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Jay Deragon had a great post last week on analysis versus synthesis. His points are really well taken and directly applicable to the challenges of intangible capital management.

Intangible capital includes a broad range of asset that all have as their basis, in one way or another, knowledge, learning and connection--things like people, data, systems, processes, networks, relationships, intellectual property, culture, business models are all part of intangible capital.

If you ask a manager if they are managing their intangible assets and show them a list, the answer is “of course I’m managing them.”  But the truth is that in most cases, intangibles are being managed as individual items or systems according to traditional org charts (sales, marketing, human resources, IT, operations, etc).

The right question is whether intangible capital is being managed as a system. This holistic, systemic view of intangibles fits the definition that Jay cited of synthesis:

Synthesis (from the ancient Greek) is used in many fields, usually to mean a process which combines two or more pre-existing elements and results in something new.

This is the thinking that we need in business today. We can’t view separate parts of an organization in isolation. We need to be able to see the big picture and understand how this system works.

A similar sentiment was outlined in a great article about the Secrets of the Flux Leader in Fast Company late last year that quoted John Landgraf from FX Networks:

"When I say we need a smarter organization, I mean we need multiple, different kinds of brains, of intelligence, on topics, rather than just specialists," Landgraf says.

 

*For a world of constant change, a company needs widespread mental plasticity. "In the old-style economy, where objects tend to remain in place, you could segment these types of intelligence. So you put your crazy intuitive people in marketing and your analytic people in engineering," he explains. "But as we've moved to an economy in which the adoption of new ideas happens so fast, you need all kinds of intelligence in all parts of a business. You can't have people siloed in their particular areas of strength. You have to value all styles, because you will never know which type will solve a problem."

This systemic view is harder today than in the past because most of the action is going on inside computer systems and peoples’ heads. You can’t walk through a factory and see exactly what’s going on.

So we need new management models. To be successful, an organization also needs to create a shared vision at a system level of how knowledge and connection are created and leveraged by your organization.

Use your intangible thinking to take the knowledge that already exists in your organization’s network and create something completely altogether new and very, very powerful.

For 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.

Words matter.

They shape our thinking and shape our conversations.

Here are some really common conversations I have with new business acquaintances:

I ask what they do. They ask what I do. I say (of course!) that I work with intangible capital. Some people ask what I mean by that. Most immediately add their own mental interpretation of what I mean by “intangible capital:”

…If they work mostly with the law (and sometime technology), they say, “Oh, like intellectual property!”

…If they are accountants or financial types, they say skeptically, “Oh, like Goodwill…”

…If they are bankers, they might say, “Oh, like intangible assets? We don’t lend on them.”

…If they are in marketing, they say, “Oh, you mean brand and reputation!”

…Many business people say, “Oh intellectual capital, that’s tied closely to people…”

And so on. The point is that it can be hard to talk about intangible capital when people bring so many preconceptions to the conversation. That’s why we often use the Blind Men and the Elephant example. In this poem, each blind man feels a part of the elephant and makes an assumption about what the whole elephant looks like. That’s what happens with intangibles. Most people are trained to just look at one part and they miss the significant of the whole.

And the whole is really important. 80% of the value of the average business today is intangible and yet mainstream business continues to dismiss intangibles as soft and/or unknowable. I guess I really don’t care what word people use but I do hope that people will develop a holistic understanding of intangible capital.

...It’s not just IP. It’s not just people. It’s not just knowledge or data. It’s not just brands or relationships. It’s not just culture.

...It’s all these things working together in a dynamic, social system. Intangible capital requires holistic thinking and holistic management. And it works best when there is a shared understanding of collaborative advantage.

Good intangible capital management fuels growth, innovation and performance. Don’t be a blind man (or woman). Start looking at the big picture before the elephant stomps all over you.

This drawing was done by Collective Next in Boston.

There is a clear and succinct post at WSJ I recommend called Shift to Valuations, Estimates Challenges Auditors  that talks about the challenges auditors face in their evaluation of corporate financial statements. Emily Chanson summarizes a speech by Jay Hanson of the Public Company Accounting Oversight Board (PCAOB):

estimates and measurements are one of the most frequently identified trouble spots by the U.S. auditor watchdog, as managers and accountants have to spend more time focusing on the fair value of financial instruments, goodwill impairments and intangible assets in the new economy.

I had this same discussion a number of times over the years with my father. He was a CPA and CIA (Certified Internal Auditor, a little more settled than the espionage types). In the first half of his career he was an auditor at Exxon then was an independent auditor with his own practice and ultimately served one term as the State Auditor of New Mexico. He’s gone now but he and I used to have long conversations about changing financial standards and the challenges that intangibles create for accountants.

You see, accounting has the unenviable challenge of applying a tool set designed for the tangible economy to the rapidly-changing and radically-different intangible economy. These standards favor tangible assets and generally recognize spending on intangible assets as operating expenses. This approach has failed to measure or capture the enormous value in the knowledge, ideas and connections that companies have been able to build using information technology and the internet over the last 30 years. These intangible knowledge and collaboration assets are the key drivers of revenues and profits in almost every company today. But since they exist outside the balance sheet, the tangible net worth of the average public company in the U.S. is equal to just 20% of its total corporate value. The rest is., well, intangible and generally not well-understood.

The accounting profession is trying to adapt to this changing world by focusing more intensely on fair value rather than historic costs. But the truth is that accounting (as it is conceived today) will never be able to fully account for many of the intangibles in a business. Many intangibles like people, relationships and culture are not owned assets that can be isolated and quantified on a balance sheet. But they are critical to the competitive (and collaborative) advantage of every company.

This is why we are advocating the promulgation of ICounting. It is a separate skill set that is complementary to Accounting. It is less worried about resources that are owned and controlled and more about resources that are available and connected to an enterprise. Accounting uses financial transactions as a way of measuring financial health and success of an organization. ICounting uses value transactions (the exchange of knowledge, trust and solutions) as a way to understand the health and success f an organization. Each has its place.

Mr. Hanson explains that the PCAOB finds that

auditors fail to check the reasonableness of management assumptions, don’t weigh valuation risk properly, and don’t appropriately consider positive and contradictory evidence in evaluating estimates

How to check "reasonableness and risk," how to "evaluate estimates" in today’s business without understanding the intangibles? Even the Accountants will have to learn ICounting.

Intangible Capital. Intellectual Capital. Intangible Assets. Intellectual Property. These phrases get used a lot and many people think they are the same thing. This post is intended to help you understand the difference. Our objective is to provide clarity to our terms and correlation to the impact IC has on business results.

The study of intangibles emerged as a field in the 1990’s to explain the significant shift in our economy and businesses as knowledge became the key competitive advantage in the global market. This shift reversed the historical pattern of tangibles accounting for 80% of total corporate value to the exact opposite today with the value of the average company today being 82% intangible. How to describe this critical asset class? The field is still emerging and as such, there can be confusion about the meaning and usage of different words and phrases.

The terms intangible capital, intellectual capital, intangibles and intangible assets are often used interchangeably. Although we prefer the phrase “intangible capital” because it has a more precise definition (see below), “intangibles” is also frequently used. Below, for your reference, are some definitions of these and related terms:

INTANGIBLES / INTANGIBLE ASSETS

Strictly speaking, the definition of “intangible” comes from the field of accounting. Intangibles are organizational resources that do not appear on the balance sheet. On average, more than 80% of the value of today’s public corporations is intangible.

This phrase is both our friend and our enemy. It orients people that we are talking about assets and resources that are not tangible. But it also feeds into the broad misconception that intangibles are unknowable and unmeasurable. Nothing could be further from the truth (which is why we wrote Intangible Capital).

Why do we not find a different word? Well, as tempting as that sounds, it wouldn’t solve the problem. Accounting standards and norms are critical foundations of our economy. We have to find ways of orienting people within their own experience. So when talking about intangibles, let’s start with what people know and help them learn and expand their understanding from this base.

INTANGIBLE CAPITAL (IC)

This is a phrase and a concept that comes out of the study of intangibles in an organization. It takes people beyond the strict definitions found in accounting and takes a fresh look at what is going on. Basically, the rise of the importance of intangibles is part of the story of the end of the industrial economy and the rise of the new economy based on information technology and the internet. In this new economy, knowledge, connections and collaboration are the key assets driving growth and performance. To paraphrase Baruch Lev, there is no tangible asset today that is more than a commodity. The unique, the valuable part of business comes from how tangibles are used, how work is done, how the future is innovated.

The field of IC has identified four main categories of knowledge intangibles, each of which has a different character. It is important to understand individual intangibles as well as how they work together as a whole:

• Human Capital - This includes all the talent, competencies and experience of your employees and managers. This is the intangible capital that “goes home at night.” More on human capital
• Relationship Capital – This includes all key external relationships that drive your business, with customers, suppliers, partners, outsourcing and financing partners, to name a few. This kind of capital also includes organizational brand and reputation. Due to the growing importance of networks in organizational structures, this is also sometimes called Network Capital. More on relationship capital
• Structural Capital – This includes all knowledge that stays behind when your employees go home at the end of the day. There is significant structural capital in today’s organizations including recorded knowledge, processes, software and intellectual property. More on structural capital
• Strategic Capital – This is a category that is not always included in academic definitions of IC. However, in our experience, this category of knowledge is the necessary complement to the others. It includes all the knowledge you have of your market and the business model that you have created to connect with market needs. The driving force behind Strategic Capital is purpose. It also includes culture. Culture and purpose are the glue that holds the rest of IC together. More on strategic capital

INTELLECTUAL CAPITAL / INTELLECTUAL PROPERTY

Some people use the phrase intellectual capital instead of intangible capital.

We prefer to use “intangible capital” rather than “intellectual capital” for two reasons: 1-intellectual sounds too elitest–intangibles are real and practical so let’s not make them sound inaccessible and 2-people often confuse intellectual capital with intellectual property.

Intellectual property is a specific type of intangible asset that can be protected legally through copyrights, trademarks and patents. It is a subset of Structural Capital. Many people think that intellectual and intangible capital is primarily intellectual property. Hopefully, this discussion helps you understand that there's much more to the picture!

As the year wound down, Boston Business Journal published a great list of the 10 worst social media mistakes brands made in 2012.

As I read them, I saw a huge difference between the implications (and lessons to be learned) from these mistakes. In my mind, the mistakes fell into two categories:

Bad Marketing: The first I would call bad marketing mistakes. 6 of the 10 fell into this category. They included things like:

• Chef Marc Orfaly, who unloaded an expletive-laced rant on an unhappy customer who posted her review of her Thanksgiving dinner at Orfaly’s Boston restaurant
• Gap tweeting "All impacted by #Sandy, stay safe! We'll be doing lots of Gap.com shopping today. How about you?"

These bad marketing mistakes can be attributed to an ill-considered statement by one person. These can usually be prevented just by making sure that you have good marketing people and a culture and a process to think before you hit send.

Bad Management: This second category are the really scary ones. These are mistakes that are caused by systemic problems happening far away from the marketing department. Here are the four mistakes highlighted in the BBJ article that fall into this category:

• The tweet that went viral: "My sister paid Progressive Insurance to defend her killer in court"
• Starbucks' #spreadthecheer hashtag campaign backfiring in the United Kingdom, where users hijacked the hashtag and tweeted out negative, sometimes expletive-laced tweets about the chain's workplace practices
• #McDStories hashtag. People were supposed to share positive stories about McDonald's. Unfortunately for the burger chain, people began sharing some very unappetizing stories
• Boloco CEO John Pepper alerting 50,000 email subscribers that the chain planned to keep its restaurants open for business during Hurricane Sandy. Angry tweets and emails immediately started pouring in, criticizing Boloco for potentially putting employees in harm's way.

These aren’t social media marketing mistakes. They are Social Era management failures. These are the kind of failures that should keep every leader up at night. And they are a clear harbinger of the dramatic changes to come.

Social technologies empower your customers, your stakeholders and your employees. They move the conversation away from branding where you get to say who you are to a conversation about what you do. Social means (among other things) that your actions can become part of a public conversation. And actions, as my mother always said, speak louder than words. Scary right?

So what’s the answer? The last chapter of our book Intangible Capital is entitled Reputation is the New Bottom Line. In it, we make the case that reputation is the metric that determines your ability to make profits. Starting a new year as we are this week, I submit that your reputation will be much more important to your performance in the coming year than your earnings last year.

What drives reputation? Your intangible assets. Your people, your culture, your shared knowledge, your partnerships, your business model. It’s what you do and how you do it. These intangibles are very real economic assets. And they’re actually easy to inventory and measure. And, if you want to avoid the second category of “social media” mistakes, you better start paying attention to the intangibles.

It's true and very easy to see in this calculation from Ocean Tomo.

I use the figure a lot. The fact that 80% of the value of the average business is intangible. It’s an astounding factoid that I use in the hope of awakening a realization in people how fundamentally our economy and our businesses have changed.

The 80% is significant because it is a complete flip from the past. Until the launch of the first PC’s in the early 1980’s, 80% of corporate value was tangible (and 20% was intangible). And, even though that seems like a long time ago, the financial markets and management practices are still tied to the tangible point of view.

Think about it. Most of the value created using computers, the internet and social media are invisible in today’s accounting and management information practices. How did this happen and why the 80% gap?

Basically, businesses have been investing in intangibles like people, software, processes, data, intellectual property, brands, culture and business models for decades. But most of that investment is considered a cost in current accounting standards. So these investments get booked as current year costs.

Year after year, these investment have built a new kind of infrastructure, an intangible value-creation factory, that is invisible and unmeasured. If you asked the average business person what they would think about a company that failed to document 80% of the value of a factory, they would be horrified. But that’s essentially what’s going on in today’s economy.

This leads to inaccurate corporate valuations, suboptimal performance, blocked learning, stifled innovation and stagnant growth.

Is 80% really intangible? Yes. But it doesn’t have to be invisible and unknowable. That’s our mission at Smarter-Companies. To help companies see, measure, manage, optimize and monetize their intangible capital. Find a better future with intangible capital.