The Enduring Value of IT and Process Investments

March 19, 2010 by  

Fortran punch cards on Wikipedia

Fortran punch card on Wikipedia

Yesterday, I had a meeting with some consultants who told me the story of a group of IT and accounting people from one of their clients screaming at each other because they could not find common ground to communicate about the cost and ROI of IT investments.

Then, last night, standing in the parking lot outside the Boston KM event, I had a long chat with an engineer who has been around tech and business for decades. He was very active in the Y2K adjustments (yes, that was a decade ago?!). He volunteered to me that people still don’t have a disciplined way of tracking their IT and processes.

This is one of the big reasons that IT and accounting people end up screaming at each other. It’s not that the individuals are at fault. It’s that they are working in a broken system.

For more than 30 years, corporate America has been investing in processes and software (structural capital), competencies (human capital), networks and relationships (relationship capital). It is this investment that leads to the big gap between corporate value and book value of the corporation’s assets. These investments have driven increases in revenue and earnings to the extent that in 2007,¬† 60% of investments (based on macroeconomic value) and 70% of acquisition purchase prices (M&A is one of the few times that intangibles get booked to the balance sheet) were intangible.

Yet, when I speak to most businesspeople  about intangibles, they view them as truly intangible, unknowable and, therefore, not worth thinking about. They see the value of intangibles as short-lived and always at risk.

But this engineer immediately understood what I was saying and told me some great stories. He told me about an actuarial system that was built in Fortran in the 1970′s that is still in use in a large insurance company. About homegrown systems that are still in place decades after they were built.

The Fortran system actually hasn’t been recompiled in 20 years. Most systems do get modified. They may even undergo radical transformation. But they rarely go away. Because the processes that they are automating are usually core to the underlying business. This is why we like the analogy of the knowledge factory. The intangible capital of an organization is the way that it creates value for its customers and generates revenue. It is a system of processes (largely IT-enabled) that help maximize the human and relationship knowledge of the organization.

And the components of that factory are enduring. Like the Fortran system. Like Federal Express’s end-to-end package tracking system. Like the huge majority of the systems inside your own company.

To me, all this is an argument for better accounting for intangibles. Not GAAP or IFRS (yet anyway). No, intangibles management accounting. Every company should have a report that says how much it invests every year in its knowledge factory.

Ten, 20, 30 years from now, will your systems and processes still be there? The answer is yes. Would you operate a store without an inventory of your products? Would you operate a warehouse without an inventory of its contents? Why are you operating a knowledge factory (worth 60-70% of your total corporate value) without an inventory and basic information?

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