Leveraging the Power of Intangible Assets
Despite its potential, few managers have begun even to scratch the surface of information about intangibles and the opportunity it offers.
Topics
Many managers have been looking forward to when they can track information about their intangible assets — for example, the value of their brands or the quality of their human talent — as easily as they monitor cash flow and market share.1 Inspired by the works of strategy theorists such as Robert Kaplan and David Norton, they have anticipated a day when it would be possible to keep track of customer sentiments, innovation and employee skills with real-time data, just as they manage profit and loss.2 Whether managers are aware of it or not, that day is almost here. Thanks to advances in information technology, managers of consumer-oriented businesses have the ability to track not only the percentage of satisfied customers but also the reasons why people are satisfied or dissatisfied. Companies in other industries can use IT and industry data for their own purposes — for instance, to follow opportunities for patent licensing or acquisitions. Despite the potential, most managers have been slow to respond. Few have begun even to scratch the surface in seizing the opportunities that information about intangible assets offers.
Different companies, of course, have different types of intangible assets. The most common include licenses, franchises, patents, trademarks, brands, knowhow, market competences and human resources. For many companies, the mix of intangibles represents a large percentage of the total corporate value, as measured by stock market valuation, investment level or perceived importance.3 A 2003 study by Accenture and the Economist Intelligence Unit found that 94% of the global executives surveyed saw comprehensive management of intangibles and/or intellectual capital as important, and half considered it one of the top three issues facing their organizations.4 But management awareness about how to take advantage of this value remains surprisingly low.
Until recently, there were good reasons why managers paid scant attention to information about intangibles. Companies had no regulatory obligation to disclose information about intangible assets to shareholders the way they had to disclose, say, executive compensation or pending litigation. In addition, most managers had limited experience dealing with intangibles. Those who were familiar with intangibles mostly relied on intuition to choose appropriate valuation methods for mergers and acquisitions as well as simple surveys to gauge employee morale. In general, managers were reluctant to introduce new methodologies without a clear understanding of the return on investment.
References
1. The termsintangible assets orintangibles refer to any nonphysical assets that can produce economic benefits. They cover broad concepts such asintellectual capital, knowledge assets, human capital andorganizational capital as well as more specific attributes likequality of corporate governance andcustomer loyalty.
2. R.S. Kaplan and D.P. Norton, “Strategy Maps: Converting Intangible Assets into Tangible Outcomes” (Boston: Harvard Business School Press, 2004) provide a strategy and management view of intangibles. B. Lev, “Intangibles: Management, Measurement and Reporting” (Washington, D.C.: Brookings Institution Press, 2001) discusses intangibles chiefly from an accounting perspective. A broad, more technical, discussion of intangibles is given in J. Hand and B. Lev, eds., “Intangible Assets: Values, Measures and Risk” (Oxford and New York: Oxford University Press, 2003), which discusses management, valuation and economic issues.
3. The editor’s introduction to two articles on intangible assets in Harvard Business Review 82 (June 2004): 108, states: “Everybody knows that in the modern corporation intangible assets are the source of greatest value.... The nonmanagement of intangible assets has measurable costs.”
4. A summary of the Accenture study, “Survey Results on Accounting for and Managing Intangible Assets,” can be found at: www.accenture.com/Global/Services/By_Subject/Shareholder_Value/R_and_I/SurveyAssets.htm.
5. I use the termstext mining anddata mining broadly to refer to any type of automated analysis of collections of text documents and data in databases. For example, text mining can include not only data extraction from text but also automated classification of content in documents.
6. See W. Zadrozny, “Text Analytics for Asset Valuation,” IBM research report RC23311, IBM Corp., Yorktown Heights, New York, 2004. I present a comprehensive list of 90 different types of intangible assets mentioned in academic research, consultant reports and during mergers and acquisitions. I also discuss the status of text- and data-mining technologies and specific cases where they have been used to monitor intangibles. In W. Zadrozny, “Making the Intangibles Visible: How Emerging Technologies Will Redefine Enterprise Dashboards,” IBM research report RC24020, IBM Corp., Yorktown Heights, New York, 2006, I describe how the monitoring of intangibles can be integrated with existing enterprise reporting applications. The research is based on published cases of enterprises using the technology to monitor their intangible assets. It presents details of an argument that monitoring opportunities exist for more than 80% of intangibles and describes cases where multiple text- and data-mining modules are used together. Both reports are available at http://domino.watson.ibm.com/library/cyberdig.nsf.