A Valuation Is Not Always the Best Way to Measure Value
Intangibles make up 80% of the value of the average business. Understanding these intangibles helps create a map of how different parts of your organization can and should work together.
I often get requests from people asking if I can help them "value" their intangibles. Sometimes they need a formal valuation for tax or compliance reasons. That’s easy because this is something a good valuation firm can do. But most of the time, the person just has an unsettled feeling that their boss or their colleagues or customers or any number of other people associated with their organization "just don’t appreciate how important" the intangibles of the organization really are. And they think that hearing a big number, say in the millions, will catch their colleagues' attention.
A Different Perspective on Value
Monetary business value isn’t that relevant for most business decisions. It’s more about what you can do with the intangibles, how well you can meet the needs of your stakeholders. Because, ultimately, that’s who is going to value your intangibles: the people you work with.
These stakeholders are interested in the value you can create for them: how well your processes work, how well your products/services are designed, how smart your people are. If you think about it, this "value" is the most important value to your business. It tells you whether you are meeting the needs of your customers, partners and employees. If they are satisfied, they will stick with you and help you continue to generate growth and performance.
If you need a valuation, by all means get one done. But if you want to understand how to build a better business, how to create a strong reputation, how to ensure that your business is around next year, then get your stakeholders to "value" your intangibles.
Accounting has roots that go back 500 years to Columbus-era Venice when local merchants built global businesses and needed ways of keeping track of their financial transactions. This system worked well over the following centuries, even as the global economy changed dramatically through industrialization. That’s because it is a system to track financial transactions. The system works really well for arms-length purchase and sale of tangible assets.
This system helped measure the financial health and success of an organization. But in today’s economy, accounting is facing some real challenges. A lot of the value created in and by an organization happens outside the view of the accounting system. In order to understand the health and success of an organization today, you need to look beyond the assets captured in the accounting system.
Workers thinking, processes improved, problems solved, lines of code written, designs drawn, relationships created, workers motivated -- all of these exist in the accounting system only as operating expenses, here today and gone tomorrow. That’s the problem. Because what’s happening inside companies today leaves behind a footprint, a lasting value, a renewable and, most importantly, a re-usable resource. Human capital, relationship capital, structural capital (knowledge, processes, designs, etc.) and strategic capital are all long-lived assets that are the infrastructure driving the financial success of companies today.
Measuring intangibles is based on the principle that the knowledge, data, processes and relationships you form in your work have a lasting value. Rather than relying on financial transactions, measurement should look at the value created by the exchange of knowledge and solutions as well as the long-term infrastructure that gets left behind in the form of competencies, processes, data, networks, designs and trust. If you want to understand the health and success of an organization, you’ll need to understand these "intangibles."
What Are the Key Intangibles Driving Your Success?The following questions are an open source methodology called the ICounts™ methodologies that we have developed for identifying the core intangible capital of an organization.
- Question 1: What is your brand? - This is either your corporate name or the key brand that you support with your marketing.
- Question 2: Who are your customers? - Include all the major client groups you may have. For example, a software company in the healthcare space may have hospitals as well as other software companies as clients. Internal groups (such as IT, finance or accounting) have other internal business groups as clients. You may have critical stakeholders (such as users of freeware or community groups) that you also consider to be "customers." For example, Google search users are critical stakeholders that need to be identified.
- Question 3: What do you do to create value for your customers? - Include both paid and unpaid activities. For example, Google’s search business creates value both through free search and through paid ads.
- Question 4: What are the key processes and knowledge that support this value creation? - Include processes, key data sets, knowledge management and key intellectual property (especially patents). For example, in a software company, the software itself is part of structural capital as are business processes such as software life cycle management, implementation and customer service. You may also want to list the key tangible assets that the company needs to support its operations.
- Question 5: Who are the key partners that support the model? - Key partners usually support your value creation processes or your value delivery processes. These include suppliers, but also other external organizations that are critical to your business. For example, an aircraft services company may have relationships with part suppliers, fuel suppliers, aircraft manufacturers and the FAA on the value creation side, and marketing and sales partners on the delivery side.
- Question 6: What are the key competencies your people need to support the model? - Focus on what your customers expect to generally experience with your employees. For example, a technical company may need specific technology capabilities as well as project management and troubleshooting skills.
- Question 7: What are the key elements of the culture your organization needs to keep this system working? - Here, include elements that should be there for everything to work well. For example, a high-risk business needs a detail-oriented culture while a social media firm may need an open culture.
Answering these questions provides a clear list of the intangibles that make up 80% of the value of the average business. It is a great starting point for a measurement or a strategic project. It also helps create a map of how different parts of your organization can and should work together.