INTANGIBLE ASSETS

MAKE THEM COUNT!

How best to quantify value

BY Jayashantha Jayawardhana

In their article titled ‘Measuring the Strategic Readiness of Intangible Assets,’ published in the Harvard Business Review (HBR), Robert Kaplan and David Norton pose some thought-provoking questions. 

How valuable is a company’s culture that enables employees to understand and believe in their employer’s mission, vision and core values? What’s the payoff from investing in a knowledge management system or new customer database? Is it more important to improve the skills of all employees or focus on a few key positions?

While the tangible assets of an enterprise are almost always well accounted for, it’s the opposite with intangible assets. 

In many businesses, they amount to little more than part of the corporate rhetoric – fancy words lavishly scattered in annual reports, coffee-table books, corporate brochures or the company website, at motivation training sessions and so on. 

They sound cool (and even ideal) coming out of the mouths of ‘C-suite’ executives… and that’s all there is to it. 

But Kaplan and Norton take a remarkably different stand as they cogently argue that “measuring the value of such intangible assets is the holy grail of accounting. Employees’ skills, IT systems and organisational cultures are worth far more to many companies than their tangible assets.” 

“Unlike financial and physical ones, intangible assets are hard for competitors to imitate, which makes them a powerful source of sustainable competitive advantage. If managers could find a way to estimate the value of their intangible assets, they could measure and manage their company’s competitive position much more easily and accurately,” they add.

But accounting for intangible assets isn’t easy… 

Compared to financial and physical assets, the former are worth many things to different people. A parcel of land at a prime location in the city is equally valuable to both a real estate development company and a retail business. But a workforce with a strong sense of customer service and satisfaction is worth far more to the employer than an external agency.

And unlike tangible assets, intangibles don’t create value by themselves; they must be combined with other assets. For instance, investing in an enterprise AI package for the IT division in an effort to accelerate the company’s artificial intelligence transformation won’t bear fruit without being complemented by an HR training programme to implement it throughout the organisation. 

Conversely, many human resources training programmes have little value unless they’re complemented by modern technology tools. 

HR and IT investments must be integrated and aligned with corporate strategy if the entity is to realise their full potential. When companies divide functions such as human resources and information technology for general administration purposes, they often end up with competing silos of technical specialisation. The HR division argues for increases in employee training whereas IT lobbies for new hardware and software packages.

Furthermore, intangible assets rarely affect financial performance directly. Instead, they work indirectly through complex chains of cause and effect. For example, having employees trained in Total Quality Management (TQM) and Lean Six Sigma should improve process quality.  

That improvement should catalyse customer satisfaction and loyalty, and also generate excess resource capacity. But the investment in training will pay off only if the company can transform that loyalty into improved sales and margins, and eliminate or redeploy excess resources. 

In contrast, the impact of a new tangible asset is immediate. When an oil company sets up a new rig, it reaps instant financial benefits from the increased production of crude.

Even as these characteristics make it impossible to value intangible assets on a freestanding basis, they also show the way to a new approach for quantifying how they add value to the company. The value added is embedded in the context of the strategy that the business is pursuing. 

Companies such as Dell, Walmart and McDonald’s, which follow a low-cost strategy, derive value from Six Sigma and TQM training as their strategies are based on continuous process improvement. 

In contrast, the strategy of offering customers integrated solutions calls for employees who are good at establishing and maintaining long-term customer relationships.

A business can’t possibly assign a meaningful financial value in a void to an intangible asset such as a motivated and prepared workforcebecause value can only be derived in the context of its strategy. 

But what it canmeasure is whether its workforce is properly trained and motivated to pursue a particular goal. And then it too will want to capitalise on its intangible assets.