We’re looking at it all wrong: the intangible information gap

I have been really heartened to see more attention to the way that the intangible information gap skews investors’ understanding of what’s really going on in today’s knowledge-driven companies. This latest article comes on the heels of a Reuters piece last month calling for getting intangibles on the balance sheet.

Yesterday, this new examination came in Jeff Saut’s Market Call column where he quoted Steve Vannelli of the GaveKal Platform Company fund talking about technology and intangible capital (I added the bold):

To this technology point, I asked Steve to discuss his “knowledge,” or intangible capital, theme. He responded by stating that our current accounting system doesn’t value “intangible capital accumulation” appropriately. Most certainly, intangible capital accumulations are “expensed,” not capitalized. Such accumulations increase productivity, foster more efficiency, and drive better financial money flows than are currently measured. Moreover, if you are not measuring such metrics correctly, you are also not measuring our country’s “economic output” correctly. For example, “What is Amazon’s (AMZN) “search engine” worth? Read more

Analyzing I-Capex: How to understand the return on your intangible capital expenditure

This is a follow-up to yesterday’s post about intangible capital expenditure.

When you are starting out, an i-capex report will just be a separate report in your accounting system or in a spreadsheet to be used to report to management or your board of directors. Ideally, you should go back a few years so that you start out with a data series that you can use to learn about the patterns of your spending. When you do this, you might want to also gather some demographic data that can be used in calculating ratios.  Read more

Intangible Investment Builds Value – A not so surprising review of the research

Intangibles are a class of asset that has always existed. But the importance of intangibles now eclipses all other asset classes because of the shift in our economy from the industrial to the knowledge era.

New things make people nervous. And the easiest way to dismiss something that makes you nervous is to ask for proof. So for all you doubters out there, here’s some proof. But I have to tell you that there’s nothing here that surprising. In fact, there is nothing here that good old common sense wouldn’t tell you. Thank goodness, there are academics out there willing to invest their time in making sure that our common sense is right. Read more

On the Value of Intangibles (and why that’s the wrong question)

The measurement of intangibles tends to create a lot of confusion. That’s because there are a number of ways of measuring them and they all get jumbled together. If you look at my last post on intangibles spending, you’ll see a real mixture of metrics. Some of Nakamura’s estimates looked at categories of “spending.” But in the case of M&A data, “cost” data for acquired intangibles on the balance sheet (which sounds a lot like spending) is really derived from “valuations” of individual assets (we’ll explain this below). Stock market data would be considered “valuation” data because it is extracted from the total corporate value placed on the company by the stock market. You can see that value and cost get mixed together a lot of the time. This leads to a lot of confusion. We’ll try to break down the concepts of value here and then tell you why we don’t think value is the right question for managers most of the time. Read more

Measuring Intangibles: The Simple and Elegant Answer

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. Read more

I-Capex Is the New Capital Expenditure

Capital expenditure (capex) is an accounting concept that has ingeniously supported the tangible economy for centuries. It allows a company to apply to its balance sheet the cost of investments in its future productive capability. This is called “capitalizing” an expense. Then the cost of this investment or capital is depreciated over a period of years. This is an extremely important feature that helps companies avoid having to show decreased earnings in a period where they make large investments. It is through a corporation’s capex that the tangible production value of the company (and by extension, its balance sheet) is built and maintained.

The idea of capital expenditure is actually very relevant to intangibles. U.S. businesses are already investing as much or more on their intangibles as they are on tangible investments in property, plant, and equipment. We know this from macroeconomic data. And we can see the benefit of it in stock and valuation data. But we don’t really know on the individual company level because no one counts it. That’s right. No one really knows how much is being spent on intangible capital expenditures (i-capex) by American companies to build their knowledge infrastructure. Read more

The Enduring Value of IT and Process Investments

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. Read more

Five Reasons to Focus on Optimizing Intangibles in 2010

I am more and more convinced that 2010 will be the year of intangibles, intangible assets, intangible capital, intellectual capital, knowledge assets or whatever else you want to call them. There are five big reasons why:

1. Intangibles already get the majority of your  investment dollars. Estimates are that at least 60% of the money organizations invest in their future productive capacity is in intangibles. If you are already spending money, isn’t time you created a way to track intangibles performance? Read more

CIO’s–and CFO’s–Need to “Get Real”

There is an interesting report at CFO.com called CFOs to CIOs: Get Real.

My response is that CFO’s need to “get real” too.

One of the biggest barriers between CFO’s and CIO’s is how they view the cost of projects. CFO’s are trapped inside an accounting model that expenses a lot of investments. Recent macro data suggested that US businesses spent $1.7 trillion on intangibles versus $1.2 on tangibles. For the most part, intangibles get expensed, tangibles get capitalized. Many  of these intangibles are related to IT-enabled systems and/or processes. Read more

Shedding Light on the Value and Performance of Intangible Capital

The first thing that most people ask when discussing intangibles is value. My answer is, “how can you value something for which you have no data?”

I do not mean to imply that it is impossible to develop data on your intangible capital. It’s just that most companies have not taken the necessary steps to accomplish this. How can you create a sound data set on your intangibles? Read more

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