Intangible Asset Performance and Financial Results

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Intangible Asset Performance and Financial Results

Mary AdamsPresidentIntellectual Capital Advisors

IAFS Conversations on Intangibles

Friday, August 7, 2009

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Economic value is increasingly intangible

Research: Ned Davis

Components of

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Market Premium

Intangible Book Value

Tangible Book Value

Components of S&P 500® Market Capitalization

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

S&P 500 Market Cap ($ billions)

Market Premium

Intangible Book Value

Tangible Book Value

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This change touches all sectors

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Energy

Materials

Industrials

Consumer Discretionary

Consumer Staples

Health Care

Financials

Telecommunications Services

Information Technology

Utilities

Intangible Value as a % of Total Market Capitalization by Sector

1975

2005

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Here’s the calculation:

• Total corporate value per the stock market

• Minus: tangible assets at historical cost• Minus: intangibles on the balance sheet

at “cost” (really discounted cash flow from mergers)

• Equals: intangibles (value, cost,….?)

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What it really means

• That analysts and investors are not relying on the balance sheet to help them value stocks

• That analysts and investors rely on earnings and narrative reporting

• Earnings are increasingly being driven by intangibles and intellectual capital

• But there is no concrete information to make the link between intangibles and financial performance

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Earnings don’t tell you what the company has left in reserve

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The clearest answers come from the field of intellectual capital

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Value is created when IC elements are combined in a system

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Human Capital

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+ Structural Capital

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+ Relationship Capital

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+ more Structural Capital (that generates revenue)

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+ more Relationship Capital

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This “knowledge factory”grossed $22+ billion in 2008

From: You Can Grow Like Google on YouTube

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Every business has a knowledge factory

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Management of a factory

• What did it cost to build? • Is it working as it should? • What should we do in the future? • How will we track performance?• How did we do?

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Management of knowledge factory

• What did it cost to build? �I-Capex*• Is it working as it should? �Assessment*• What should we do in future? �Strategy• How will we track results? �Perf. Mgmt.*• How did we do? �Financial Statements

* Form the “new accounting”

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I-Capex* ($1 trillion/year)

• Intellectual capital expenditures are expensed under today’s accounting

• Should be tracked in a management report• Cost is actually the most concrete piece of

data available about intangibles• Internally, will help with better decisions• Externally, will help tell corporate story

* the new capital expenditure

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IC assessment*

• Like a 360-degree review of the knowledge factory

• Review is by stakeholders (both internal and external)

• Asks whether it is working well today, outlook and risk

• Used for strategy, reporting, M&A* the new balance sheet

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IC Rating assessment output

AAAAAABBBBBBCCCCCCD

-

R

RR

RRRA R

BB RRA

BBB

RBBBBBB

Brand

IP Processes Management Employees CustomersNetwork

Intellectual Capital

Relational Structural Capital

Business Recipe Organizational

Structural CapitalHuman Capital

BBB BBB RRBBB BBB RR

BBRBB

BBBB RRBBBRBBB BBB RBBB BBB -BB BBB

BBRBB BBB

BBRBB BBB

BBB BBB R

AA

BBB A RBBB A R

RBBB

B

RBBB BBB RBBB BBB

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Performance management*

• Uses non-financial indicators • Examples: headcount, customer

demographics, IP mapping, process metrics

• Bottom up for learning• Top down for management and

reporting—key performance indicators (KPI’s)

* the new income statement

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Triangulate intangible performance

Source: http://amath.colorado.edu/outreach/demos/hshi/2000Sum/TaT.html

Cost

Assessment

Indicators

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“Technology and especially the internet can really help you be lazy. Find the leverage in the world, so you can be more lazy!” - Larry Page

Intangibles battle cry

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Resources

• www.icknowledgecenter.com• Worksheet for knowledge factory:

http://tinyurl.com/you-can-grow-like-google

• www.smartercompaniesblog.com

Mary Adams, 781-729-9650adams@i-capitaladvisors.comTwitter: maryadamsica