It can be hard to understand corporate acquisitions, especially when they are as dramatic as this one. Facebook bought WhatsApp for $19 billion. Like most deals of this kind, it’s hard to judge whether the price makes sense. So I won’t try to address it specifically. But I do think that it's a great moment to talk about what drives value in companies today.
There’s clearly value in WhatsApp. Google made an earlier offer of $10 billion. Many speculate that Facebook had to buy the company to ensure that Google didn't get it.
Both companies were after the 450 million WhatsApp users. The success of all three of these companies is heavily dependent on their users. This kind of relationship capital is one of the big four categories of intangible capital, the other three being human, structural and strategic.
WhatsApp actually already has strategic capital in the form of a business model where they get paid (only a dollar and only after one year but that’s more than Facebook makes from their users). I actually like this because it puts the company in less of a dilemma than many other web companies who have to find a way to extract as much value as possible from their users without driving them away. (Another alternative would be to offer equity to users. This still sounds crazy today but I'm convinced that more inclusive financial models will come in companies with models heavily dependent on free users).
Human capital is critical to any company like this even though at 55 employees, WhatsApp is a great illustration of the leverage that can be gained from structural capital, the underlying software and data in their platform. Until recently the best discussion to my mind of this leverage was Paul Romer’s discussions of New Growth Theory. But right now I’m reading The Second Machine Age and I’m loving the authors' explanation of how the right algorithm can be replicated over and over again.
Getting the right algorithm is the holy grail of our time. It’s the starting point for everyone, including the tech giants. But none of them can succeed without all four forms of capital:
- people to develop the ideas and keep them growing (human)
- technology/processes/software to make the idea repeatable (structural)
- users and customers to co-create (relationship)
- and the right business model to ensure the sustainability and profitability of the system (strategic)
Why do we call this capital? Because they are all economic assets. I can assure you that WhatsApp spent significant sums on all of them. But the accumulated investment isn’t recorded in traditional accounting.
But most people know the assets are there. And most people deal with all these elements intuitively. And if you are a runaway success like WhatsApp, you might not need a more structured approach like we advocate with ICounting—identifying and measuring the key intangibles driving the success of an organization.
Of course, most companies don’t achieve these kinds of dramatic results. And they could use a little extra help to figure out their model and explain it to potential partners and funders.
What do you think? Does the IC perspective help shed light on these value drivers? Would IC information help the markets make better decisions (not just for mega-deals like WhatsApp but also mainstream companies)?
To date, a lot of the focus in practice (and theory) has been on identifying the key capitals that drive this value creation. But the question about how value and the capitals change over time, and how the capitals interact with each other has been too advanced for most practitioners.
I’ve been lucky to witness the development of a platform that endeavors to help business people map and model value creation in a dynamic way. It’s called VDMBee.
A few months ago, they approached me about including the open license Value Creation Worksheet tool that I developed into their platform. It’s there now along with a number of other tools such as Alex Osterwalder’s Business Model Canvas. I can’t wait to dig in and test it out and hope to find a good test case (contact me if you’re interested).
A little bit of background: The connection between my intangible capital work and VDMBee goes back to shared ideas and work with Verna Allee. I can actually remember the airplane trip when I opened Verna’s 2002 book The Future of Knowledge. In it, Verna laid out powerful ideas about flows of value in networks. Her work and that of many others led to the formation of the Value Delivery Modelling Language™ (VDML™) managed by Object Management Group® (OMG®), an international, open membership, not-for-profit technology standards consortium. As explained in the standard:
VDML is designed to address several critical business challenges: 1) It creates a robust way to model both tangible and intangible value flows; 2) It provides the capacity to model complex collaborations and business networks; 3) It provides a flexible way to model business activities to more readily support continuous transformation in environments of high variability; and 4) It supports more effective shared capabilities optimization and deployment. Table 1.1 highlights these challenges and VDML solutions
The VDMBee platform is the first software implementation using VDML. It’s a forward-looking tool to model how value gets created. But once in use, I can see how it will inform measurement of success against a plan.
Here’s how the integrated reporting community could use the platform:
- Identify the core capitals of the company (using the Value Creation Worksheet)
- Model how the capitals combine to create value over time
- Measure the value flows
- Create different cases to test how changes in one part of the system might affect others
- Compare projected versus actual performance
I’ve used earlier versions of the Value Network approach. It is an extremely robust way of modelling value. I think that we will all learn a lot from using tools like this.
Today 100% of U.S. public companies provide accounting information publicly. It’s a requirement and an accepted practice. At the same time, over 80% of those companies are also disclosing some kind of sustainability data. This latter kind of disclosure is not yet a requirement in the U.S. and standards are still in development. But as the data show, the practice is already well underway.
These two kinds of presentations have traditionally been made in different reports offered on different sections of their websites with differing messages.
Now, however, the financial markets are awakening to the importance of Environmental, Social and Governance (ESG) issues as a source of risk and a driver of innovation and value. They are looking to connect the dots between these different messages. This creates a dilemma for companies. They have a business rationale for both their financial and their sustainability reporting. But they are not accustomed to telling a unified value creation story.
The International Integrated Reporting Council (IIRC) is leading the charge in creating a model that unites these differing perspectives (read an introduction here). Its Framework provides a way forward to creating holistic presentations that explain the multiple forms of capital that support a company’s value creation ecosystem. The IIRC model draws on the traditional accounting/financial reporting perspective, the sustainability/ESG movement and a third, less understood field of study, broadly referred to as intellectual or intangible capital (IC).
The IC field has been focusing for several decades on the rise of the knowledge economy. While IC practice is not as advanced as accounting and sustainability reporting, there is already significant research that suggests the size and importance of this class of capital to the success of companies in today’s economy.
Combining all three perspectives is powerful but challenging. Few people are trained in all three of the root disciplines. So we have to work together and learn from each other. But it's the right goal to support the kind of integrated thinking that empowers financially-sound decisions today that still preserve and build value for the future.
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.
We are learning that networks as a means of conducting business or creating social change cannot be treated like our traditional "bricks and mortar" organizations. This is true for both networks made up of individuals and those composed of member organizations. It is important to understand how networks differ from traditional organizations. This, in turn, leads us to changing the way we respond to networks in our efforts to help develop and improve them. Thinking of networks in terms of their value propositions can be very helpful in working effectively with networks.
One way in which networks differ from traditional organizations and even traditional knowledge organizations is that the roles are dispersed and not organized in a definitive manner. There are no departments, no functions, no bureaucracy. In a network operating at its optimum, the roles (and the people in them) can join together in various combinations in order to do the work of the network.
In traditional organizations, we could plot how the work of the enterprise is performed. We have called this "plot" the work process, the transformation process or the value chain. Traditionally, it was a linear sequence of activities that added value to preceding activities leading to the completed output that was handed off to customers. Even in more knowledge-driven organizations, there was some high-level sense of sequence though work was carried out in deliberations that might not necessarily be in sequence.
I believe that the value chain approach used in traditional organizations has less applicability in understanding and acting upon a network. This is not to say that a sequence of activities cannot in particular cases be identified. It is to say that such a sequence can no longer be generalized as an operational blueprint for the network enterprise. In fact, such a formalized approach is antithetical to a network and the unique value that can be gained from a network.
A useful way of thinking about a network is in terms of its value propositions. For any given network, there is an overarching purpose. Purposes are then translated into value for customers, members, society and the network itself. The value proposition is an articulated statement of benefit to each interested party. There could be one value proposition or several value propositions. A given value proposition could cover one or more groups of interested parties.
The value proposition becomes an organizing mechanism for the network. The value proposition becomes an embedded intangible structure that influences or governs what emerges or is planned within the network.
Ideally, value propositions influence planful activities. They also catalyze conversations in networks. Conversations can occur spontaneously or as the result of facilitating actions by network weavers or coordinators. These conversations can result in ad hoc configurations or more planful configurations to carry out the work of the network. We could call these configurations clusters, communities of practice, or committees. They can be in existence short-term until a new idea runs its course, longer-term to deal with a common grouping of ideas though with varying membership, and can spin off into other initiatives.
A network can be assessed in terms of whether its actions and factors like relationships, trust, inclusion, interactions, funding, convenings, etc. further the given value proposition or not. We can ask, is desired value being provided to interested parties; are we being innovative in how we pursue the value proposition? We can take action to bring alignment to these factors and the given value proposition.
In one network, my data indicated the following candidates for value propositions:
- Improve professional competencies and effectiveness.
- Transfer skills and theory.
- Build interpersonal competencies.
- Create good relationships among members and clients.
- Build a better world.
In another network, an educational consortium, some aspects of the stated value proposition were:
- Through collaboration and cooperation provide greater academic and intellectual opportunities for students and faculty members than could be offered at any single campus, and
- Achieve greater efficiency in operations and administration and greater opportunities for innovation.
What can a network do to create greater alignment between a given value proposition and network actions and factors?
One step is to be explicit about these network value propositions. Think about them and even rethink them. Publicize them, talk about them, and create greater awareness throughout the network. Discuss whether the network has the most desirable balance among its different value propositions. Assess the impact that the network is having on interested parties and create network conversations about how to increase positive impact in line with these value propositions. A network can also share amongst its members what is working well in advancing these value propositions.
This is the fourth in a series of posts leading up to our upcoming sessions 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, what this means for management and how technology is ensuring that these changes are irreversible.
The message is that technologies are empowering employees, customers and investors both individually and collectively. This trend ensures change will come from the bottom up, not just the top down. You won’t always be in control of the changes. And you’ll see that corporate value creation will shift from being extractive to being attractive.
In our session on Monday, I’ll have the opportunity to explain what we are doing at Smarter-Companies. We are a global network of consultants who share a common viewpoint and toolset to help companies and their stakeholders create organizations better suited to value creation, not just value extraction.
We are creating a movement to arm businesses with practical tools to model value creation, to see their intangibles and to be able to measure them—a system of open source and proprietary tools we call ICounts. The people we train are called ICountants. Our ICountants have all kinds of backgrounds: finance, valuation, IP, risk mgmt, innovation, growth. Some day every businessperson will have basic ICounting skills. Because ICounts will provide information on the intangibles that drive value creation and create competitive advantage.
The investment management industry can use ICounting to better analyze your portfolio companies. And if you want to create value for them, you can teach them ICounting to help them manage better and to communicate more effectively with you.
You can also put ICounting into place to manage your own businesses so that you are focused on not just extracting, but also creating value with your stakeholders.
In the Thursday session at Sibos, we’ll help you get started. We’ll be running live exercises using a couple of the open source ICounts tools that help you understand the importance of intangibles in a business and see what the specific intangibles are that are critical to the business’s ability to create value for its stakeholders.
If you are at Sibos, I hope you’ll join us on the Value Track (by the way, as you can see in the graphic it’s all organized like a subway map, we’re the Orange Line!) If you can’t be with us, I hope that you’ll share your thoughts here. It’s going to be a fun journey. I expect to learn an incredible amount along the way. I promise to share my thoughts live and more upon my return.
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.
Value and Economic Growth: Summary of a Workshop.
Back at the time, I wrote a series of posts about the event at Hybrid Vigor (scroll down to July). But please note that the links in those posts don’t work anymore. The presentations are now here (scroll down to June).
My favorite presentation was by Irving Wladawsky-Berger of IBM and MIT on The Transition from the Industrial to the Knowledge Economy for its perspective on the underlying changes in technologies that drove the transition and will drive future change. He sees moves in technology:
* From tangible to intangible
* From automating the back office to automating market-facing systems
* From machines/products to people and services
Speaking with Steve Merrill of the National Academies last week, he told me that limited hard copies are available from STEP@nas.edu and there is a free pdf at http://www.nap.edu/catalog.php?record_id=12745
This was an important first conference of its kind in the U.S. Hopefully more to follow!
This is the first part of a series of posts leading up to our sessions in the Value Track in the Innotribe sessions at Sibos next week. Sibos is the annual conference of SWIFT (the Society for Worldwide Interbank Financial Transfers), an organization of more than 10,000 banks in 212 countries that facilitates secure, reliable intrabank transactions)
The conversations are going to be around the question of value. What creates value and what are the assets and capabilities that create value? The truth is that value is changing. And it provides both risks and opportunities to the investment management business.
I have to look no further than my own backyard here in Boston to see this happening. This was a center of industrialization that began over 150 years ago. In those days, companies required large amounts of capital to buy and build factories. The financial system provided that capital and companies were organized to reward capital. Investors, shareholders were put first. Externalities were not given much consideration. The model was extractive. Capital had the rights to all the excess value after the costs were covered. This is still the norm today but the dynamic is shifting.
Today in Boston, our economy continues to be quite vibrant but it’s different from the past. Today, companies don’t require the large amounts of tangible capital to get off the ground. The brick and mortar industrial buildings have largely been converted to creative spaces for cutting edge knowledge companies. To succeed, these companies need access to smart people, good partner networks and fresh knowledge. You can’t buy and control this kind of capital the way you can a machine. You have to attract this kind of capital and keep it connected to your company. Attraction versus extraction.
So thinking about management and ownership in classic ways has to change. You have to think more broadly about stakeholders. You can’t just put shareholders first or you can’t get the resources you need. The model is no longer extractive, it’s attractive. Can you attract the people and partners and resources you need? How do you keep them engaged and contributing to your organization?
The answer to these questions is relevant to investment managers (and all kinds of financial investors) in two ways: 1- How should you be analyzing your portfolio companies and also 2- How should you be managing your own businesses? We’ll look at both these questions in future posts over the coming week.
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