Measuring Intangibles: The Simple and Elegant Answer

November 15, 2010 by  

A few years ago, a colleague from the Institute of Management Consultants, Michael Egan, approached me after I gave a keynote address on intangibles at the Institute’s annual conference. Michael’s firm built a platform a number of years ago that is used by industry association members to anonymously report benchmarking data. The postings by individual member organizations are reported back to everyone in the system with useful averages so they can see how their organization compares to industry norms. Michael was sure that there would be opportunities for reporting on intangibles.

Our first response was the standard response of everyone in the accounting and the intangible capital communities, that you cannot really measure intangibles in dollar terms. But we kept thinking about it and then one day a light bulb went on. We remembered a paper we had read from the Melbourne Institute in Australia called Measuring Intangible Investment, by Beth Webster, Anne Wyatt and L.C. Hunter.  They had made very detailed case for how accountants could keep track of intangible investment in a similar way to the accounting for tangible capital expenditures. We realized that this team had identified the simplest and most concrete metric available for intangibles: the amount of money companies spend every year.

From the moment that light bulb went on, intangible capital expenditure (i-capex), has become something of an obsession for us. Our hope is that this book will provide inspiration to individual companies and then industry groups to create norms for management reporting of intangible investments. We view this as a critical piece of information that could break open the subject of intangibles by giving managers what they crave: hard information about what are considered soft assets, the intangibles that they already know to be the drivers of future success of their businesses.

This shouldn’t be such a radical concept except that this information is trapped inside of a failing accounting paradigm upon which our entire financial system has been built. This paradigm has such a hold on mainstream thinking in business that this chapter will be seen as the most controversial in our book.

Most people want to look at value of intangibles. But market value of owned assets is not the primary focus of a good manager. Rather, the manager’s job is to understand the cost and potential return of investments in productive assets. This logic should apply whether the assets are tangible or intangible.

Adapted from Intangible Capital: Putting Knowledge to Work in the 21st Century Organization by Mary Adams and Michael Oleksak.

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