DNA sequencing to a level that will change the practice of medicine.

The interesting question is then - How does intangible capital fit in the criteria? My answer is that a special specific type of intangible capital is the essential part of the capability to  do radical innovation. For example, measurement and development of intangible capital that supports radical innovation are two of the twelve principles of the fourth generation (4G) of innovation management.

Integrated Reporting (IR) is the new international project to upgrade financial accounting to measure innovation and intangible capital. It would be great if IR could produce a list that was similar to the MIT top 50.

Today 100% of U.S. public companies provide accounting information publicly. It’s a requirement and an accepted practice. At the same time, over 80% of those companies are also disclosing some kind of sustainability data. This latter kind of disclosure is not yet a requirement in the U.S. and standards are still in development. But as the data show, the practice is already well underway.

These two kinds of presentations have traditionally been made in different reports offered on different sections of their websites with differing messages.

Now, however, the financial markets are awakening to the importance of Environmental, Social and Governance (ESG) issues as a source of risk and a driver of innovation and value. They are looking to connect the dots between these different messages. This creates a dilemma for companies. They have a business rationale for both their financial and their sustainability reporting. But they are not accustomed to telling a unified value creation story.

The International Integrated Reporting Council (IIRC) is leading the charge in creating a model that unites these differing perspectives (read an introduction here). Its Framework provides a way forward to creating holistic presentations that explain the multiple forms of capital that support a company’s value creation ecosystem. The IIRC model draws on the traditional accounting/financial reporting perspective, the sustainability/ESG movement and a third, less understood field of study, broadly referred to as intellectual or intangible capital (IC).

The IC field has been focusing for several decades on the rise of the knowledge economy. While IC practice is not as advanced as accounting and sustainability reporting, there is already significant research that suggests the size and importance of this class of capital to the success of companies in today’s economy.

Combining all three perspectives is powerful but challenging. Few people are trained in all three of the root disciplines. So we have to work together and learn from each other. But it's the right goal to support the kind of integrated thinking that empowers financially-sound decisions today that still preserve and build value for the future.

READ ABOUT THE ROLE OF INTANGIBLES IN THE INTEGRATED MODEL

Foreign trade driven by offshoring has caused a large loss in manufacturing jobs. A change in trade policy can return many manufacturing jobs to the USA and stop many additional losses.

The right legal argument recognizes that trade policy and economics don’t account for THE THEFT OF PUBLIC INTANGIBLE CAPITAL (PIC) IN OFFSHORING where the PIC was financed with public investments. Failed trade policy is based on a paradigm of comparative advantage but doesn’t penalize offshoring that is advantaged by the theft of PIC. Economics currently ignores the theft of PIC by a company that does offshoring where the PIC is a product of public investments such as those in national defense, federal R&D, domestic security, healthcare, public (and non-profit) education and infrastructure.

Trade policy currently protects the theft of many types of private IC such as patents but ignores the theft of public IC (PIC). The theft of PIC occurs when business operations at a company with jobs and factories are first established in America with PIC created as a result of public investments in IC that get translated into business IC and then moved offshore as proven business capabilities (both tangible and intangible capital) consisting of knowledge, tools, technology and processes. Since 1992, IC has been a larger part of business investments as a part of GDP in America than tangible capital.

Theft of PIC in offshoring creates a negative externality in economics that is similar to pollution (and theft) of public resources penalized in environmental regulation. Trade imbalances don’t measure the flows of IC. Measuring the flows of IC created with public investments is a prerequisite for properly governing offshoring in globalization. The new international activity in Integrated Reporting is changing financial reporting in business to measure both tangible capital and IC.

The 21st Century hopefully will finally see the huge gap in economics filled so capitalism, financial accounting and government policy measures IC and defines laws and compensation protecting applications of IC including private and public IC. The stagnation in wages is a symptom of the failure to compensate workers for the applications of their IC.

Trade Policy should add regulations on offshoring that require repayment of the apportioned public investments that produced the PIC used to build manufacturing operations at a company with a tax of at least 20% on the value of traded goods sent back to America from offshored factories. But there should be no broad tax on imports.

Intangible Capital (IC) is misunderstood by the federal government, universities, economists, think tanks in Washington, and other organizations such as The Conference Board. Here’s a new report by the Information Technology  and Innovation Foundation (ITIF) entitled “The Limits of the Knowledge-Based Capital (KBC) Framework” that is unaware of intangible capital frameworks such as described by SmarterCompanies .  

http://www.itif.org/publications/limits-knowledge-based-capital-framework

The federal government and other organizations have been studying how IC is linked to the GDP and to innovation. The ITIF report correctly cites the work, research and prolific publications of Carol A. Corrado of the Conference Board and Charles R. Hulten of the University of Maryland and the NBER. Unfortunately, the ITIF report makes the mistake of assuming that the only KBC framework that describes intangible capital is the one defined by Corrado, Hulten and Daniel Sichel (CHS). The report is unaware of the framework for IC described by SmarterCompanies and other frameworks that integrate IC with innovation.

The link between innovation and IC has been established and described  in the fourth generation of innovation management (4G) to emerge as best practice since 2000. Since 1900, there have been four generations of best practice. 4G has been described in Wiley’s Encyclopedia of Technology and Innovation Management in Chapter 21.  In 4G, innovation is driven by capabilities which are combinations of tangible and intangible capital. 4G capabilities are people with knowledge, tools that are developed and bought with tangible capital, technology and processes.    

With architectural rules, capabilities in 4G are structured into “stacks” of services, applications, products, platforms, components and technologies combined with knowledge and processes. “Stacks” are linked together to form projects, organizations, business models, and industry structures such as value chains.  In 4G, capabilities evolve into dominant designs that govern new markets.  4G has twelve principles and one is that innovation hubs that typically have more than 50 partners such as the Department of Energy (DOE) innovation hubs and the Apple hub for their iPhone family that coordinates service providers and third party supplier of applications are required to create new dominant designs.

1. They are humble
2. They seem to lack ego because they are comfortable with who and what they are.
3. They have opinions but never push them on others
4. They don’t care about titles or prestige but they don’t exhibit false or unnecessary modesty either
5. They are committed to principles but are detached from outcomes 
6. They live the “Serenity Prayer”
7. You trust them, unless you are a troublemaker. Then they unnerve you
8. They don’t insist upon being heard yet are willing to speak if you are willing to listen
9. They support growth 
10. They don’t sweat the small stuff. But they seem to see “everything” and understand most things.
11. They are kind. But don’t mistake their kindness for weakness. Few are stronger in spirit or character.
12. They listen more than they speak and understand more than they show.
13. They are committed to creating the next generation of elders but do not seek followers.
14. They have strong, steady moral compasses that are not affected by the “group consciousness”
15. They are, at all times, students, teachers and learners about life.
16. They believe in a power greater than themselves.
17. They are wise enough to be forceful and powerful when it is in the best interest of the greater good
18. If they had a motto it might read something like: I am what I am and I will be that with as much honor and grace as I can muster.

EE = EBITDA

Transforming Human Capital into Financial Capital.

Jeffrey S. Deckman, Founder, Capability Accelerators

02.14.12

   EE = EBITDA is an obscure but interesting formula that, once I came to understand, revealed an exciting new source of increased profits that any business can realize.

The “blow up” of this formula is:

Employee Engagement = Earnings Before Interest Taxes Depreciation Amortization

Before going any further I want to say that Employee Engagement (EE) is certainly not the only factor that impacts EBITDA but it does have a significant impact on your bottom line. It just also happens to be one of the easiest ways to increase profitability you will ever come across. 

Why? 

Because, of all the ways to increase profits such as increasing prices; decreasing costs and generating more sales increasing your levels of EE is almost completely within your control. This is because EE is largely determined by the leadership culture of your organization. And you get to control that.

In fact, a recent Melcrum Employment Engagement Survey of over 1600 HR professionals found that “The actions of senior leaders and direct managers are the most important drivers of employee engagement by a factor of between 400% and 700%.

So not only is this “silent profit driver” largely in your control but the financial impact of increasing the levels of EE in your organization is undeniably real.

In fact, I doubt you could find a single CEO of a Fortune 500 company who even questions whether increasing EE increases EBITDA. 

The Numbers behind the Science: 

In an effort to be as informative as possible as quickly as possible let me get right to the math. 

A recent study done by the Gallup Group in October of 2011 involving thousands of participants revealed that, on average, 71% of people are “disengaged” from their work. Within this group 55% are considered “not engaged”. These people do their jobs but not much more. The other 16% are considered “actively disengaged”. These are people who are actually working against the best interests of the organization. 

This leaves only 29% of the workforce who are considered “highly engaged”. These are the ones who put in extra time; think about their jobs during off hours and are energized. They are the ones who generate the most per capita profit.

This means that 7 out of 10 people in organizations are not engaged in their work. Imagine the lost productivity and profits that represents! And in today’s economy this can spell death to an organization.

The High Cost of Low Employee Engagement

Lets look at how the level of EE in your organization affects your profitability.

The following EE vs Productivity numbers are generally accepted throughout the industry, give or take a few percentage points: 

• “Highly engaged” workers are 90% productive 

• “Not engaged” workers are 60% productive 

• “Actively disengaged” workers are 40% productive. 

When you combine the EE and the productivity numbers the impact on profits becomes clear:

• 29% are highly engaged and are 90% productive.

.29 * .90 * 100 = 26.1% productivity level

• 55% are not engaged and are 60% productive.

.55 * .60 * 100 = 33% productivity level

• 16% are actively disengaged and are 40% productive

.16 * 40 *100 = 6.4% productivity level

This means that your overall productivity levels are:

26.1% + 33% + 6.4% = 65.5%

To make this real lets assume a company spends $2 million on employee compensation. Under this scenario their ROI on that investment is: 

2,000,000.00 * 65.5% = 1,310,000.00. 

This represents a $690,000 “payment vs. performance” gap.

The Big Difference of a Small Adjustment

Now lets look at the impact to your bottom line that will occur if you simply increase the

highly engaged numbers by only 5% and decrease the actively disengaged numbers by the same amount. And if your company is like most, and if you decide to make EE a
priority in your organization, moving your EE numbers 5% in this fashion is not unrealistic at all. 

WARNING: These numbers are almost un-believable!

• 34% are now highly engaged @ 90% productivity.

.34 * .90 * 100 = 30.6% productivity level

• 55% are still not engaged and still 60% productive.

.55 * .60 * 100 = 33% productivity level

• 11% are now actively disengaged and are 40% productive

.11 * 40 *100 = 4.4% productivity level

New productivity levels = 30.6% + 33% + 4.4% = 68% 

New Profitability Calculations: 2,000,000.00 * 68% = $1,360,000.00

This represents a $50,000 improvement in the “payment vs. performance” gap in only one year!

What is also important to realize is that as long as you keep your management teams fine tuned and your culture healthy this $50,000.00 continues to flow to the bottom line year after year. Imagine the impact to your Retained Earnings and the vaule of your business that this will have in just a few short years.

All of a sudden investing in developing solid management teams with excellent leadership skills becomes one of the most important and easy ways to drive significant profits right to your bottom line.

In Closing

If you are like I was when I first started looking at these figures, your initial thinking may be that they can’t be right. But I can tell you that study after study from organizations ranging from the Harvard Business School to the McKinsey Group prove them out.

So while we have all been trained to increase profits by cutting costs; capturing more clients and negotiating for higher prices few of us have been taught how to activate one of the most significant profit drivers available to us: increased Employee Engagement.

And at a time when profits are very tight, competition is tough and the market is demanding it should be very comforting to realize that with just a few internal adjustments you can uncover a source of profits that will not only increase your bottom line but will also increase company morale.

During economic times such as these understanding the EE=EBITDA formula can be a real life saver.

Jeffrey Deckman is the founder of Capability Accelerators, a consulting firm that specializes in helping clients convert human capital into financial capital. If you have questions or comments he can be reached at JDeckman@CapabilityAccelerators.com

For many years I have had a great interest (some would say obsession!) about the role of intangible capital in the growth and competitiveness of companies. With the help of my colleagues, our clients and our broad network, we worked to develop  tools and methodologies to support this thinking. And we created this web community to share our learnings because we felt strongly that one person or one company could never have all the answers. Until now, the community was known as the IC Knowledge Center. Today, I am announcing a new future for our community with the re-launching of the site as smarter-companies. 

This new site will be designed around our existing community. To date, we have attracted an international audience. 60% of you are consultants. 20% are academics (many of whom also consult). The remainder includes attorneys, companies, non-profits, governments and solutions providers. Your areas of specialization include intellectual/intangible capital, knowledge management, human capital, innovation, finance, information technology, marketing, performance management and intellectual property.

In short, our community is like a map of the intangible capital of the organizations we serve. Yet the potential of our community’s IC, like that of many organizations, has not been fully developed. That’s why we’ve made the decision to re-name the community and create a business model around it.

Going forward, at smarter-companies, we will be offering the products and methodologies that we’ve developed over the last seven years (some as open source and some as paid products) under the ICounts name. But we hope that our products will be surrounded by products from other consultants and service providers. Our goal is for the smarter-companies site to become a place of continuous learning about how to create smarter companies—and also a marketplace of solutions that help consultants and companies apply that learning.

As we enter 2013, allow me to share my belief in a bright future. The ultimate message of intangible capital is that we share collective knowledge, much of it untapped, that has the potential to conquer the challenges facing the world and create profitable, sustainable businesses fueled by the power of people, communities and social technologies.

I hope you will join us on this journey,  Mary Adams

I talk a lot about the knowledge era. I specialize in the measurement, management and monetization of knowledge intangibles. I wrote a book on intangible capital. So what I am about to say shouldn’t be that big a surprise to me but it kind of is….

Technology is not as important as it used to be.

If you think about it, technology and top-down industrial models still dominate our thinking. When we industrialized our economy, we industrialized everything from agriculture to education to government to manufacturing.

I have written before about how the shift from the industrial era is coming at a time when there are new constraints on our global economy. Externalities like energy use/mis-use, pollution, health are all represent (at the same time)nbsp; problems, opportunities and design constraints. The failure of the industrial model to address these new constraints and the potential of new models to address them is fueling the shift to the knowledge economy.

Of course, the shift has been driven by the rise of a new kind of technology: information technology and brain power.

In today’s Boston Globe, there is a great opinion piece that exemplifies what is going on.

World hunger is best treated with local growers and crops was written on the occasion of UN World Food Day on Sunday. It explains that the conversations about solutions to world hunger often go immediately to “ways to increase the food supply with purchased technologies”nbsp; that use chemicals and carbon-intensive solutions to food production.

This won’t be sustainable to improve the yields of the “half-billion small-farm families that still grow 70% of the world’s food.”

The alternative suggested is agro-ecological approaches that use local seeds, build healthy soil and conserve water. Finding the right approaches in individual communities solves the challenges of both hunger and greenhouse emissions (the article quotes GRAIN magazine’s estimate the agro-ecological approaches could offset as much as a third of global greenhouse gas emissions within 50 years).

Lest you think that this is only about the third world, read How the U.S. Curbs Farm Work. It's basically the same message.  That U.S. agricultural policies promote "industrialized and chemical intensive" production. And that

Ecologically based food systems should become the United State' overarching goal. Such a shift would invariably employ larger numbers of people while providing safer, more appealing jobs. It would also create safer, tastier, more nutritious food...

This kind of thinking is very disruptive to existing economic and business models. Many businesses will fail in the face of this thinking. But many more will prosper. Which one will you be?

And when will you start treating knowledge intangibles as the key infrastructure of your own business?

I stole this title from an article I read recently in Time. The article Street Smarts is about infrastructure. And why infrastructure changes need to be planned in a new way.

Just as we industrialized every corner of our economy in the industrial era, so too must we knowledgeize every corner in the knowledge era. Infrastructure is no exception.

What does that mean? It means that we have to re-think every challenge and find the most efficient solution. And remember that we have many new tools that we didn’t have before. Here are just a few of the examples cited in the Time article:

• Don’t build billion-dollar lock expansions in the Mississippi River when better scheduling and peak-hour pricing can solve most of the problem
• Don’t add new highways when telecommuting, carpools and mass transit can take cars off the road
• Don’t rebuild the Philadelphia sewer system when you can keep storm water out of the sewers through permeable roads, green roofs and rain gardens
• Don’t create an enormous national grid when you can add smart components to the existing grid
• Don’t rebuild the 4,000 structurally-deficient dams in the U.S. when you can remove them and create recreational habitats that fuel the economy.
• Here’s one that Time didn’t mention from here in Boston: Don’t disrupt the local economy for four years when you can rebuild the Fast14 bridges on eight summer weekends…

What’s different about these examples? Nothing and everything. The market usually opts for the smart solution. But many of our knee-jerk assumptions about solutions automatically default to the large-scale, top-down solutions so common in the industrial era.

Every one of the solutions above reflect new conditions, new thinking and new tools. They are all great illustrations of knowledgeization. And why we need to start paying attention to knowledge intangibles as the critical assets of this century.

Do you think the contractors for the Fast 14 were chosen because they have the right equipment? No, it’s because they have the right smarts.

The point we all keep making in the IC community is that we need the management tools and techniques to support the development of the right smarts.

Intangible Capital: Looking Inside the Black Box - I often explain that the 70% of corporate value that is intangible in companies today is stuck inside a “black box.” This article I wrote for Strategy magazine tells the story of a company that looked inside the black box to let loose its potential for innovation and growth.