The Intangible Drivers of Business Value

I was thrilled this month to have the opportunity to give a webinar for Business Valuation Resources on intangibles. I showed the audience the usual slides I often use to show the growth in intangibles in our economy.

The lessons for valuation professionals is two fold:

1. They will be valuing many more intangibles as stand-alone assets in the future
2. But they should already be considering the intangible drivers of corporate value NOW

My talk focused on the second point. Read more

To Understand Risk, First Understand Your IC

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

It’s Time for a Knowledge Economy Balance Sheet

The traditional balance sheet is one of the key financial statements produced by every business. It records all the physical assets owned by a company as of a certain date. It also records monetary liabilities and the equity of the corporation. Together, these two sides of a balance sheet served for centuries to demonstrate the health of an organization by reporting the amount of investment the organization makes in its productive capacity as well as the kind and mix of its assets and liabilities.

But today, the average balance sheet explains only 20% of the value of a company. This is due to the growing importance of knowledge assets which usually are not included on the traditional balance sheet. 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 Capital Expenditures: How to track your annual i-capex

Last week, in my interview of Alan Anderson and Chuck Hulten on accounting and intangibles, Alan made a statement that has stuck with me: That in all his travels in his own business and through his activities with the AICPA, he has never heard people say that they use their GAAP statements to make business decisions.

But businesspeople use their accounting information all the time. They just use it for presentations and analyses that better suit their needs. This is often called managerial accounting as opposed to statutory reporting (which conforms with GAAP or IFRS).

This post is about just such a use. It is about tracking the amount of money that you invest in intangibles each year.
Read more

The New Accounting

The accepted wisdom inside the IC world is that we should ignore accounting and accountants—they will never “understand” what we are doing. I went along with that for a number of years, accepting the view of many that IC is special, it cannot be truly measured, that it must be appreciated.

Well, I am way beyond that now. And I feel that the only course of action is to talk very explicitly about the link between accounting and the group of knowledge assets known as intangible capital.

Once you have come to understand your business as a knowledge factory and understand the management implications of this new operating model, you are find yourself needing an intangibles information set. The information set you will need is not that different from the set you would use to operate a tangible factory. You just need to learn some new techniques for generating it. Read more

The New Management: Finding the right balance

As you probably know by now, we see the modern business as a knowledge factory. This means that all managers need to become expert in the management of a knowledge factory. There are three critical management concepts that you will need to add to your toolkit in order to get the best results possible from your knowledge factory: networks, orchestration, and innovation. Read more

6 principles of management in the knowledge era

We often use the image of a “knowledge factory” to talk about the infrastructure of the today’s business. A huge percentage of this infrastructure is in intangible knowledge assets that work together as a system, the knowledge factory. Once you begin to understand the power of the combination of your knowledge assets, you are on your way to becoming building a smarter company–and you are ready to think about what this model means.

What are the business implications of the knowledge factory? These principles explain why management of a knowledge factory is different than management of a physical factory. Here are the main points, followed by an explanation of each:

1. The KF is greater than the sum of its parts
2. Ownership of the KF is dispersed
3. Power in the KF flows down…and up
4. The KF is held together by reputation, not control
5. The KF runs on information technology
6. The KF is a business

Read more

A Lego Model of a Medical Device Company

Here’s one more example of a Lego model of the knowledge factory of a company. This one is for a medical device company that sells a physical product that is supported by a service. The product is used by consumers in their home. But the company does not have direct contact with the consumers until they call to order the product. Instead the company relies on referral sources. Read more

Another Lego IC model: A Specialty Contractor

With the Google model, we told the story of how the company developed and built its knowledge factory starting with human capital.

But to model the IC of an established business, it often helps to start with how a company gets paid. This gets the focus directly on the value creation process and also ensures that the model is of maximum usefulness—making that direct link between IC and financial results. Read more

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