The debate on the perceived need to measure the value of organisational intangible assets has been around for over 30 years. But the complexity of the issue has consistently obscured the benefit of numerous attempts to bring accounting and valuation practices up to date with the realities of the post-industrial economy. In the balance-sheet approach to the world, intangible assets – be they human resources, processes, brands, intellectual capital, customer goodwill or the value of IT-underpinned productivity, are somehow considered to be divorced from the cash-flow. They are therefore deemed irrelevant in determining a company’s current or future value.
In the parlance of the finance community, which rewards profitability (or an appearance of it) over any other aspect of company performance, the intangibles conundrum is no conundrum at all. In this context, neglecting to properly account for the ever-growing portion of a company’s value is all about efficiency. In other words, why bother trying to measure something that can be worked out through a simple equation: subtract the value of tangible assets from market capitalisation, and, voila – you have the number that describes the value of your intangibles sufficiently enough. For the markets, that is.
The problem is, of course, that determining the exchange rate between theoretical money (the company’s book value), and real money (its market capitalisation) is not the most congruous process in the world. And managers and economists do worry about it. At its most obvious, when unmeasured, intangibles amount to unmanaged risk. When one takes into account that most intangibles are fluid, ie they change in nature, and over time may or may not become tangible (think the asset-light company of the post-industrial era), the issue of establishing their risk profile comes to the fore of management and analyst concerns.
The current orthodoxy that relies on external analyst research to communicate the value and performance of these assets to the markets has already proven its shortcomings. If anyone should need a reminder, the bells are toiling for the uncritically hailed “new economy giants” of the Internet bubble fame … More importantly, in an economy where the unmeasured enterprise value keeps gaining traction (research suggests that up to 60 per cent the total value of the US stock market fits this description); understanding, measuring, managing and disclosing the performance of its drivers becomes critical – and not only in terms of aligning theoretical and real value of a corporation more closely.
IT departments should understand the problem better than most. They have been on the receiving end of the intangibles dilemma for over a decade now, and, for all the Balanced Scorecards and value allocating methodologies, have yet to convince the critics of the direct impact of their contribution to the creation of corporate value. There is no doubt that pursuing a goal of a common language/measurement holds a key to unlocking the mystery of future growth (and its related value) as underpinned by technology and related productivity gains. It is the economic behaviour of these resources that forms an ever-increasing basis for competitive advantage for the 21st century business.
The process of arriving to an appropriate solution of intangibles measurement, risk profiling and management is, of course, going to be a difficult one. Critics will object to it using every weapon in the large arsenal of economic rationalist thought – from efficiency to over-regulation, to shoot it down. None of it, though, can alter the economic reality of the advanced economies. And that can be captured in a simple statement: when the value of future earnings is largely relying on its intangible drivers, such a change – no matter how Don Quixote-ic, inefficient and complex it may appear at first sight, is absolutely necessary.
This is an edited version of a column that appeared in AFR’s MIS Australia Magazine in February 2005.
RECOMMENDED READINGS
Untangling Intangibles is a background paper on the issue of knowledge capital and intangible assets valuation and management I wrote for MIS Australia last year. The article explores the main knowledge capital issues and initiatives currently underway in Australia. To read more, please go to:
http://www.misweb.com/magarticle.asp?doc_id=25428&rgid=2&listed_months=0 [1]
Society for Knowledge Economics is a professional body with a national charter to raise awareness and instigate a debate on the changing nature of the global economy, and the related need for the appropriate measurement and management of its key economic input – knowledge capital. You can find out more about its charter, activities and initiatives at www.ske.org.au [2].