Triangulation – Getting a complete picture of your intangibles

Once you have a full set of data about your intangibles, how should you use it? We like to use the image of triangulation seen here as a way of explaining how you can use the three kinds of data that we have described to come up with a unified measurement of your intangibles.

Triangulation is an approach used in a number of disciplines (including surveying and astronomy) using known points to plot out an unknown distance or space. With intangibles, you can use these three kinds of data—investment, assessment and indicators—to plot out the landscape of your intangibles and get comfortable with the future earnings potential of your business. Read more

KPI Fever: Beware Magic Metrics

Every company I visit these days is talking key performance indicators (KPI’s). This tells me that people understand that financial metrics aren’t (and never have been) enough to measure organizational success. But I worry about how using the shorthand KPI for all non-financial measurement could doom companies’ efforts from the start.

The problem is the word “key.” A lot of experts recommend finding a small number of key indicators that can be tracked easily so that you don’t get overwhelmed and spend all your time on measurement. I am sympathetic to this view but I am much more concerned about the danger of narrowing down your metrics too far. Part of the answer was in my last post about using some metrics for management and some for learning.

One thing is clear, however, it is never a good idea to rely exclusively on a small number of indicators. This warning is necessary because business publications are full of articles about what we call magic metrics. They offer an easy solution that will seemingly solve all your problems. Following are just a few examples. Read more

Why are you creating your measurement management system? (And do you really need a balanced scorecard?)

A few years ago, I read an article by Ian Graham called, What’s Wrong with Targets? Graham made the case that setting targets or goals for employees creates the wrong kind of behavior. This is because it focuses the employee on the target rather than on the underlying processes that create value for customers and stakeholders. And once a goal is achieved, there is often no reason to reach further. He also asserts that targets can be gamed. The alternative he suggests is to focus on specific processes and measure everything you can with an eye to continuous learning. His perspective comes out of the quality movement and the concept of continuous improvement.

We thought of Graham recently when we read an article about the games that colleges play to ensure that they meet the thresholds for statistics used by US News and others to “rank” colleges. Areas that can be manipulated include soliciting alumni donations of as little as $1 to increase their alumni giving percentage, giving more weight to applicant GPA and SAT scores than in the past, and manipulating class size.  Anyone who has ever worked in a for-profit or not-for-profit organization knows that goals can drive behavior in good and bad ways. Read more

Getting Intangible Capital Into Your Performance Measurement System

Building a performance measurement system without the right foundation information would be like designing a dashboard when you have never looked under the hood of a car. Now, “wait a minute,” you will say, “I know my business inside and out.” And you probably do. But no matter how deep your personal familiarity with the business, it still makes sense to build systems that can ensure that provide the right kind of information and controls to keep it on track. This is true in every size company. Knowledge that is concentrated in the head of an individual is knowledge that is at risk. A good performance measurement system is an essential part of the structural capital supporting your organization.

Most performance measurement systems being built today are being built without a basic understanding of the underlying intangible capital of the organization. Since IC represents 80% of the value of the average organization, this means that the integrity and utility of these performance measurement systems should be questioned. It all starts with an inventory of your intangibles. Read more

Performance measurement is the new income statement

The Income Statement

The income statement is the universal scorecard for business. It is the way that a company tracks and communicates its progress month to month and year to year to tell its operating story. The key components are the revenues the company earns by selling goods and services to its customers, the direct costs of those goods and all the other current year operating costs of the organization. The difference between the two, the “bottom line,” is profit.

The income statement is still the main tool we have to measure the profitability of an organization. It is the one place that all the financial flows come together—revenues, expenses and amortization of capital expenditures. But the income statement has been distorted by the rise of the knowledge economy. This has led to the rise of a new kind of reporting of the operating story, called the performance measurement system.

As organizations began to invest more heavily in intangibles beginning in the 1970’s and 80’s, this expense led to a gap between corporate value and the balance sheets (because these intangible investments are not eligible to be capitalized).

This investment also distorts the income statement. It is important to understand these because, while most businesspeople appreciate the distortions of the balance sheet caused by the shift to the knowledge era, few appreciate its affect on the income statement. Here are two big distortions: Read more

The ABCs of Intangibles Assessment

Assessment is a word that you are probably used to hearing in relationship with tools in the human resources area. Myers-Briggs and DiSC are two well-known tools that are used to assess the personality of people. Most people in business today can tell you the letters of their own Myers Briggs type. Another kind of assessment, 360° reviews, are used to get feedback on a manager from all sides, that is, those that work at a more senior level, as peers or as subordinates.

Over time, many of these tools have been refined and evaluated for statistical significance. The idea is to use a series of questions that indicate what’s going on inside a person’s head, how they work and interact with others. Because the output is delivered in the same way for each assessment, they become comparable across individuals and/or teams. The knowledge gained through an assessment like this helps create a starting point for change and improvement.

An assessment of your knowledge factory is more complex than the analysis of a single person but many of the same principles apply. Read more

Five Reasons Your Organization Should Assess Its Intangibles

In posts over the past weeks, I have already shown you some simple but powerful ways of generating concrete information about your intangibles. The first is generating an inventory of key knowledge assets. The second is building a graphic or model that serves as a shared visualization of how your company combines and monetizes those assets in your knowledge factory. And the third is to start tracking your annual intangible capital expenditure.

But is it enough to just know how much money has been spent? Isn’t it also important to know whether your investment is working as well as you expected? Is it ready to handle your future challenges? Is your knowledge factory working up to its capacity? How do you know if your knowledge factory is functioning the way it should? Are these not the important questions that need to be answered in your business?
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The intangibles information CEO’s want

Every year, PriceWaterhouseCoopers (PwC) surveys CEOs around the world. Their 2009 survey asked CEOs about different types of intangibles information. Read more

Four reasons why the old accounting models don’t work and won’t ever be enough to measure the intangible economy

Today’s accounting systems keep track of certain types of financial transactions. (and mis-reports intangible financial transactions). There is a need to get good financial information about intangibles. But knowledge intangibles are a different kind of asset. It is hard to imagine a time when financial metrics alone will be adequate on their own to measure the health and performance of intangibles. There are several reasons for this: Read more

Remembering the traditional balance sheet: a wonderful, but outdated, tool (in its current form)

The roots of the balance sheet go back to 15th century Venice when merchants were building trading businesses that spanned the globe. They developed ways of keeping records for their businesses. These emerging practices were recorded by a monk named Luca Pacioli and his treatises became the foundation of the balance sheet and income statement that are still used today. The model held up remarkably well through many centuries and came into its own as standards for financial statements were codified in the early years of the 20th century. Public reporting of these statements was begun in response to calls for greater transparency following the Great Depression of the 1930s.
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