To Understand Risk, First Understand Your IC

August 10, 2011 by · Comments Off 

Today, 80% of the value of the average company is intangible. A lot of time is spent talking in the IC community about managing and measuring this value. But not enough time is devoted to managing the risk in intangibles.  Based on my conversations with risk management professionals, not enough attention is paid to intangible risks. So this month, I’ll be digging in on this issue. Read more

Comparables and Valuation: the role of intangibles in setting a market price

July 31, 2011 by · Comments Off 

I  made the case earlier this month that corporate values are largely intangible today and that you can influence the value placed on your company by the market by sharing information on your intangibles.

What I haven’t discussed is the role of “comparables” in the valuation process.

Comparables are transactions for similar companies. The tell you the price and basic data from M&A for companies of similar size and business model in your industry. Seeing the price that other companies go for gives a good feeling for the overall market for businesses like yours.

But when you dig into the data, you’ll find a huge variation in results. There are often companies that have sold for as little as 2-3 times EBITDA. And others that have traded for numbers as high as 14-15 times EBITDA. The natural first inclination is to assume that your company is in the top category, Read more

The Goodwill Problem

July 20, 2011 by · Comments Off 

Everyone loves to hate goodwill. It’s this amorphous, misunderstood number that sits on many companies’ balance sheets and causes headaches year after year when it has to be adjusted.  People assume that  represents an over-payment by the acquirer. And accountants look at you with a straight face and say that the entire value could go away in a moment.

Goodwill is created when a company buys another company and has to bring the acquired company into its accounting. There isn’t a lot of good data about this but there is one great study from a few years ago from Ernst & Young that tells us that the average deal is 47% goodwill. The rest of the deal is booked as 23% named intangibles and 30% tangible assets. The total intangibles are thus 70%.

Believe it or not, that 70% intangible figure was less than the 80% average intangible value in public companies in that same time. So, rather than having some wildly optimistic value that it is often painted to be, the average acquisition is in line with (or more conservative than) prevailing corporate valuations. Read more

Intangible Capital Case Study: Talking Non-Profit Business Models

June 26, 2011 by · Comments Off 

Running a non-profit is tough in any economic environment but it’s a nightmare today. Donations are down. Budgets are tight. It’s hard to know where to turn. And, while the financial statements provide clues on managing the cost base, there is no balance sheet for the most important elements a non-profit: its resources, its reputation, its processes and its network.

Here’s how we broke down the intangibles of one non-profit, a regional museum: Read more

Intangible Capital Case Study: Monetizing Your Knowledge

June 25, 2011 by · Comments Off 

One of the great strengths of the intangible capital (IC) perspective is the lessons it gives around business model and organizational sustainability. The IC Value Drivers Report for this services company provides a great example of this.

By way of background, IC Value Drivers include ten categories of the intangibles that are create the unique competitive advantage of companies today. Read more

Intangible Capital Case Study: Beyond Intuition to Objective Measurement of Intangibles

June 24, 2011 by · Comments Off 

Most people assume that you cannot measure intangible capital (IC). But it is very possible and also very powerful.

The starting point that we recommend in Intangible Capital is a high-level inventory of your unique intangibles.

Once you have an inventory, there are lots of ways to pursue measurement. We like to start with an IC Value Drivers Assessment. This gives an overview of the unique IC of the organization as well as those that are common in all companies. The areas of examination fall into 10 categories: Read more

Delivering on Bernanke’s call to measure intangible capital

May 31, 2011 by · Comments Off 

In my last post, I shared Fed Chairman Ben Bernanke’s call for “better ways to measure innovation, R&D activity, and intangible capital.” What better way than this statement to kick off the next two half-day discussions at the New Building Blocks for Jobs and Economic Growth conference?

So, after the opening plenary, the group did get down to the work of identifying next steps for business and policy. On the Steering Committee, we spent a lot of time trying to design a conference that engaged and tapped into the amazing wisdom of the attendees—experts from all over the world in intangibles and innovation. We were helped by great facilitators (and artists) from Collective Next from Boston.

I introduced and helped moderate one of the four discussion areas: Emerging Measures. I introduced a paper by Ken Jarboe that I had contributed to. Here’s how we framed the discussion Read more

The doughnut hole in the corporate info universe

March 21, 2011 by · Comments Off 

The CEO of a spin off from D&B, Dun & Bradstreet Credibility Corp, spoke recently to Bloomberg Businessweek about his company’s new business model:

“What we’re trying to do now is show a holistic picture” of what makes a business appear trustworthy, he says. “Credit is just one component…. D&B’s largest competitors these days are Google, Facebook, and Twitter.”…[the company] compiles credit files on private companies from public records, payment information supplied by vendors, and self-reported data such as financial performance. The company sells that data to corporations that use it for marketing and to evaluate credit risk.

I like their thinking and, of course, see more and more traditional businesses rethinking their business models for a social media world.

But there is something really important missing here. Read more

Reputation and Intangibles – Connecting the dots

February 15, 2011 by · Comments Off 

My last few posts have been about reputation. There are some out there that would ask what the big deal is. What’s different now? Companies have always had employees and customers. Why do they have more influence now?” Why do I need to think about reputation more than before? There are actually several forces driving this change.

The first driver is the shift in the control of the means of production. In the industrial era, a company’s profits were driven by what it owned. Workers had to come to the employer to get access to the means of production. It gave companies a greater level of control over its workers. With the rise of the knowledge economy, however, the knowledge held by employees and, indeed, external stakeholders have become an important part of a corporation’s “means of production.” The knowledge factory relies on the unique contribution of human and relationship capital elements. This shift in the balance of power means that companies have to pay more attention to the interests and priorities of their stakeholders as “partners” in the success of the knowledge factory.

The second driver of the increased focus on reputation is the acceleration of communications. If you didn’t understand this before, you certainly do now given the events of wikileaks, Tunisia, and Egypt. Blogs, Twitter, Facebook and other social networks are just the latest developments in a society that had already developed 24-hour news. It is easier than ever before for anyone to get a message out. Sometimes all it takes is a blog post or a YouTube video by one disgruntled customer to go viral and threaten your reputation in an instant.

The third driver is an increased interest in sustainability and corporate social responsibility. Sustainability is an umbrella term for a number of related trends including corporate social responsibility and triple bottom line. CFO magazine defines sustainability as “the practice of publicizing a company’s environmental and social risks, responsibilities and opportunities…it can be thought of as an environmental-impact statement for the entire corporation, with ‘environment’ defined not only in terms of natural resources and climatological effects but also the economic and social impacts of labor practices, charitable endeavors and governance structures.”

The fourth and final driver is the lack of transparency of intangibles. There is a shocking lack of information available to internal and external stakeholders about the knowledge side of business. So when news does get out about a problem or a failure, then the reaction is swift and often very negative. If your stakeholders don’t understand how your business works and don’t receive periodic information beyond just the financials, then bad news is a warning to get out. The less your stakeholders understand about your business and the less you share about non-financial aspects of it, the more vulnerable you are to severe reactions to bad financial news.

You need to consider all four drivers as you think about managing your reputation. But we ask you to pay special attention to the last driver—intangibles reporting. You have a lot of control over your reputation—if you are getting the kind and quality of information to your stakeholders. And very few companies have developed good reporting on intangibles. That means that the 80% of corporate value that is driven by intangibles is invisible. Stakeholders can only guess at it unless you give them the information they need. This is really the goal of Intangible Capital. Helping you see, leverage and communicate about your intangibles. Because it will help you perform better AND because it will help you get the reputation you deserve.

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

Reputation: beyond shareholder thinking to stakeholder thinking and back again

February 7, 2011 by · 5 Comments 

When we talk about the core intangible capital of an organization, we spend most of our time focusing on the intangibles that drive customer value creation and revenue generation. This is a helpful perspective for operational performance and strategies. In this view, relationship capital focuses on the partners that help support your business model: your customers, partners and vendors.

In thinking about reputation, however, it is important to flip the perspective and see your company through the eyes of your people and your partners. As contributors to the knowledge factory, they are also stakeholders in its success. What do they think of the organization? Does it seem sustainable? Is it a place they want to be or to do business with? Read more

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