Intangibles Mismanagement and the Current Crisis

As we end this tumultuous week, I have a few thoughts on the relationship between intangibles management and the current crisis.

How bad intangibles management got us into this mess…

A financial company’s principal intangible assets are its people, its management, its processes, its brand and its customers. While all of these are important and none can be understood in isolation, process deserves special attention in this case. Processes are the way that a company institutionalizes its collective knowledge and experience. The unique processes of a financial company include those for processing transactions and managing risk.

It has been reported here that the SEC allowed the investment banks to increase their leverage and here that the SEC made its oversight of the banks’ compliance with regulations voluntary. Guess what? The investment banks opted out. Regulations are basically requirements for good process. If I had to guess, opting out of the oversight system did not improve the quality of the i-bankers’ processes.

There are those that would argue that the market should reward and punish good business practices. The problem is that the market is not necessarily focusing on process either. I spent the first 15 years of my career in high risk lending. There were two ways that our work was evaluated. The first was to verify the risk of the loans we made. But the tougher examination was of our credit and risk management processes. If I were an investor in a bank, I would want to understand both processes.

Most businesspeople continue to focus on financial analysis. If the balance sheet and income statement look good, the reasoning goes, we should be in good shape. But financial results are about the past. The future comes from those intangible assets I mentioned earlier: people, management, processes, brand and customers. In this crisis, bad management and bad process pulled down the brand, the financials and, in some cases, the whole company.

And how good intangibles management is the best way out…

There are huge possibilities for improved process management in many corners of our economy. That is the goal of movements as diverse as supply chain management, performance management, project management, to name just a few.

The way out, however, is not just better process management. The current financial crisis is going to increase the intensity of a recession that had probably already taken hold of our economy this past summer. The weak dollar, a recession and continuing globalization will put pressure on almost every business.

How will American businesses find their way out of this mess? It certainly won’t be by building factories or new machines. The answer will come from the use of technology and knowledge-those same intangible assets (people, management, processes, brand and customers) can and will be leveraged to improve existing businesses and create new ones.

The successful companies will re-tool themselves. They will learn that intellectual capital is the new factory. That factory is filled with technology-enabled business processes that leverage the brilliance of their people and their customers. They will see their businesses as networks that bring together the best resources inside and outside their corporate walls. They will find new ways to measure, manage and monetize their intangibles. They will know that good intangibles management will lead to innovation and growth.

The winners will be what I call “Smart Companies.” The goal of my blog, of my company and my up-coming book is to help American business to re-tool themselves into smarter companies that will rise to a new level of prosperity.