How much is your company worth? A stockbroker would look at the share price.
An accountant would point to the balance sheet. But if you bought a knowledge-rich business - a Microsoft, say, or an Arthur Andersen - and flogged off its offices, computers and other fixed assets, you would be left with a gaping hole in your bank balance.
This gap between a company's tangible assets and its market value must be the value of its intangible assets. Some intangibles, such as brand or goodwill, have long been recognised. But as products, services and technology become more homogenised, other intangibles, such as processes, people and supply chain relationships, are increasingly important.
These elements can be called intellectual capital (IC) - what a business knows, what it does and how it does it, rather than what it owns, what it makes and where it makes it. Cost-cutting, streamlining and automation are virtually played out, and today's lean, mean organisation is looking for new differentiators.
IC is one of the few levers left to pull, but few boards of directors know where the lever is or what is on the other end. They spend a huge amount of effort on knowing what their buildings and cars are worth, but ask them about their IC and their eyes glaze over and they change the subject.
A typical model might look at four areas - business structures and processes; intellectual property; staff; and customers and suppliers. Business structures and processes include obvious ones, such as order fulfilment - how accurate you are, how quick, how many returns you get - and apparently tangential things which, in practice, give you a real edge, such as recruitment - where you advertise, how you interview, how you follow up candidates.
Intellectual property, such as patents, music recordings or software licences, is more visible and so easier to measure. But it also includes less obvious and apparently transitory things such as Websites or customer presentations. Staff are key to a firm's uniqueness and competence. But its supply chain, especially its customers, also contribute to its IC - not only because without them it would have no income, but also because they can help build other IC, such as staff experience or intellectual property.
Assessing every aspect of IC could be extremely complex, and you often have to rely on gut feeling since the field is very new and methodologies are scarce. The value of an asset, for example, could just be your best guess for the amount of money it will make for you in future, or how much you would lose if you didn't have it.
A key question to ask managers is: what is essential to make their part of the business work? For the company as a whole, look at the value added by each department, what they know about and what they do, then focus on the unique or industry-leading elements - in most firms there won't be many.
Paul Bray is a freelance IT journalist.
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