Intangible Metrics

I had an inquiry over the weekend from a reader about setting metrics for intangibles. Here’s my first level response.

One of my favorite articles about metrics is by Ian Graham, What’s Wrong with Targets? (it’s on page 15 of this document). It sums up most of the problems that happen with metrics.

The way I see it, there are two types of metrics:

• Bottom up measurement of everything that can be measured. The intent here should be for learning as Graham says in his article. This is something larger organizations are doing using a lot of computer power. But it is also an approach that any size organization can use if they take a little time to set up systems that measure the progress of their core processes.
• Top down measurement. These are often called key performance indicators (KPI’s). These should determined through a disciplined process and also used for learning. In practice, they are often set by people based on their experience in their business and used for control. This is the kind of metric that often gets gamed.

In today’s organizations where most of the drivers of success are intangible, the metrics game is complicated by the fact that many businesspeople still lack a good foundation in the theory and practice of intangibles and intellectual capital management.

Here are some steps that are necessary if you want to measure and manage key intangibles:

1. What are your key intangibles? The first step is to identify how you generate income or create value for your customers. Is it from products, services or relationships? What are the processes that support this value? What are the relationships that support the value?
2. How do these intangibles fit together? Value creation requires a system based on a unique combination of intellectual capital–people, process and relationships. Here’s an example of a modeling approach for intangibles.
3. How well is the intangible side of your business functioning? This can be through an internal discussion although ideally, you should get input from your external stakeholders too.
4. What do we need to do going forward? This is where you identify a course of action and then the metrics to monitor them.

The truth is that most people start with Step 4. Although they would deny it, starting here means that they are going with their gut rather than taking a disciplined approach to managing intangibles. Just because intangibles are invisible in accounting systems, that doesn’t mean they cannot be managed in a disciplined way.