Intangibles Measurement II: Investment

Here’s the next installment in my intangibles measurement series. I always warn folks that this the most radical of the three types of intangible measurement, although it shouldn’t be.

Today, any money you spend on building intangibles gets expensed. Even if you are investing money to build something you expect your company to use for many years to come. This means that most of the money spent on developing internal knowledge systems, operational processes and even relationships with key partners is treated as a direct operating expense on the income statement in the year that you make the investment.

There are a lot of valid accounting reasons why this is the case. I’m not out to change accounting. But I  focus on helping companies make better decisions to grow and improve performance. And the secret to that, except when my clients are buying a new machine (which isn’t that common), is to invest in intangibles like process, IP, people and networks.

So here’s my radical proposal: keep track of how much you are investing in intangibles every year.

An investment is defined in the same way you would define it for a tangible: money spent to create something the company will be using for more than the current year’s operations. That’s a distinction business people are used to making for tangibles, I’m just suggesting that you do it for intangibles too.

Create a separate management report. Once you figure out the accounts where these expenses are tracked, you may even be able to go back and calculate the investment from prior years.

Then use the data to learn more about the intangible side of your business. Here are just a few basic questions to get you started:

• How much do you spend every year?
• How does the amount of this intellectual capital expenditure compare to your tangible capital expenditure  (you may be surprised about the answer to this on)?
• How does the spending break down as to human, relational and that magic structural capital?
• Is there a pattern to your spending (consistent over the years or in big projects)?
• Can you see a benefit to the spending in increased revenues, lower costs or improved competitive position?

One of the greatest challenges facing the mainstream understanding of intangibles is lack of broadly understood metrics. If you want to get on the radar of your management team, your board of directors, your investors and analysts that follow your company–show them the money. There’s no easier way to telegraph the importance of intangibles than to highlight your spending.

Once you have their attention, they’ll ask whether your investment has paid off. That’s where Parts II & III of this discussion will come in.  Stay tuned.