Member Blogs

The long-discussed and reviewed merger of American Airlines and USAir has finally gone through. It is the latest in a series of bankruptcies and mergers that have turned twelve airlines into four .

Mergers have a very bad record in general because more often than not, they fail to deliver achieve expected benefits. Airline mergers have an even tougher time because the industry struggles to make a profit. So there should be interest in using information that would improve the chance of the success of mergers and acquisitions. But there’s enormous momentum in our financial and accounting systems even though they miss a lot of the story in today’s businesses.

The Accounting for the American transaction hasn’t been disclosed yet (although here’s a long but interesting discussion of how the accounting might look) but there eventually will be a consolidated balance sheet of the combined entities.

Of course, the GAAP balance sheet won’t include many of the most important assets of the two organizations. Things like:

• Human Capital – Unionized workers, unionized pilots, training systems, core competencies
• Structural Capital – Systems to support reservations, route management, maintenance. Rights for routes and landing slots in airports.
• Relationship Capital – Customer relationships. Relationships with suppliers and regulators. Brands and reputations.
• Strategic Capital – Business models, culture and external market opportunities.

What if there were a consolidating and consolidated inventory of these “intangible” aspects of the two organizations? It would tell us a lot more about the prospects for success of the transaction than any of the raw numbers would.
Even better, what if there were an objective evaluation of the relative strength of each of these assets in the two organizations as a guide to how the consolidation should be handled? It would provide greater transparency among management, employees, customers, partners and regulators. And, based on our experience, lead to better decisions and, who knows, maybe even a profit for the combined airlines!

If you look at the reporting about this deal, most of it is about the intangible capital of the two airlines. However, since there is no ICounting available, the best we get is isolated pieces of a jigsaw puzzle. Here’s hoping that businesses catch on and start pulling the full puzzle together before the deal closes…

One of our ICountants, Vedran Antoljak, posed this question:

In case of EU, some countries (such as Hungary) have included measures of Innovation Capacities as one of criteria when evaluating projects for EU and national grants and other co-financing programs. In other words, if we would be able to push this for IC, it would tremendously increase companies' appetite for use of IC measurement tools such as iCounts. This is a tough and risky approach, but it would bring high results. Do we have any experience or examples of similar approaches in the world?

In our ICountant training, we distinguish between the innovation ecosystem and the innovation process. Our existing measures of IC are directly applicable to the ecosystem. We would have to add something for innovation processes. But that may not be necessary.

The question is whether you think that innovation capacities are primarily around how to do innovation (process) or around whether or not you have the knowledge, competencies, culture, connections, etc. to innovate (ecosystem)? The first can be taught. The second can take years to build.

My questions to Vedran and the community are:

• Is there an EU definition of "Innovation Capacities?"
• How are others measuring this?
• Are there other examples we could look to?

There’s a wonderfully thoughtful new article by James Saft at the International Financing Review about a recent Fed examination of rise of both corporate cash levels and intangible capital.

It seems that

“Using a new measure, we show that intangible capital is the most important firm-determinant of corporate cash holdings. Our measure accounts for almost as much of the secular increase in cash since the 1980s as all other determinants together,” Antonio Falato and Jae Sim of the Federal Reserve and Dalida Kadyrzhanova of the University of Maryland write.

Saft’s theory about what’s happening (which makes sense to me) is

Having more of your value invested in and represented by intangibles creates some problems. For one thing, unlike a factory building or a piece of machinery, you can’t pledge intangibles as security against a loan. That makes borrowing more expensive or even, if a company is in distress, impossible. It follows then that firms with high levels of intangible capital, which is just about everyone, would hold more cash in order to keep their options open, either for investment or acquisitions or simply to weather the inevitable storms.

But then Saft goes on to say

One partial potential solution might be to make it easier for firms, perhaps through banking regulation, to borrow against their intangibles. That might encourage them to keep less cash on hand and invest more. It also, of course, might lead to banks going bust when they find it impossible to measure, much less seize and liquidate, the intangibles pledged against a loan.

Would banks go bust if they try to measure and liquidate intangibles?

It’s a question answered in a number of papers by my colleague Ken Jarboe at the Athena Alliance.

It’s also the question that led me as a consultant and former banker to create the ICounts toolset. Every company should have a basic information set about their intangibles, not only to show to their investors and bankers but also for their own internal management.

What does a basic information set look like? It’s not that different from what you use with tangible assets:

• An inventory of key intangibles
• A visual/canvas that maps the connection between these intangibles and financial results
• A measurement of the health of these intangibles

This kind of ICounting information isn’t a guarantee that banks won’t lose money. Accounting isn’t a guarantee either. The point is that intangibles are way too important to the ability of a company to succeed and to generate the cash it needs to survive. Banks should want this information today.

My vision is that some day in the not-too-distant future, banks will be willing to make more loans to companies with high intangible levels. In fact, it’s an opportunity for the right bank right now. Curious to know more? Join our movement for measures that matter.

I’ve just started working out of WorkBar in Boston. One of the many cool benefits of working here are the special programs for members.

On Friday there was a talk about coffee given by Equal Exchange (EE) based in Bridgewater MA. As I thought later about the presentation, I realized that it was focused on outlining EE’s intangible capital without ever using the terminology. 

Here’s what they talked about (annotated for ICounting:)

• Human Capital – EE is a worker-owned cooperative. Each of the 100+ employees has an equal vote and receives a share of profits. The highest paid employee does not earn more than 4x the lowest paid employee. Everyone earns a livable wage.
• Relationship Capital – EE does business with companies/organizations like theirs. The presentation included pictures of the farmers and talked about the programs they have to educate farmers about sustainable methods as well as how to grow beans that produce the best possible coffee. On the customer side, EE focuses on cafes/facilities where their story and value resonates.
• Structural Capital – EE is a coffee roaster. There is considerable knowledge within the company on this process. There’s lots of other knowledge about sustainable business practices and, of course, coffee. A lot of the presentation was an informative overview of different brewing methods and other factors that affect the final taste of a cup of coffee. The company has some nice cards they use to explain these different methods.
• Strategic Capital – EE has built a good business by connecting with cafes and consumers who share their values and interest in good coffee. Their values and culture are a key part of their value proposition and a big reason why they are able to compete in a crowded market.

When we talk about intangible capital, people often think we are talking about something abstract and esoteric. But it’s really a very practical set of ideas. And it explain why and how organizations are able to generate revenues and profits, including EE. Can’t get much more practical than that.

That's why our movement advocates for identifying and measuring intangible capital in organizations--because IC is the heart, soul and fuel that drives success in today's markets. Try the exercise for any business you know. Feel free to use our ICounts open source tools.  You'll see how important intangible capital really is to its future success.

I started this table last year and find myself going back to it more and more. It's a high level summary of the implications of the shift from the industrial to the knowledge era:

When you see it like this, it makes it clear that there is a fundamental shift in our economy and that we all need to continue to learn how to measure and manage in new ways. And why we see ICounting as the necessary complement to the accounting that continues to provide the foundation for our financial system. ICounting is still about money. But it digs deeper to map and measure the drivers of the financials.

What do you think? Does it capture the essence of the shift? What's missing?

There’s been quite a firestorm on the web started by Chris Heuer declaring Social Business Is Dead – Long Live What’s Next.  I’m interested because I see social business as a parallel and overlapping concept with intangible capital and new forms of measurement.

Basically, Chris say that the words and the concepts of social business have not been embraced by large corporations:

Through my conversations with colleagues and executives at large enterprises, the words Social Business have not struck the right chord with leaders. The movement has failed to earn their faith, trust and budgets in a significant way. While the ideas behind the moniker are invaluable in defining the future of work, most large companies simply aren’t buying into or investing in Social Business transformation efforts in more than a piecemeal sort of way

The underlying assumption here is that for an idea to succeed, it has to be accepted by big business. But this assumption contradicts everything we know about innovation. All of us in the business of disrupting management practices have to understand that the people we are disrupting are managers who are comfortable in their positions at the top of the pyramid. Large companies are full of such people. And, as Chris points out, there aren’t a lot of immediate motivations for the kind of wholesale change that social business implies.

This assumption in itself shows a bit of an industrial mindset—the idea that change can and must come from leaders and bosses—even though the concept of social business clearly would say otherwise. And that consultants can co-opt the power of managers and make broad changes in an organization. This is the irony of our era. All of us, even at the vanguard of change, are creatures of our upbringing. Every one of us in the workforce (and unfortunately even my sons who are in college) is the product of an education system that was, like all the rest of our institutions, optimized in the industrial era. We are industrial beings trying to cope with a post-industrial reality.

One of the basic concepts of that reality is that disruptive change comes from the bottom of markets—in this case, from the bottom of the management pyramid and the external environment of a company.

This means that the hard work of selling new ideas has to be done at the grassroots level. Our work is to empower people with tools that they can use to do their work better. It has to succeed there and filter up. The days of top-down, legislated change are over (as if they were ever that successful to begin with). When the success of your business depends on a smart, engaged workforce, you need for your people to be part of any change.

I’m heading to DC later this week to an academic conference, ICICKM. On Thursday I’ll be presenting a paper with John Dumay that basically says that practitioners have to get out of the cathedral and stop legislating how next generation business should be measured and managed—and get into the streets as missionaries to help empower people with the skills and tools they need to be successful.

Everything that Social Business and Intangible Capital are about tells us that power comes from the people: from your employees and customers and communities and stakeholders of every kind. Social Business isn’t dead. The idea that’s dead is that big business will show us the way to create social businesses. Don’t get to the people through the bosses. Get out and sow change in the streets.

My reading pile has grown and gotten a little out of control in the past few weeks. I promise to dig in more on some of these many developments. However, many of them the continuation of issues/approaches we have discussed before and change still isn’t happening.

The pile includes new information about Shared Value (Porter), Knowledge-Based Capital (OECD), IIRC, Shift Index and Cultures of Purpose (Deloitte), End of Shareholder Value (Drucker Institute). They are all talking about the need to think long term. To fuel innovation, solve the world’s problems and create more sustainable results for companies, regions, countries and the global economy.

All of these assume a different kind of organization and different approaches to management than generally exist today. To me, one of the biggest barriers to achieving these ideals is to give people inside organizations tools that help them see what’s important. Most people recognize that people are important, relationships are important, culture is important, knowledge is important. That innovation is necessary but that it is driven by a different dynamic than the traditional industrial views of top-down strategies and imposed changes by managers.

But most people don’t have a way to show how and why these things are important, how they are linked to the financial and quantitative metrics that dominate most conversations about what’s important inside the organization. In my mind, all of these calls for change and longer-term thinking are calls for a new kind of measurement system. For me, the calls ultimately lead to ICounting.

ICounting focuses on the measures that matter to an organization and its stakeholders. It measures the intangibles like people, knowledge, processes, relationships, culture, reputation and purpose. It reverses the perspective on measuring. Instead of using inside-out quantitative or financial measures, ICounting uses outside-in stakeholder assessments. Putting stakeholders first is one of the ties binding together the calls for long-term thinking. So it’s only natural that key corporate measures should be based on stakeholder feedback.

I believe we are on the cusp of an extraordinary era in human history. That there exists the possibility to drive innovations that solve problems of environment, health, education and create greater shared prosperity. But it’s not going to happen by optimizing quarterly results. Businesses will ultimately make more profits than they ever could have by thinking short term. ICounting is a part of the solution. Join our movement for measures that matter.

There were people from 40 countries who attended International Conference on Intellectual Capital and Knowledge Management (ICICKM) in DC last week. As always, it was great to see old friends from our community.

Our contingent included Xiaomi An, LinLin Cai, Paul Okeke, Dan Paulin and Paul Tolson who all presented great papers. Jon Low and Debra Amidon gave the keynotes. And the current, past and future co-chairs of ICICKM were all present: Annie Green, Vincent Ribiere and John Dumay. Our ICountants Melanie Sutton, Jodie Cohen-Tanugi and I were there carrying the ICounting flag (Melanie gave an amazing presentation that we filmed and will share later). [if I missed anyone, please let me know and I'll get you in the list!]

The thing that I always come away from these events with, especially so this year, is the thought that there are so many people all trying to tackle the same challenges all across the globe. These occasional conferences are good. But to really change the world, we need to turn it into a more continuous conversation (don’t ask how many times I asked people to post their work to our community:)

Some papers that caught my eye:

• IC of universities (especially because we have a Graphs project starting with a university in November)
• A paper about Collective Intelligence (CI instead of IC!) that examined the workings of three on-line citizen communities in Lithuania—glad to see this line of thinking in the IC world.
• An individual-centred model of intellectual capital
• And many more that all continue to contribute to the overall conversation about IC.

I had a number of great conversations with John Dumay about his plans for next year’s conference in Sydney. He plans to encourage more practitioner cases and Melanie Sutton’s great presentation made it clear that we practitioners bring a lot to the discussion.

The best thing about these conferences is that I return to my work energized that we are a much bigger movement than any of us (or anyone else) realizes. Let’s keep working!!

(apology to readers and note to self: you’re carrying around several devices with cameras. please take pictures next time)

Most organizations today are highly dependent on the strength of their people, systems, processes, relationships and strategy for success. Yet these intangibles are invisible and rarely managed in a systemic or holistic way.

This is a problem because, for better or worse, people tend to pay more attention to things they can measure. Measures help frame thinking and help create a feedback loop for learning and improvement.

One of the most established measurement systems in our economy is Accounting. This is a system that has roots in 15th century Venice. It is a well-balanced system that worked well through the industrial era. These Accounting systems have taught us to manage business by the numbers. It’s all built on the foundation of “accounts,” sorting financial transactions into categories labeled as income, expenses, capital, assets, inventory, property, plant and equipment. These “accounts” are reported on financial statements as measures of performance of the organization on a monthly basis and such measures have been hallmarks of corporate performance standards for decades.

For a lot of good reasons, Accounting will never be able to address all the intangibles in a company. At Smarter-Companies, we are promoting the concept of ICounting as a complement to Accounting to fill in that gap. It is based on the concept of ICounts, which are “accounts” categorized by the type of intangibles within your organization. ICounts provide the foundation for ongoing measures of the performance and influence of intangibles on overall organizational results.

The ICounts process involves the creation of an intangible capital inventory which is then mapped out on to an intangible capital map and/or canvas. Then these elements are measured using intangible capital graphs. This approach creates a custom-designed system that describes and measures the unique intangibles of an organization—something most companies have never seen before.

The graph report uses stakeholder feedback and ratings to score the strength of an organization’s intangible capital. Yes, I said stakeholder feedback. Therein lies an important distinction from Accounting. ICounts are not developed and measured by external standards. They are developed by a team with and for their stakeholders. And the stakeholders are the judges of how well things work.

This is why we see ICounts as the ultimate leading indicator of growth, performance, valuation and reputation. It’s the net promoter score on steroids. If you have the right people, processes, partners, culture and business model in place to create value for your stakeholders, you will be successful and profitable. If you want to know how you're doing, ask your stakeholders. You’re already managing these things. Why not measure them in a holistic, systematic way? ICounts make it simple.

We 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!

This is the second of a series of post leading up to our upcoming sessions at Sibos. In the first post in this series I talked about how the basic model of value creation is shifting from extraction to attraction. This shift demands dramatically different ways of thinking about management in general and investment management in particular.

In the industrial era, the name of the game was productivity. If I am the head of the factory, I will find the most efficient way to do things and tell you how to do it. I use automation to minimize labor cost. To track how I’m doing and what excess goes to the shareholders, I use accounting.

Today, the name of the game is creativity. If I am the head of a company, I will create an environment where smart people tell me how to do things better. It’s about listening, supporting, engaging not only employees but also customers and partners. I use automation to make people smarter.

A simple example of this is Google: their capital is their people, the users of their search engine, their software, their famous culture and their advertising business model. Most of that exists because its employees, its partners, its users are engaged. They have to be getting value from Google to stick around. Value has to be created for all the stakeholders, not just the shareholders.

This doesn’t just apply to companies like Google. It also applies to any business that wants to innovate and grow. You can’t grow for long by just thinking about maximizing short-term profits. You have to think about how you’re creating value for all your stakeholders and keeping them engaged so your organization if constantly learning.

So to measure your success in this digital era, I can’t use accounting, I have to use ICounting. Basically it’s the same process: inventory, classify, measure. We’re just focusing on intangibles, not tangibles. And we measure these assets not by how much they cost but how much value they create for stakeholders. We measure this by asking the stakeholders. It’s the ultimate leading indicator. To generate future profits, you have to create value for your customers and employees. Track the value and the profits will follow.

What's the lesson for investment managers?  Follow the value in your own company and in your portfolio companies.

Today, we had an amazing day with our partners in Holland, IPR Plaza, TPA and i2c.  We took video and photos and will share more soon.

Now it's on to Dubai!

This is actually the third in a series of posts leading up to our upcoming session at Sibos. In the first posts in this series I talked about how the basic model of value creation is shifting from extraction to attraction and what this means for management in general and investment management in particular.

Remember how I talked about the shift in Boston from an industrial to a digital economy? This whole shift is caused by technology: computers, the internet and social technologies. This latest step, social technologies is a tipping point. Social technologies are not just Twitter and Facebook, but all also all the tools that empower customers, consumers, partners and employees to share, learn and control conversations. These tools give them unprecedented powers that will only grow. And they will fuel alternatives like crowd funding that can replace you completely.

What does that mean for investment managers? It means you have to look at companies differently. But it also means that you need to manage your own business differently. You can’t just think about extracting value, asking what do we get out of owning your stock? You have to think about attraction: why someone would want your money rather than someone else’s money?

This means that you have to ask yourselves questions like: What value do we bring to the system? How do we support a company’s ability to create value for its stakeholders? Remember, your financial capital isn’t as important to the creation of value was when companies needed massive amounts of money to build railroads and factories. They can start those with less financial and more intangible capital.

Think about Facebook. They got some venture capital but not the kind of numbers that you saw in the industrial era. Facebook was built on intangible capital, attracting smart people, partners and knowledge. They only used the public markets to partially cash out the founders. I actually think that Facebook could have and maybe should have skipped the capital markets and raised money from their users. Once they went to Wall St, they ensured that they would be an extractive business, focused on how they can take as much value out of the network without losing members—rather than how can we create the most value for everyone in the network? Their goals are not as well aligned with their users. Some day, someone will replace Facebook with a network where the users get a return on their contribution to the network, where the financial and management systems are aligned around attraction, not extraction.

Technology is behind the changes facing the global investment management industry. The power of this technology is in how it empowers employees, consumers, companies and investors to connect directly. To remain relevant in this market, you have to think about creating value, not just extracting it.

Awhile back, I developed a free tool for evaluating IP using IC concepts. A number of people have asked me to bring it back so I am providing it here (see terms of use below). Let me know what you think. Maybe we’ll automate it again….

Background

Most companies develop intellectual property for their own use. In this situation, the ultimate success and value of a specific piece of IP ends up depending on the success of the business supporting it. This QuickScan allows you to test the strength of the business resources that your organization intends to use to exploit your IP. It examines the four elements of intangible capital that are necessary for any business:

IP Mangement QuickScan

The tool was designed for a four-point scale: 1-Below Average, 2-Above Average, 3-Average, 4-Best. Once you score your IP, use the scoring table below to interpret your results.

Human Capital

• How would you rate the management team’s understanding of what it will take to commercialize this technology?
• How would you rate the management team’s knowledge of the industry related to this technology?
• How would you rate the employees’ competencies related to production/delivery of this technology?
• How would you rate the employees’ competencies necessary to renew and continue to build this technology?
• How would you rate the employees’ competencies necessary to support customers of this technology?

Structural Capital

• How would you rate the company’s ability to create an effective process for producing the technology?
• How would you rate the company’s ability to create marketing processes appropriate for creating demand for this technology?
• How would you rate the company’s ability to create sales processes appropriate for selling this technology?
• How would you rate the company’s knowledge base related to this technology?
• How would you rate the company’s access to related technologies that it will need to commercialize this technology?

Relationship Capital

• How would you rate the company’s understanding of the target market for the technology?
• How would you rate the fit between this technology and the company’s existing customers?
• How would you rate the company’s access to the right prospect group for this technology?
• How would you rate the company’s access to the right partners to produce and deliver this technology?
• How would you rate the company’s brand as consistent with this technology?

Strategic Capital

• How would you rate the fit between this technology and the company’s existing business model?
• How would you rate the company’s ability to create an appropriate business model for this technology?
• How would you rate the opportunity in the marketplace (strong opportunity usually means fewer incumbent competitors)?
• How would you rate the outlook for the market need that this technology is addressing?
• How would you rate the level of freedom from regulation in the market for this technology?

As mentioned above, this was designed for a four-point scale: 1-Below Average, 2-Above Average, 3-Average, 4-Best. This scoring sheet has some ideas on how to interpret your results.

This is obviously a tool used as a first level analysis of your IP. Our ICounts Graphs platform provides a much more robust analysis. If you are interested in understanding the Graphs or any of our other methodologies, we’ll put you in touch with one of our ICountants.

Terms of Use: I developed this approach initially for IPR Plaza, Amsterdam, Netherlands as a free on-line tool (which is no longer available). I make it available here under a Creative Commons Attribution-NonCommercial-ShareAlike license 

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.

Structural capital is a special and critical element of intangible capital. It can be both an asset and a liability; it all depends on how stakeholders view the performance of your structural capital.

If you understand human and relationship capital, you can start a business. If your business creates strategic capital for your stakeholders, you can earn a good living. But you will never grow large or particularly rich with just these three kinds of intangible capital. This is because the leverage of intangible capital comes in the creation of structural capital, that is, knowledge that gets captured and institutionalized in an organization.

Structural capital is the supportive infrastructure that enables the rest of an organization to function in a repeatable, scalable way. It is owned by an organization and remains with an organization even when people leave. Structural capital includes processes, data, systems, designs, and knowledge. Some structural capital qualifies for special legal protection as intellectual property such as patents, trademarks, copyrights and trade secrets.

Most structural capital can be used and re-used without diminishing its value. In fact, most structural capital improves with re-use. Think about a database or a process or a design. Each of these can be improved over time and the more users, the more the potential for improvement. There may be a cost for improvements but the marginal cost of re-use is essentially zero. This is why structural capital deserves a lot of attention.

When people say that “all our assets walk out the door at night” they are showing their ignorance of structural capital. A really successful business depends on people coming in every morning. Bit it also has standardized processes and shared knowledge that stay in the company when people go home at night.

Intangible capital measurement can help you ensure that you have the right structural capital to succeed when your employees arrive tomorrow morning.

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.

Everything you read about the Twitter IPO is talking about pieces of its intangible capital. Not a big surprise—it’s a perfect example of a social technology company built almost completely of intangibles.

But as someone interested in the field, I get frustrated that the holistic view that IC brings is often lacking. In an effort to gain such a view, I've brought together some pieces of the puzzle:

• Human Capital: Twitter has 2,000 employees. Interestingly, managers/employees own much smaller percentages than seen in comparable young tech companies (could be a good thing—see my comments on shareholders below). There’s no clear leader like Zuckerberg at Facebook or Page and Brin at Google. There’s also no woman in senior leadership (definitely a bad thing).
• Relationship Capital: Twitter has over 100 million Daily Active Users, over 218.3 million Monthly Active Users. The NY Times article explains that the whole business depends on users posting interesting things that attract readers and other users. Other forms of relationship capital includes Advertisers, 3 million websites that integrate Twitter, 6 million Registered Twitter Apps.
• Structural Capital: 6 patents, the platform software itself, 300 billion Tweets and related data about use of the platform
• Strategic Capital: Revenue model is based to date 85% on advertising (65% of which is mobile—better than Facebook) and 15% sale of data. But the model still isn’t profitable. Will it be in the long run? In the S-1, management explains their purpose as follows:

  The mission we serve as Twitter, Inc. is to give everyone the power to create and share ideas and information instantly without barriers. Our business and revenue will always follow that mission in ways that improve–and do not detract from–a free and global conversation. 

(Sources are listed at the end of this post)

I assembled the above summary using the inside-out kind of data we are used to seeing from and about companies. This approach uses financial and quantitative data to describe the essentials of a company. But there’s no consolidated view, like we used to have with the tangibles-based balance sheet.

Categorizing the data by intangible type and looking at how it’s connected can be interesting. In this case, it shows that not much is understood about the people behind the company’s success. It also shows how dependent the company is on its relationship capital—the primary structural and strategic assets are directly related to the relationship capital. And, you could make the case that the relationship capital is dependent on the continuing strength of the culture (strategic capital) and the people (human capital). But if we don’t know about management,  we don’t have a complete picture

How could we get clarity? That’s where I’m left wanting an outside-in measurement. How do the company's stakeholders view it?  Maybe the number of active users is a proxy for that. But that’s going to be a lagging indicator. If I had to choose, I would want to monitor the people and the culture as leading indicators. Catching a problem there would be far preferable to waiting to see it in the user data. This is why we recommend that companies proactively measure their key intangibles through stakeholder feedback. Meeting your stakeholder needs is the path to success for just about every company.

And this begs the final question about the IPO. If Twitter puts itself in the position of being beholden to Wall Street to extract more value from its intangible capital, what happens to its power to attract those all important users? In other words, how much alignment will there be between the shareholders and the stakeholders?

This is why I continue to believe that future Twitters and Facebooks will turn to their users rather than the capital markets for liquidity. In the Slate article referenced below, Matthew Iglesias makes the point that IPO’s today aren’t about raising capital, they’re about liquidity for early investors. This IPO replaces an interested, more engaged investor group for a more fickle, demanding investor group on Wall St, not the kind of relationship capital I would choose for a company whose value is so strongly based in intangibles like people, users and partners…

Sources:

NY Times: Twitter’s Biggest Risk is Losing You 

Tech Crunch: Twitter IPO by the Numbers

BusinessWeek How to Read Twitter’s IPO Filing

Slate Twitter’s S-1: Four Interesting Points

NY Times Curtain is Rising on a Tech Premiere With (As Usual) a Mostly Male Cast and story about management’s response on Twitter

For those who still don’t think social technologies will turn corporations upside down, here’s a dispatch from the front lines that you shouldn’t ignore: Even if It Outrages the Boss, Social Net Speech Is Protected.

In it, the NY Times reports that

Federal regulators are ordering employers to scale back policies that limit what workers can say online.

Employers often seek to discourage comments that paint them in a negative light. Don’t discuss company matters publicly, a typical social media policy will say, and don’t disparage managers, co-workers or the company itself. Violations can be a firing offense.

But in a series of recent rulings and advisories, labor regulators have declared many such blanket restrictions illegal. The National Labor Relations Board says workers have a right to discuss work conditions freely and without fear of retribution, whether the discussion takes place at the office or on Facebook.

I talk a lot about the limits to command and control management. In a knowledge-based social economy, it doesn’t make sense to let top-down communication dominate your conversation with anyone including your employees, customers, partners and lots of other kinds of stakeholders. But this ruling makes it clear. Two-way conversation is mandatory, not nice to have.

We’ve already seen countless examples of how customers can change the conversation about companies via social media. But this adds a new wrinkle. Does it mean that there will be a floodgate opened for unhappy employees to vent? Probably not. But the possibility shouldn’t be discounted. And you should welcome that.

Why should you welcome this? Because it reminds you that your actions in business can and will be held up to the scrutiny of others. It’s harder than ever to keep a secret, to control a conversation, to get away with something you would rather not have other people see.

Well, that’s not possible. So live your life, do your job, run your company in a way that will stand up to scrutiny. Not everyone will agree with everything you do. But if you are fair and transparent, you’ll be in a strong position in any disagreement.

Even more than that, the feedback from conversations with your stakeholders is gold. It often tells you more about your business in a few minutes than you can find in piles of management reports. Learning and adapting is critical to companies that depend on intangible capital. So stop trying to control the conversation and jump into it. Embrace free speech and start listening. You’ll learn something and you’ll build the trust of your stakeholders. You’ll be on  the path to building a much smarter company.

(By the way, this why all our measurement methodologies at Smarter-Companies are based on stakeholder feedback).

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.

I was sitting on my couch flipping through Fast Company last night and found two articles back to back in the Next section that are like a double punch for any businessperson who isn’t already thinking about how social technologies will change their world. (I was so struck by the double whammy, I looked to see if the editors noted the link between the two...I guess they just let them speak for themselves)

The first, You Sign, Companies Listen is about change.org where anyone can make a petition about anything:

Disgruntled customers have used Change.org to pressure insurance companies into covering denied treatments and force mortgage lenders to halt foreclosures. A 2012 campaign launched by 10-year-old Mia Hansen convinced Jamba Juice to ditch Styrofoam cups for an eco-friendly alternative. Another, started by 14-year-old Julia Bluhm, persuaded Seventeen magazine to stop Photoshopping models. In May of this year, 18-year-old Benjamin O'Keefe called out Abercrombie & Fitch CEO Mike Jeffries on the lack of larger sizes in the company's stores, and two weeks and 75,000 signatures later found himself in a meeting with Abercrombie execs discussing ways to make their brand more inclusive.

The website is providing the platform and also teaching people how to craft effective petitions that lead to real change.

The second article, Not Kidding Around, is about how young consumers are “angry, vocal and eager for change.” It quotes Umair Haque:

That stuff is really there, and we have to build different kinds of organizations. Otherwise the young are going to eat these companies alive. They don't trust them, they don’t want to do business with them. 

This is scary to many businesspeople because they are afraid that they could be blindsided at any moment by a seemingly random attack from a customer or activist. But, if you are thinking about the present and future of your company in the right way, you’ll be well ahead of this kind of “attack.” What’s the right way to think? How can you manage proactively? I have two basic pieces of advice:

First, focus your management efforts on your intangible capital. That means having and actively managing an inventory of your key intangibles (including human, relationship, structural and strategic assets) and working to keep it healthy and in balance. If tangible assets are key to your competitive advantage, include them here too.

Second, measure your intangibles from the outside in. Most companies are experienced with what I like to call “inside-out” measurement like financials and scorecards that use internal metrics of both tangibles and intangibles. But very few engage in comprehensive “outside-in” measurement exercises. This involves asking your stakeholders (customers, partners, communities, employees) how you’re doing with all of the key intangibles on your inventory (here's an example).

If you match stakeholder assessments against your inventory, you’ll create a heat map that tells you where you are doing well and where you are vulnerable. It gives you time to work on it all and communicate openly with your stakeholders about what you’re doing. Wouldn’t you rather do that rather than waiting for someone else to shine a light on your vulnerabilities when you least expect it?

That’s what ICounting is all about. It’s a set of proactive measures that looks at the intangibles that make up 80% of the value of the average business today. I guarantee you that your business is dependent on intangibles for success and competitive advantage. Measure them today and you won’t get blindsided tomorrow.