Tuesday, July 29, 2008

Valuing the Intangible

Mary Adams, CMC, principal at Trek Consulting spoke on the Intangible Knowledge Economy at our July networking coffee. Having spent many years in the banking business engaged in high risk lending, Mary realized that, in most cases, the intangible assets of firms are being incorrectly analyzed, if they are understood at all: “The material inputs to the economy have been going down, but intangibles, i.e., something of value that cannot be physically touched, such as a brand, franchise, trademark, or patent, have been exploding” accounting for something like 80% of corporate value. There is a strong relationship between intangibles and reputation: “Reputation is the new bottom line. Your ability to move forward is determined by your reputation.”

Reputation rests on three types of intangibles:
  1. Human capital, including the competencies and knowledge of the workforce
  2. Structural capital, such as the knowledge that has been captured and is being used by an organization and its distinctive processes
  3. Relationship capital, such as the quality of its networks, its ties to major vendors, the degree to which customers are identified with it, and the status of its links with a whole range of external stakeholders.
None of these intangible ingredients are captured on most balance sheets, yet they make an enormous contribution to organizational viability and future prospects. Therefore, the value of any investment or decision should be considered from the perspective of the contribution it will make across all three of these intangible domains.

A full range of Mary’s views on the value of intangible assets, how to assess them and their meaning for a broad range of issues (e.g., the future of the CFO) can be found at the Intellectual Capital Knowledge Center’s blog.

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