Intangibles (22)

IIRC is moving ahead

 Another great article on the emerging reporting framework under IIRC. While the approach moves us into a new environment on statutory reporting I think it would benefit from a closer tie in with the work on intangibles. The potential links are there when you look at the six "capitals" that are discussed.  http://www.theguardian.com/sustainable-business/finance-reporting-evolve-integrated-rating

Read more…

Three things that make a company smarter

10468398261?profile=original

We spend a lot of time in this community talking about how to make companies smarter and more successful. But a few weeks ago, I realized that we have never really defined what we mean by "smarter companies." The answers are complex and rich and something we all need to continue to define. 

But as I thought about it, I came down to three key characteristics that shine through:

Intangibles Focus – Knowledge intangibles are at the core of how value is created in today’s economy. This includes the knowledge in peoples’ heads and in re-usable forms (process, software, data, designs, etc.). Companies that recognize the growing importance of knowledge in these many forms have moved beyond industrial-era approaches to management and measurement so they can focus on the knowledge that can give them a competitive advantage.

Sense of Purpose – Access to and use of knowledge is a collaborative, collective effort. The amount of knowledge available to an organization—and the value it can create—is directly related to its ability to attract employees, partners and customers who share its mission. Purpose involves elements of both profit and prosperity. Companies that recognize the relationship between attraction and collaboration embed this purpose in what they do, how they do it, and how they tell their story. 

Social Measurement – Traditional financial and quantitative approaches fall short in measuring the strength and performance of knowledge, collaboration and innovation. The use of social, qualitative measures is on the rise. It’s already used commonly for knowledge products like books, services like hotels and restaurants, and even for employers. Companies that recognize the importance of intangibles, attraction and collaboration spend time listening from the outside-in, not just measuring from the inside-out. They are turning measurement into a collaborative, social process.

Does this list speak to you? I welcome your feedback!

Read more…

Valuation Failures

In the latest BVWire newsletter, there’s something of a bombshell (if you’re into this kind of thing):

Fair value is on hold at the FASB, observes Adam Smith (FASB), due to concerns over the BV profession. Up to now, the FASB has been a proponent of fair value in financial statements. This trend will not continue, according to Smith, because of the fragmented nature of the profession and lack of a unified set of standards. Why should the FASB spend all this time on fair value if investors have no faith in the numbers?

No faith in the numbers? That’s pretty strong language given that valuations are used all the time in business for accounting, purchase price allocation, tax and fund raising purposes.


Could it be that bad? Here’s a story I heard just last week at the IP Finance conference last week in NY. One of the panelists told the story about a portfolio of patents that his company needed to value for transfer pricing purposes. Because they were held in different countries around the world, the company decided to get two different valuations of the portfolio. One valuation came in at $100 million. The other came in at $266 million. One of the biggest differences in the two analyses was the discount rate used to calculate the net present value of the cash flows--which means that the two valuators saw very different levels of risk and opportunity in the portfolio. There appears to be qualitative analysis in the process but it’s not necessarily repeatable and verifiable.


Why is this happening? I think it’s part of the intangibles story. The shift away from a tangible, industrial economy to an intangible, knowledge economy is changing how value is created. Lots of people talk about the fact that intangibles have come to dominate corporate valuation (20% of corporate value is in tangible net worth, the remaining 80% is intangible). But there’s a lot less talk about what those intangibles are and how they should be analyzed. This leaves any financial analysis of a company open to a lot of subjectivity and variation. (By the way, the valuation community is not unique in this. Everyone is facing the challenge that the numbers don’t add up the way they used to)
What’s the answer? The first thing is to admit there’s a problem with the system. If valuations can have such a broad swing, then there’s work to do. Second, is to talk about how knowledge intangibles should be measured. How can the assumptions be handled in a more consistent way?


The answer isn’t just in the numbers. It’s hard to evaluate knowledge using dollars or quantitative indicators. What we really need is more disciplined qualitative analysis.

At Smarter-Companies we’re focusing on qualitative analysis based on stakeholder feedback. Our assumption is that those who are in the best position to judge the strength and sustainability of knowledge intangibles (like process, data, competencies, networks) are the stakeholders of the organization. They know better than anyone (including a valuator) if and how well the intangibles support the company’s value creation process.
Is there a way to incorporate stakeholder feedback in the valuation process? Yes. And I’m betting it will happen sooner than you think.

Read more…

 New paper about the strategy on intangibles. Changing to a more intangible-intensive strategy can have benefits but it has costs so it is important to understand whether there is a threshold for the change. This is analyzed in "Status-quo vs new strategy in intangibles" (http://www.emeraldinsight.com/doi/abs/10.1108/JES-07-2015-0132). To get the conclusions there are some mathematical procedures that can appear as complicated but the conclusions are quite clear. Enjoy the reading and comments are welcome. 

Read more…

I have just published a paper with my co-author Elena Shakina about the changing role of IC during the economic crisis. 

This study has been carried out in our International Laboratory 'Intagible-driven Economy' (ID Lab). 

The paper investigates factors of corporate success over the crisis period of 2008–2009. We advocate the idea that investments in intangibles allow a company to be better off, even if the markets go down. We have analysed a sample of more than 300 companies which operate in developed and emerging European markets, and belong to traditional and innovative industries. The result is that there is a robust significant link between the companies’ investment decisions and their performance before and during the crisis. This study provides empirical evidence that investment restriction is not the best response to an economic recession.

If you are interested you can download the paper at http://www.tandfonline.com/doi/full/10.1080/1331677X.2014.974918#tabModule. It is open to everybody.

I hope that the study result of interest and we would appreciate any comment.

Read more…

This summer I wrote about the great research on intangibles in the Chilean Wine Industry done by Mark Dutz and colleagues at the World Bank. And I promised to let everyone know when the full study was released. Here it is and I highly recommend it to anyone interested in intangibles: Public and private investments in innovation capabilities : structural transformation in the Chilean wine industry


We used some of the early versions of the data in our meetings in Chile in June set up by our Smarter-Companies partner AKLOE. It was wonderful to have data that was directly applicable to the country. One country down. A couple hundred to go!


What was so great about this paper? It used a “novel” approach to measuring intangibles at the corporate level: investment. Novel? Really? Well yes. We’ve known for a long time from the CHS macroeconomic data from The Conference Board that investment in intangibles eclipsed tangible investment in the U.S. over 20 years ago, with a similar pattern in the largest economies. But there is still virtually no information on the spending at the individual firm level. That’s because intangibles aren’t capitalized so they wash through the income statement year after year.

The investment approach was taken in a couple of earlier studies including by Nesta Investing in Innovation in the UK but what was great about this study is that it looked at the correlations between investments and the growth of individual firms and the industry overall.

In the period from 1990 to 2012, Chilean wine production (in liters) rose by 9% per annum. Much of this growth went to exports which went from $116 million to $1.78 billion, 13% per annum. What drove this shift? Was it just about producing more wine? No. That capacity already existed. It was about making a connection with new markets, telling an effective story to the market and controlling quality in a time of significant growth. All this required investment in intangibles.

10468396701?profile=original

As this graph shows, the growth story of Chilean wine exports is a story of intangibles investment. The study found that spending on knowledge-based intangibles was a statistically significant and economically important correlate of the growth in the industry and in individual firms.

When we wrote Intangible Capital in 2010, we called for a new report to record “i-capex,” spending on knowledge intangibles that is an investment in the future but not an investment that qualifies for capitalizing on the balance sheet. This simple accounting issue has led to the 80% gap between tangible net worth on balance sheets and corporate value in the public markets.

It’s past time to start measuring intangibles investment. This study is a great step in the right direction. Where should we take the next step?

Read more…

Straight from the Source: Intangibles in M&A

10468395683?profile=originalWe had a great half-day session called Making the Intangibles Count earlier this week at the AM&AA Summer Conference

Over the course of the afternoon, we led some 100 M&A professionals on a discovery process to learn how to identify, measure and optimize the intangibles portion of M&A transactions. The agenda included live exercises using our open source ICounts Index and ICounts Canvas tools (more on our full ICounts toolset).

We were also lucky to have what one panelist called the best panel on intangibles he had ever been on including:

  • Mike St. Martin of Navigant
  • Michael Friedman of Ocean Tomo
  • Gabe Fried of Hilco Streambank
  • Ken Sanginario of Corporate Value Metrics
  • ...And a great forward-looking talk by Jay Deragon of Smarter-Companies.

At the end of the afternoon, we crowd-sourced the best ideas that the participants learned/developed during the session to help on the buy and/or sell side. Here they are as promised:

Buy and Sell Smarter

  • Teach everyone involved to think about the intangibles
  • Look at the full range of intangibles: people, IP, supply chains, brands, processes, culture and more
  • Be able to look not just at innovations achieved but at the ability to innovate
  • Try to understand the key intangible elements that distinguish companies that have generated different market multiples

Sell Smarter:

  • Identify and measure key intangibles before starting the sales process
  • Find ways to quantify, use metrics to make intangibles tangible
  • Make the org chart real by including key metrics about the management (such as years of experience)
  • Tell the story of where there are upside opportunities in the intangibles
  • Don’t put lipstick on a bulldog—it has to be real to be valuable
  • Run through a trial due diligence to be ready for the process

Buy Smarter:

  • Make sure the buyers understand their own intangibles as a starting point to mapping the fit with a target

Thanks to Kathy Richardson Mauro, Mike Nall and the team at AM&AA for making this possible. Thanks to the speakers and the wonderful participants who took our material and ran with it. We look forward to continuing the conversation on line and in future get-togethers!

Read more…

My friends in the academic world who keep track of these things tell me that there are dozens of systems and frameworks that have been suggested for measurement and reporting of intangible capital. What many, many of them have in common is that they are trying to create a structure for reporting that moves in the direction of creating “standards.”

Normally, I would say that this is a good thing. Standards can be really valuable. They help simplify communication and collaboration. There are lots of standards in the tech world that ensure interoperability of hardware and software. There are standards in financial reporting that help make the markets more efficient. In the future there will be more and more standards as more and more devices and processes need to talk with each other. And, yes, some day there will probably be intangibles reporting standards.

But we don't know enough yet to set standards. For now, we need to stop focusing on creating rules and spend more time focusing on questions like: What works? What information helps people work together? What are the intangibles that drive success in an individual business? What kind of information helps companies tell their story more effectively?

The answers to these questions are still emerging and developing. We have a long way to go before we are ready for standards. First we have to collectively understand what works and why. We need to learn before we dictate.

Join the learning and the conversation at Smarter-Companies. We’re exploring the frontiers of intangibles management and measurement. But we are still a standards-free zone.

Read more…

Smarter Companies Use the Right Information Set

In recent weeks I’ve been getting ready for an exciting session on Accounting for Intangible Assets at SIBOS 2013 in Dubai next month. Working with the team for the Innotribe track has been amazing. They are helping me fine tune our ICounts open source exercises in a way that will help the bankers in the room understand the intangibles that are so critical to smarter companies.

These intangibles are mostly invisible today. That’s because the dominant information sources used today are the financial statements which were optimized for the tangible world. Financials are still important. But because they barely get at the intangibles, there is a need for a new information set. Our term for this new approach is ICounting.

 

The basic steps are the same in both systems: inventory, classify, measure and consolidate. But the focus is very different. Here are the basic steps in the two systems:

Activity

Accounting

ICounting

1-Inventory

Owned tangible assets

Networked intangible assets

2-Classify

Inventory, Equipment, Buildings, Land

Human, Relationship, Structural and Strategic Capital

3-Measure

Monetary cost/value

Stakeholder value

4-Consolidate

Balance Sheet

Graph

Everyone in business has a basic understanding of the accounting steps outlined here. But very few have translated them to the intangibles side of business. There are lots of smart companies around today. But they are figuring this stuff out on their own using gut feel and intuition. Given the fact that up to 80% of the corporate value is intangible in economies like the U.S., it creates a lot of unnecessary risk and blinds people to greater possibilities. Is that the best we can do?

We think we can do better. That’s what we’re up to at Smarter-Companies. And that’s what I’ll keep talking about at tomorrow at IPR Plaza and at Sibos. I’ll share more in the coming weeks but the best way to experience these ideas is to be there live. Hope you can make it!

Read more…

10468394888?profile=originalFor those of us trained to think financially, we tend to think of the word “value” as a financial concept. As in, what is something “worth?” This is still a valid concept for intangibles. In fact, there are already well-established approaches to determining how much intangibles are “worth” using traditional valuation techniques. They are based on financial models and historical transaction data (where available),

Yet the most common questions I get about intangibles usually have the word “value” in them. And they are not asking about valuation. I think it’s because despite the fact the valuation is a valid concept for intangibles, there’s something more going on that people sense even if they don’t fully understand it.

It’s this: intangibles include and are directly connected to your value proposition, your culture and your relationship with customers, partners and all kinds of stakeholders. Except for the occasional banker or transaction professional, none of your stakeholders care about the “value” of your intangibles in the sense of their financial worth.

What your stakeholders care about is how you create value for them. If you create value for them, then your intangibles are valuable. How do you create value? Through problems solved, learning a better way to do things, engendering trust. By creating knowledge and/or connections that represent future potential for creating value. By ensuring that your organization is responsive and growing and sustainable, in all senses of the word.

If you need a valuation, by all means get one done. But if you want to understand how to build a better business, how to create a strong reputation, how to ensure that your business is around next year, then get your stakeholders to “value” your intangibles.

Intrigued? Check out our ICounts Tools. Learn how to identify, model and measure the intangibles that create value for your stakeholders.

Read more…

Follow the Money?

10468395066?profile=originalLate last week on Twitter, Harold Jarche commented on a post by Jay Deragon saying:

Follow the money? It’s a line of thinking that I’m usually too polite to follow but I think Harold’s right, it's time to give it a try...

Following the money ends up showing how the momentum of the status quo yields considerable profits for many advisors but ends up holding back individual companies and our entire economy. The status quo is that intangibles are considered to be undefined and unknowable.

Yet nothing could be further from the truth. The data are very clear.  Investment in intangibles. has outpaced investment in tangibles for over 20 years. You can’t get better data than hard dollars invested. But accounting doesn’t track the investment so competencies, data, processes, networks and new business models exist outside the balance sheet. All this has led to a situation where 80% of corporate value is now intangible. That means that most of the value created using computers, the internet and social technologies exists completely outside of traditional accounting and management information systems.

All your advisors and partners and colleagues are smart people. Yet they see these same facts and usually choose to ignore them. Why? Well, change is hard and if you follow the money, you’ll see that there is profit in the status quo:

  • Accountants can charge for lots of analysis of “intangibles” that have to be re-valued every year
  • Bankers can charge more for lending to “higher-risk” companies with fewer “assets”
  • Investors can control the valuation of your company because value drivers are considered subjective and “intangible”
  • Analysts can profit from information asymmetries caused by the 80% intangible information gap
  • Consultants can charge for custom diagnoses of intangibles
  • And a lot of managers feel that they earn their pay by making sense of all this for their companies

If you ask any of these advisors about the importance of intangible capital in your business, they’ll all nod their heads. But when it comes time to “get serious” about the discussion, they opt to return to the tried and true tools of business. Financial statements. Org charts. Valuations. Competitive strategy. The lip service to the “soft stuff” ends. Big boys focus on what they call the hard side of business.

What they don’t know or choose to ignore is that there is a whole body of work developed over the last 20 years about how to measure, manage and monetize intangibles. At Smarter-Companies we have open source tools to identify intangibles and a proprietary platform that uses stakeholder feedback to measure intangibles. Yes, stakeholder feedback. Rather than asking you to rely on their individual (albeit informed) judgment, our ICountants will help you open up the lines of communications with the people who know your organization best. There’s nothing soft about the data generated by an ICountant. And its use is threatening to traditional advisors who currently control the definition and measurement of your core strategic assets.

By the way, an ICountant charges $5 to $20,000 for a standard assessment of intangibles where McKinsey charges anywhere from $100,000 to $1 million for a custom assessment. If what we say is right, players like McKinsey are going to have to up their game. For now, though, they are going to protect what they have. What consultants and advisors like McKinsey have for now is control. They get paid to tell you what’s really going on in your company. And as long as what’s going on remains “intangible” and undefined, then they make more money.

So there’s your choice. Pay up to the big boys and their chosen set of hard data. Or get a new set of hard data about the intangibles driving your success. It’s up to you. To learn more about your own intangible capital and the value creation it offers your organization, visit us at www.smarter-companies.com . We’ll help you take control of your money and your information.

Read more…

Measuring the Immeasurable

The following is an AREOPA white paper titled: Measuring the Immeasurable.


MEASURING THE IMMEASURABLE -JA-20050630 (wp GNO20100203).docx

About AREOPA

We are a leading knowledge and practice provider in the fields of Change Management, Knowledge Management, Risk Assessment and Intellectual Capital Accounting.

With our own models, methodologies and tools we create a turnaround in the valuation of intangible assets of organizations active in the knowledge economy.
Our tools for IC accounting make us world leader in this field.
Worldwide we work together with partners, large organizations, multinationals and governments.

Working with AREOPA means working in the organization of the future, based on the following values:
• We are all entrepreneurs and shareholders;
• We are fully empowered within the Areopa network;
• We are working in a customer driven organization;
• We have no hierarchy, but we believe in leadership;
• We have no fixed costs in our organization;
• We use the Shamrock model for revenue distribution.

We are expanding globally.
Feel free to contact me for more information.
Joris Claeys
VP Global Operations
Joris.Claeys@AREOPA.com

AREOPA - Provoking Innovatieve Intelligence

Read more…
AREOPA's white paper on Intellectual Capital and its 4-leaf model as the full solution to measuring intangibles.IC Accounting Leaflet.pdf

About AREOPAWe are a leading knowledge and practice provider in the fields of Change Management, Knowledge Management, Risk Assessment and Intellectual Capital Accounting.With our own models, methodologies and tools we create a turnaround in the valuation of intangible assets of organizations active in the knowledge economy.Our tools for IC accounting make us world leader in this field.Worldwide we work together with partners, large organizations, multinationals and governments.Working with AREOPA means working in the organization of the future, based on the following values:• We are all entrepreneurs and shareholders;• We are fully empowered within the Areopa network;• We are working in a customer driven organization;• We have no hierarchy, but we believe in leadership;• We have no fixed costs in our organization;• We use the Shamrock model for revenue distribution.Feel free to contact me for more informationJoris ClaeysVP Global OperationsJoris.Claeys@AREOPA.comAREOPA - Provoking Innovatieve Intelligence
Read more…

Intangibles, GDP and You

I have to confess that I have been surprised by the depth of the reaction to the latest changes in the GDP calculations which count R&D and creative works as investments with lasting value rather than current expenses that don't last. 

This is something that has been in the works for years. Back in 2006, the NY Times explained that the BEA had begun to experiment with the idea of adding intangibles like R&D to GDP calculations.  And Michael Mandel contributed thoughtfully to the discussion a few years later as the Economics Editor of Business Week. Then it was formally announced as a test in the BEA satellite accounts in 2010. The change is about R&D and creative properties which are actually among the most mainstream and well-understood intangibles. Overall the changes add roughly 3% to GDP which is the equivalent, as Credit Suisse describes it, of adding another New Jersey to the economy. It's significant but not that significant.

So I didn’t expect to have many people notice when they flipped the switch. I was wrong. And I’m happy to be wrong.

The official roll out of the new changes has been covered by the New York TimesBloombergFinancial Times  and McKinsey (here’s my response to their paper) which is more than an intangibles issue has maybe ever gotten. Smarter-Companies bloggers Ken Jarboe, Bill Miller, and Jay Deragon have all added to the conversation.

Is the reaction about these particular changes? I don't think so. I think the reaction is a bell weather of something more. It’s the growing unease with the failure of mainstream information sources (national and business accounting as well as traditional management tools) to keep up with the changes in our economy. I’ve been very pleased with the coverage as writers have acknowledged that this is just the tip of an iceberg of change.

In fact, the intangibles story is actually much, much bigger than this change implies. Spending in the U.S. on intangibles began exceeding spending on tangibles over 20 years ago (see the graph halfway down the page). In financial (rather than national accounting terms), roughly 80% of corporate value today is intangible.

My bottom line? We need to be supportive of the institutionalization of new information and practices. R&D and creative properties are just the beginning. Other kinds of intangibles that should eventually be measured include data, processes, networks. The example I always like to use is Federal Express. Even though it has enormous investments in tangible assets, its core competitive advantage comes from the system it has created for planning, coordinating, tracking and optimizing the movement of packages. This system is a more valuable and longer-lived asset than any of its planes or trucks or sorting equipment. But we are years (probably decades) away from being able to measure this asset in traditional frameworks like GDP or even financial accounting..

But we don’t need economic (or accounting) record-keepers to tell us what we already know: that tangible assets are basically commodities. Intangibles are the source of competitive advantage in today’s world. So if you want to grow your business, improve performance and/or get paid for the intangible value you create, you'll need to get better at measuring and managing intangibles right now. That’s why we have started a movement for ICounting.

ICounting includes open source tools to inventory, illustrate and model the workings of the unique intangibles of an organization. Give them a try. Join the conversation. Change the global conversation. Intangibles aren’t going away and the future of your company and our economies depend on them. Get started by counting all your intangibles now.

Read more…

A Stock Exchange for NGO's

A practical potential for NGO's to make use of their intangibles in searching for new ways of funding their projects.Concept stock exchange NGO's verbeterde editie.doc

About AREOPAWe are a leading knowledge and practice provider in the fields of Change Management, Knowledge Management, Risk Assessment and Intellectual Capital Accounting.With our own models, methodologies and tools we create a turnaround in the valuation of intangible assets of organizations active in the knowledge economy.Our tools for IC accounting make us world leader in this field.Worldwide we work together with partners, large organizations, multinationals and governments.Working with AREOPA means working in the organization of the future, based on the following values:• We are all entrepreneurs and shareholders;• We are fully empowered within the Areopa network;• We are working in a customer driven organization;• We have no hierarchy, but we believe in leadership;• We have no fixed costs in our organization;• We use the Shamrock model for revenue distribution.Feel free to contact me for more informationJoris ClaeysVP Global OperationsJoris.Claeys@AREOPA.comAREOPA - Provoking Innovatieve Intelligence
Read more…
The following is a basic reflection of what IC is.AREOPA sip - ICC&A - What is Intellectual Capital (scGNO20091022).pdf

About AREOPAWe are a leading knowledge and practice provider in the fields of Change Management, Knowledge Management, Risk Assessment and Intellectual Capital Accounting.With our own models, methodologies and tools we create a turnaround in the valuation of intangible assets of organizations active in the knowledge economy.Our tools for IC accounting make us world leader in this field.Worldwide we work together with partners, large organizations, multinationals and governments.Working with AREOPA means working in the organization of the future, based on the following values:• We are all entrepreneurs and shareholders;• We are fully empowered within the Areopa network;• We are working in a customer driven organization;• We have no hierarchy, but we believe in leadership;• We have no fixed costs in our organization;• We use the Shamrock model for revenue distribution.Feel free to contact me for more informationJoris ClaeysVP Global OperationsJoris.Claeys@AREOPA.comAREOPA - Provoking Innovatieve Intelligence
Read more…

logooecd_en.png

I was honored to be invited to the intangibles policy conference late last year in DC organized by MIT as part of the on-going project at the OECD. The presentations are now available on line.

 

One opening note: the OECD has shifted away from talking about intangible capital and now calls it knowledge-based capital (KBC).  Even though I wrote a book called Intangible Capital, I’m sympathetic to the dilemma. Vocabulary is still an issue in our field. Not sure that KBC is that much of an improvement but you better add KBC to your glossary and move on to the substance.  Because the basic ideas are not in question. KBC/IA/IC are the dominant drivers of our economies and our companies today. So let’s just keep trying to build the field.

 

This conference provided a lot of good new perspectives to our collective discussion. It also brought a number of new people into the conversation.  The format of this conference was panels of three or so academics discussing different facets of the field including:

  • Corporate Reporting and National Accounts
  • Ownership and Capital
  • Digitization
  • Human Capital
  • Intellectual Property
  • Taxation

For those of you who notice these things, you can't have a conference on this topic and not address the many facets of intangibles. Although they didn't use the IC framework, the discussions hit on all four categories of human, relationship, structural and strategic capital.

This was primarily a policy conference but there’s a lot here for businesspeople too. The webpage for the conference has most of the slide decks used by the speakers.  A few highlights include Andy Updegrove on standards, Carol Corrado (a leader in thinking about economic measures) on future data needs and Michael Mandel suggesting that data is a new category of goods (as in products+services+data).

 

There’s a related conference in Paris in February. If you go, please let us know what you learn.

Read more…

Beyond Whack A Mole Social Strategies

Most people view social technologies as a means of marketing. And, while they are indeed a very powerful way to market, there’s a lot more to the what's going on in the Social Era.

For marketers (and managers in general), social technologies create the possibility for two-way conversations with your customers and stakeholders that can’t be duplicated by any traditional, one-way medium. Companies can talk about what’s important to them in a way that is (hopefully) meaningful for their customers. And they can listen what’s important to their customers. This is especially valuable when there is a problem. A quick reaction to customers when they have a problem or a criticism can prevent one of the social media crises that every manager dreads.

This kind of conversation is primarily handled by marketing people. But it’s dangerous to just view social as a marketing strategy. To show you what I mean, I would like to refer you to the game of Whack-A-Mole. This is an arcade game where you stand with a hammer and have to pound down little “moles” who live under ground and pop out unexpectedly in different places on the game board. The faster you react to the mole popping up, the better your score.

A great marketer is actively listening so that every “mole” in your backyard can be quickly dealt with. The marketer will hear the minute there is a problem and hopefully solve it. And the marketer that’s listening carefully can see problems developing in their early stages.

But even a great marketer isn’t in a position to anticipate where the next mole is going to pop. That’s really the job of the larger management team. What are you doing right or wrong? Where is your organization vulnerable to problems? Don't leave marketing to deal with the consequence. Anticipate them.

One of the challenges is that the drivers of success of companies today are, like our friends the moles, hidden from sight. Today 80% of the value of the average company is intangible. This means that the people, knowledge, processes, relationships and culture that drive success are outside of traditional accounting and management systems. Most people manage intangibles intuitively and lack even basic information about them. And if you aren’t watching these intangibles, the only time you see them is when a problem pops up unexpectedly.

That’s why smarter companies take a more holistic approach to management. They understand the unique intangibles driving their success. And they have concrete information about all the intangibles—the things they do and how they do it. Smarter companies find ways to track the moles while they are still underground, anticipate their moves or prevent them from even entering their yard.

Are you ready to move beyond Whack-A-Mole management? Get started using our open source index and inventory tools. And let us know how many moles you find before they have time to become a problem.

Read more…

Management is Broken

Most of what we do as managers and most of what is still taught in business schools is a toolset that was perfected in the industrial era for managing factories. It shows people how to manage from the top down and is built on the assumption that the boss has all the answers. Org charts are the prototypical view of the organization under this model.

 

We all know that the world has changed. That the industrial era is over. That top-down isn’t enough. There are lots of conversations about how to deal with this change. Companies doing network analyses. Looking for ways to create more inclusive management models. Working to understand the elusive phenomenon that is innovation.

 

But the mainstream is still ignoring one of the basic underlying shifts in the foundation of organizations. As we moved from the Industrial to the Social Economy, the core competitive (and collaborative assets) of organizations shifted from being mostly tangible to now being mostly intangible. Today 80% of the value and 100% of the competitive advantage of companies resides in intangible assets like people, knowledge, processes, networks, relationships, culture and business models.

 

It is a rare business person that has any tools beyond their own good instincts to deal with this shift. Accounting calls these things goodwill. Financiers call them “soft” assets. Business schools ignore the research that shows how absolute and final this shift is.

 

What business people and organizations need are a few of the same things that they have in their toolset if they were to manage an old-style factory: a way to identify intangibles, inventory them, model their operation, measure them and optimize their performance. It’s not that exotic. It’s common sense management. People need a similar toolset for intangibles.

 

It’s absolutely critical if individuals, organizations and economies are going to solve some of the exciting and potentially mind-bending opportunities out there: improving the health of our people, the quality of our environment and the strength of our economy. The solutions are all out there, inside our minds, waiting for the right environment to nurture the collaboration and innovation to find them.

 

That’s why I founded Smarter-Companies and created the ICounts Tools. To empower organizational leaders with tools to focus on what’s important: intangible capital. Join us on our mission to change management and empower people and organizations to build a better future.

Read more…

As you probably know, I was thrilled to be invited to speak at the Rutgers symposium, “Intangibles Come of Age” organized by Miklos Vasarhelyi. The final title also called it a discussion about “comprehensive firm valuation.” And it was a wonderful discussion even though it showed us that we have a long way to go. Most of the presentations are on line—and there will be video later.


Dean Yaw Mensah opened up and said that intangibles were very much on his mind when he heard about UCLA’s Anderson business school considering a plan to go private. Would the taxpayers get their share of the value of the school’s IP that they helped build?


Baruch Lev, who never gives up on intangibles, opened the day with some fresh case studies about work he has done around specific aspects of intangibles including ROI on R&D, IT investment and IP. Also described an interesting study for a software company as to whether internal growth or acquisitions gave a better return (the answer was internal growth).


Lev insisted that “everyone recognizes the importance of intangibles.” This was a theme repeated over and over during the day. When I spoke I opened by saying that intangibles may be old news to people at this type of conference but that in general, the average businessperson doesn’t know what we are talking about, why intangibles are important or what to do about it.


For this reason, it was great to hear Amy Pawlicki’s summary of all the reasons that businesspeople are hesitant to improve their intangibles reporting—including good answers as to why each reason should not be a barrier to taking on this important challenge.


Feng Gu presented a paper that he wrote with Baruch Lev on goodwill and write-offs that makes the case that large goodwill often results from companies making acquisitions during periods when their stock is “over-valued.” Earlier in the day, Lev had said that he advocated capitalization of intangibles but that his accounting brethren have been so resistant to this that he no longer talks about it. I brought the subject back up as did Janet Hao.


Janet Hao works with Corrado, Hulten et al at The Conference Board who have done so much of the valuable macroeconomic research that has now shown that intangible investment now exceeds tangible investment in the U.S. She presented a pro forma set of J&J financials which were adjusted (based on public information) to capitalize spending on intangibles. It was very enlightening—showing that increased assets, profits and equity (by capitalizing intangibles) paint a very different picture of a company in common ratios such as return on assets return on equity and leverage. This set up a conversation about valuation and value.


Right after Janet spoke, Benedetto Bongiorno presented based on his long experience in valuation of intangibles in the real estate sector. A lot of his themes were reflected in the practitioner panel after lunch with Steve Rivera, Kevin Tom, and Shawn Suttmiller. The valuation and accounting professions are focusing very heavily on fair value and have sophisticated approaches to value intangibles acquired in mergers. Listening to these professionals, I was struck by the complexity of their valuation models. I’m not totally convinced that this is the way balance sheets should be constructed…


The panel actually got caught in the middle of an energetic discussion of goodwill. Current practitioners believe that they are identifying all the intangibles that they can and that goodwill truly is excess value, synergies and the good will of stakeholders. Others (I’m in this camp) believe that we are missing a big portion of intangibles investment and that we can and should be able to explain the origin of almost all goodwill, even though some of the elements may not end up on the balance sheet. This is the logic behind what we call i-capex.


Marcus Spies presented a refreshing alternative to reporting, explaining a large project he worked on for the EU that extracted data of many kinds from corporate systems to create leading information on the performance of intangibles. This is very complex work—not surprising given the amount of data that exists within the average company. It is this kind of work that provides a clue how reporting and (assurance/auditing of that reporting) can become a continuous process.


Stefano Zambon closed the day with a sweeping summary of work being done around the world in the field of intangibles. Stefano brought me back to some of the work I have been doing lately. As some of you know from the IC Knowledge Center, I have been developing a table that details the sometimes starkly different perspectives on intangibles held by various professions (accountants and lawyers among them).

It is increasingly clear to me that we have to face these differences head on if we are to advance the cause of filling in the enormous (80% and counting) intangibles information gap. I continue to believe that this gap holds back our thinking and our collective action, limiting innovation and growth in a time when we desperately need both.


Thanks to Miklos, all the folks at Rutgers and all the attendees for keeping this important conversation going.

Read more…