Finally! A discussion of accounting for intangibles

I am thrilled to be part of the upcoming Rutgers University program on accounting for intangibles called Comprehensive Firm Valuation Symposium: Intangibles Come to Age.

This is an important first step to raise the level of the conversation about intangibles in the U.S. I will be talking about intangibles measurement along with

• Baruch Lev, NYU;
• Stefano Zambon, University of Ferrara;
• Amy Pawkicki, AICPA;
• Miklos Vasarhelyi, Rutgers

This symposium is open to the public but has limited seating. More information

Program today: You Say IP, I Say IPR

Accountants document on the balance sheet that which: (a) is a diminishing fraction of enterprise value; (b) excludes the innovations and business processes comprising intellectual properties (and rights) that create above-average profits; and (c) is of passing interest to risk and financial executives concerned with cash flow.

Are the rules and language of accounting a hindrance to the creation and monetization of intellectual properties, or irrelevant?

Join me Friday, 6 August, at 12h00 EDT for the Mission Intangible Monthly Briefing as I interview

Dr. Roya Ghafele, Lecturer at Oxford University and expert on IP perceptions, and formerly an economist at both the UN World Intellectual Property Organization and Organization for Economic Cooperation and Development and

Jim Singer, partner at the Pepper Hamilton law firm, a member of the firm’s intellectual property practice group who publishes the IP Spotlight blog, and is formerly an electrical engineer with an iconic oil firm.

For more information and to register.

If you are general counsel, IP counsel, chief financial officer, a risk officer, an IP executive, a manager of strategic partnerships, a reputation executive (marketing, PR), a board member of any public company, or have a financial interest in any publicly traded security, you won’t want to miss this event.

Modelling the IC of Google’s search business

Google’s search business is a great example of a knowledge factory. While it is driven by highly complex math, the business model developed a decade ago is very simple. It all started with the competencies of two computer science graduate students at Stanford, Sergey Brin and Larry Page. The year was 1995. Page was looking for a thesis topic and was intrigued by the emerging “World Wide Web.” He saw it as a math problem. Brin got involved and by 1998, they had launched Google.

Here’s the story told through the construction of a model of this knowledge factory using Legos.  Read more

Why visualization is so important for intangible capital

One of the big reasons that folks don’t do more explicit thinking about intangible capital is that they have no frameworks or mental models about IC.

We see this disconnect in a lot of businesses. Just about every manager knows that our economy has shifted. They know that knowledge is an important driver of their company’s success. But very few have a vision of how to operationalize this understanding. We believe that visualization is an important first step.

We have struggled with the need for a good visual model of intangible capital over the last decade. Many approaches in use today use diagrams and flow charts to show how all the components of IC work together. But the truth is that there is no one way model that describes every business. that knowledge intangibles are put together in a company. In our client work, our writing and speaking and our continued research, we often help our clients create their own models.

Why do we put so much emphasis on a model? Because models, drawings, graphics are an important aid to clear thinking. They are the visual corollary to stories, which are another powerful form of communication. Every businessperson today is so overwhelmed with data and information that they easily lose sight of the big picture. Visuals help them see it.

We actually used guides on visualization and communication in developing this book. Two books influenced us. The first, Made to Stick by Dan and Chip Heath, helped us come up with the ideas for the ten chapters in this book—breaking down the elements of intangible capital into digestible concepts and making the connection between each and its knowledge-era equivalent. The second, Back of the Napkin by Dan Roam, helped us think about how to represent the elements of intangible capital in a visual way, a journey that eventually led us to the family room of our house and the tub of Lego blocks belonging to our two sons.

We began using the Legos when we were struggling to come up with a way to model a client’s business. We started using the physical bricks. Then we discovered that Lego also has a free drawing tool so now we also create pictures of the models. We start with a knowledge inventory, similar to the one described in Chapter 2. We use a worksheet to assign each of the items on the inventory to one of the four different shapes we have picked to represent the three traditional kinds of intangible capital plus one for products. The only color that has meaning is gold—it is used for any knowledge or product for which a company gets paid. Then we put them all together.

There are a couple ways to approach this:

• Start with competencies. Build the model from there, attaching processes to related competencies then adding relationships.
• Start with your revenue (gold) blocks. Link these with the processes, competencies and relationships together in a way that illustrates how work gets done.

As we work, we try to link related assets directly together. For example, unionized workers (human capital) should be connected to the union (relationship capital) as well as the processes that they support (structural capital). A product needs to be linked with all the processes that are needed to produce and distribute it.

When you are starting out, we recommend that you don’t focus on the support services that each of the businesses have such IT and human resources. Each of these could be modeled as well. One situation where you might want to model support services is when you are doing extensive outsourcing, so that you are clear where the knowledge for that function is coming from.

Over the next few days, we’ll run some examples of models of specific businesses.

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

Why the SBA Should Care About Intangibles

Read the statement about the importance of intangibles to entrepreneurship that I co-authored with Ken Jarboe of the Athena Alliance in response to an SBA RFI on entrepreneurial mentoring on the Athena website. IC is critical to the development of all companies–most especially entrepreneurial and high-growth ones.

Let us know what you think!

Intangibles Are the New Raw Materials

—
Raw Materials
In the tangible economy, raw materials are combined and sometimes transformed to make finished goods. It is often impossible to see the different raw materials in the finished product—together, they make something completely new. In fact, there is often a progression of processes that lead to a final product. Stalks of wheat, for example, are processed and ground to make flour which then goes into making bread. Grains of sand become silicon in computer chips and oil becomes a high tech plastic.
—

The raw materials of the knowledge era are knowledge-based intangibles. You may be nodding your head as you read this. But do you really know what it means? If not, you are not alone. Knowledge continues to be seen as an amorphous, misunderstood part of business. This widespread ignorance isn’t helped by the vocabulary. The word intangibles itself is troubling because its very definition implies that an intangible is invisible, untouchable, and unknowable. The word knowledge is also very general and lacks a specific connotation for business value creation. Yet knowledge is the core asset of this century. Read more

The Moment is Now to Leverage Our Knowledge Intangibles

Intangibles make up 70% of the value of the average company. They drive competitive advantage. They determine the innovation capacity of a company. Yet they continue to be ignored.

And now we are at a moment of truth. Our economy seemingly made huge progress in the past decades. Computers created efficiencies and fueled profits. They also enabled many white collar jobs to be moved off shore along with manufacturing work. The economic consequences of this outsourcing and the mothballing of so much of our economic infrastructure were hidden by a series of economic booms in the 1990’s and early 2000’s. Then the “Great Recession” of 2008-09 exposed the fact that our economy was running on consumer spending fueled by financial profits that have long since disappeared. Today, we lack sources of job creation and true economic growth. Add to this economic challenge the even greater ones created by serious concerns about our environment, our energy use, our health care system, even our food production. We are in a very difficult position. Read more

The Dangerous Secret of Our Economy: The Intangible Information Gap

Although intangibles are more and more important, few companies can provide a description of their own knowledge factory. Nor can they provide an inventory of its critical components. How much it cost to build, maintain, and operate the factory. How well it is performing. The knowledge factory is essentially invisible in most companies.

Experts estimate that easily half, probably much more, of the value of American companies is held in this knowledge factory. This factory has been built through steady investments that were at least equal to the investments made in tangible production capacity in recent decades—and probably much greater.  Read more

The Role of the Intangibles Information Gap in the Financialization of US Corporations

The financialization of US corporations has been aided by the lack of information on intangibles (which make up 70% of total corporate value). Filling in the gap is a big part of the solution to the problem.
Read more

Case Study: Visualizing and Communicating Corporate Value Through Intangibles Management

Last week, I helped lead a full afternoon workshop organized by the Intangible Asset Finance Society at the Think Tank and Auction hosted last week by ICAP Ocean Tomo in San Francisco. (The auction was fun to watch–here are a few Tweets about the auction).

My co-presenters for the afternoon were Nir Kossovsky of Steel City Re and Andy Gibbs of CXO IP Advisory. We opened up by each making some comments about our perspectives on intangibles management and emerging intangibles markets. My slides are here–I will add links to Nir and Andy’s presentations if they are posted online.

Then we moved to a case study discussion. The discussion was very robust. Since we usually cannot share the contents of client work when we engage in this kind of exercise, it is a great opportunity to share with you how this kind of approach works in practice.

Here’s a summary of the case we gave the participants. Read more

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