Training (and spending on intangibles in general) as an Investment?

Clive Shepherd asks whether spending on training is an investment in this thought-provoking post. He makes the comparison to spending on other kinds of business operations to highlight the challenges of going the investment route. Then he takes the next step and says that if indeed training were to be considered an investment that companies must then subject the spending to the rigorous analysis that capital investments demand such as expected returns and choice of metrics for tracking the performance of the investment.

I made the case in a recent post that much of the spending on intangibles should be considered investments so I read Shepherd’s comments with interest. He made me think more deeply about what truly is an investment. I think that the starting point is to ask whether an operating expense is intended to keep the company running as is or if it is intended to create new value, to accomplish something new. Here’s my take on Shepherd’s examples (the bold comments are from Shepherd):

• Accounting: an investment in future financial security – I would say it’s a normal operating cost unless you do something like implement a new software that that will create future efficiencies in the company’s financial management
• Customer service is an investment in customer loyalty – I would say that customer service is an on-going expense unless, as with accounting, you are building a new and better mousetrap.
• Marketing is an investment in future sales growth – Now this one is interesting. Brand is a long-lived asset although one that, as we see in today’s financial markets, can lose value very quickly. But it is hard to think that all marketing is an investment. Some of the costs belong in the current period (maybe advertising?). But what would qualify as an investment? I need to think about that.
• Research and development is an investment in new products – This is clearly an investment in the future but one that, as Shepherd suggests, needs to be analyzed rigorously.

Of course, Just because I advocate understanding and analyzing spending on intangibles means that I am advocating the capitalization of intangibles on the balance sheet. Our accounting paradigms won’t allow that for many good reasons (the most important of all is that, except for intellectual property, intangibles are not owned). The approach that I endorse is to create a separate report of i-capex (intellectual capital expenditure) so that a company’s stakeholders get a full picture of all the investments that are being made–and to enable them to question and track the effectiveness of these investment over time.