Stop staring at your spreadsheet and start quantifying your intangible capital
We're in the midst of a seismic shift in our economy — and no matter what, we can't go back. There are no "good ole days" — yesterday was then, today is today, and to borrow a turn of phrase, “what's doin' tomorrow?” The answer is intangible capital.
Thanks to organizations such as the Maine Technology Institute, Maine Center for Entrepreneurial Development, Target Technology Center and Innovation Engineering Program, among others, Maine is becoming increasingly well-positioned to engage full bore in the emerging knowledge economy. As an attentive audience at a recent Association for Consulting Expertise program learned, the knowledge economy is complemented by — and requires a new means of — measurement. This economy is built on a robust foundation of what guest speaker Mary Adams from Trek Consulting calls intangible capital or IC. Intangible capital is also described as intellectual capital.
IC describes more the process of how we do things, rather than the actual widget we make. Traditional business valuation, simply, is comprised of tangible assets: tangible capital plus financial capital (things like those widgets we make, how much money we make doing it, our number of customers, payroll, the value of our sales, etc.) and a tip of the hat to some intangibles, such as goodwill. But, as Adams points out, with the accelerating shift to a knowledge-based economy and knowledge factories, future performance and value of an enterprise has become increasingly based on the intangible: human, structural, relationship and strategic capitals.
Research says the shift in intangibles is quite visible in the public markets, according to Adams. In 1975, there was a tight correlation between the value of a company's balance sheet assets and its corporate value. Back then, 83% of the value was on the balance sheet. Today, that dynamic is completely reversed. Investments in knowledge assets such as software, process and networks drive competitive advantage but they don't hit the balance sheet. So today, only 19% of the value of a company is on its balance sheet. The remaining 81% is “intangible” and not identified by traditional accounting and management information. This intangible information gap ends up devaluing the most important competitive advantage of companies and driving less-than-optimal decisions about how to build their knowledge capabilities.
Currently, the only time intangibles get on the balance sheet is in a merger. But the data here doesn't provide much comfort either. While tangible assets and some intangibles, such as customer lists and brands, end up on the balance sheet, a full 47% of the average deal is booked as goodwill. It's little wonder the failure rate of mergers is so high given that only half of the value acquired can even be identified.
This is important, whether you are a large, established business or a startup. As a startup, it is the IC — think people, processes, skills and business partners — that drive investor evaluations. Management teams and human capital work to build the company; relationship capital carries the company; structural capital allows it to pivot and strategic capital allows it to grow — all of which is important to venture capitalists gauging interest in whether to invest in a startup. In large, established companies, IC is now the primary driver of corporate and stock value, as evidenced by Google, a huge IC company.
The core of our economy, small- to mid-sized businesses, are also increasingly driven by know-how, customer relationships, market knowledge and their employees' collective — or collaborative — capability.
All of these characteristics can be measured, benchmarked and valued. Although this is still more art than science, an IC evaluation is an emerging business process and tool. Adams provides us with some basics to get your neurons spinning:
Although it might be hard to define, intangible or intellectual capital is increasingly the basis of any business' right stuff.
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