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Published: August 26, 2008

 
 

The Real Value of Intangibles

The Danish intellectual capital (IC) statement, for example, was first published in 2000 to help companies better communicate about their intangible assets. Three criteria — effects, activities, and resources — are used to evaluate the four knowledge resource categories (employees, customers, processes, and technologies) that are included in IC statements. This index has proven so critical to Danish businesses that, according to a November 2003 article by Per Nikolaj Bukh at the Aarhus School of Business, Mette Rosenkrands Johansen at the Aarhus School of Management, and Jan Mouritsen at the Copenhagen Business School, some companies use them as an alternative to the traditional annual report.

But intangible assessments can be misused as well. The motive for deploying an assessment in the first place can be too slanted toward oversight, says Karl-Erik Sveiby, a professor of knowledge management at Hanken Business School in Helsinki, Finland. “Managers are primarily interested in the control aspect — productivity in par­ticular,” he says. “But intangible assessments should be a means of discovering hidden value.” When they are focused on the bottom line with intangibles, Sveiby says, managers overlook a more critical issue: renewing or using them to innovate or reduce risk.

“Truth is, a lot of value creation goes on that is never translated into financial terms — it just happens,” Sveiby says. He points to one Norwegian hospital where the nurses had asked what they could do to reduce the fear in patients going in for surgery. “They [decided to] invite ex-patients to talk to the new patients over coffee and cake,” says Sveiby. “It was a huge success.” A knowledge manager on staff who had been trained in Sveiby’s Intel­lectual Assets Monitor approach wanted to know how the nurses and doctors knew the fear had diminished. The nurses answered that the new patients were asking fewer questions. “This meant that the doctors and nurses saved time, which of course is money,” says Sveiby.

But where was the intangible value cre­ated? By one measure, the “customers” (patients) created it themselves. By another mea­sure, the starting point was a successful surgery for ex-patients to discuss, so the value was due to the skill of the surgeons. Or perhaps the value was realized only because clever nurses invented the project.

How then should the hospital use that information? Should it re­deploy the saved time to schedule more surgeries, which bring in more revenue? Should it “cash out” the time saved and apply it to offset general overhead? Or should it allocate it to higher salaries to hold on to its dedicated and innovative nursing staff? Most intangible assets will always defy valuation in the book sense.

To truly value intangible assets, a complex process is required, in­volving an enormous strategic in­vestment and a lot of work. Why would anyone bother? Because ac­knowledging the real value of intangibles can create open, fair, and efficient capital markets for some of these assets. As noted earlier, businesses are losing access to as much as $3 trillion a year in capital stock by leaving intangibles out of the value equation. This directly affects the ability of individual companies to compete, to innovate, and to invest.

In Search of a Method
In addition to Denmark, other countries in the Nordic region are moving forward on efforts to im­prove business performance by ac­tively addressing intangibles in both internal strategies and communications with shareholders. There has also been progress in India and Spain. And in Japan, many large organizations, such as Hitachi Ltd., publish intangible ratings in their annual reports and use them internally to improve performance. The Japanese government has also be­come involved. The Ministry of Economy, Trade, and Industry distributes white papers and measurement tools for intangibles, openly endorsing their use.

 
 
 
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