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Intangible assets and intellectual capital drive the performance of every business today. This presentation explains how this happens and how businesses can and should measure and manage their intangible value creation. The presentation was originally delivered as part of the IAFS series, Conversations on Intangibles. For more information, please visit www.i-capitaladvisors.com
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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, [email protected]: maryadamsica