Knowledge Assets:
Can you measure the intangible?
Mary AdamsTrek Consulting LLC
KM Forum, July 20, 2006
Measuring Knowledge Assets
• Why?
• What?
• How?
• Case studies
The need to measure knowledge assets is acute
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
Mar
ket C
ap ($
bill
ions
) Market Premium Intangible Book Value Tangible Book Value
Data: Ned Davis Research, Inc.
Today, 80% of corporate value is “intangible”
S&P500®Intangible Value as % of Market Capitalization
16.8%32.4%
68.4%79.7%
0%
20%
40%
60%
80%
100%
1975 1985 1995 2005
S&P500®Intangible Value as % of Market Capitalization
16.8%32.4%
68.4%79.7%
0%
20%
40%
60%
80%
100%
1975 1985 1995 2005
Data: Ned Davis Research, Inc.
Our information paradigms are based on an antiquated system
Accounting systems provide several distinct advantages:
• Objective standards
• Quantitative measures
• Consistent methodology
• Consolidated presentation
Pacioli helped us measure value creation based on tangible capital
Today, the value creation process is driven by intellectual capital
Human capital is the creative engine
Relationship capital connects you with the market
Structural capital is the holy grail
Structural capital is an “infinite” resource
The value of structural capital is limited only by its market potential
The last, critical element is the business recipe
HumanCapitalHumanCapital
Organizational Structural
Capital
Organizational Structural
Capital
Relational Structural
Capital
Relational Structural
Capital
FinancialCapital
BusinessRecipeBusinessRecipe
FinancialCapital
BusinessRecipeBusinessRecipe
What to measure? The full IC value system
How to measure?
Pacioli’s “Summa” as seen in http://www.martini-drapelli.it/lucapacioli1.htm
Pacioli would advise us to start with an inventory
Today there are three available approaches:
• Valuations
• Scorecards
• Assessments
Valuations
Scorecards start by mapping intangible drivers of financial performance
Financial Perspective
Customer Perspective
Internal Perspective
Learning and Growth Perspective
Source: Kaplan, Robert S. and Norton, David P., Strategy Maps: Converting Intangible Assets into Tangible Outcomes, (Boston, MA:
Harvard Business School Press, 2004
Metrics are assigned for each category
Source: Kaplan, Robert S. and Norton, David P., The Balanced Scorecard: Translating Strategy into Action, (Boston, MA: Harvard Business School Press, 1996).
Assessments look at the full IC portfolio
IntellectualCapital
BusinessRecipe
Human CapitalOrganizationalStructural Cap.
Network BrandCusto-mers
Process
RelationalStructural Cap.
Employ-ees
Manage-ment
IntellectualProperties
By Pacioli’s standards…
Objective Quantitative ConsistentMethodology
Consolidated
Valuations
Scorecards
Assessments
Quantitative measures are only part of the picture
Case Study:
IC Rating™
Events business
IC Rating looks at three perspectives
Present day
Accounting
1. Efficiency
Present value of IC efficiency in creating future financial value
2. Risk
Threat against present efficiency * probability of threat coming true
3. Renewal and Development
Efforts to renew and develop present efficiency
Methodology
• Interviews with internal (1/3) and external (2/3) stakeholders
• Questions include: – Closed questions that lead to a letter rating– Open questions that yield answers that are
summarized anonymously in final report
Scale similar to bond or credit ratings
Efficiency
A A A
A A
A
B B B
B B
B
C C C
C C
C
D
EfficiencyEfficiency
A A AA A A
A AA A
AA
B B BB B B
B BB B
BB
C C CC C C
C CC C
CC
DD
A A A
A A
A
B B B
B B
B
C C C
C C
C
D
A A AA A A
A AA A
AA
B B BB B B
B BB B
BB
C C CC C C
C CC C
CC
DD
Risk
_
R
RR
RRR
Risk
__
RR
RRRR
RRRRRR
RenewalRenewal
Event Co.’s overall IC had high efficiency
AA BBB A BBB
BBB
Customers
A
BBB
Human Capital
BBB AA BB A
Bus. Recipe
Intellectual Capital
Relational
I.P Process Management Employees Network Brand
Organisational
IC renewal/development were rated average
Bus. Recipe
Intellectual Capital
Relational
I.P Process Management Employees Network Brand
Organisational
BBB
Customers
BB
BBB
Human Capital
BB CC B AA
BBB BBB CCC BBB
Risk of decline in IC efficiency is moderate
R R R R
No value R
Customers
R
Human Capital
RR R RR R
Bus. Recipe
Intellectual Capital
Relational
I.P Process Management Employees Network Brand
Organisational
Employee competence is high…
93
78
76
84
71
71
87
77
85
85
0 20 40 60 80 100
Event planning
Community dev.
Strategic networking
ID/cultivate talent
Long range vision
Fundraising
Service quality
Creative problem solving
Knowledge of storytelling
High-touch culture
Employees need support to prepare for new challenges…
83
74
39
74
55
57
Experience in corecompetencies
Ability tackle new projects
Training/education
Equal competence level
Vulnerability defection
Renewal of productivity
Management is an important force…
85
59
57
49
80
34
Strong driving force
Focus on businessidea/strategy
Internal communication
Delegation ability
Inspires support for strategicgoals
Ability to handle loss of a keymanager
Comments from Stakeholders
• The sky is the limit in this market.• We could be dead in the water if something
happens to our founders.• S. has an intuitive sense for picking talent. • The brand is still not known in the media.• Big issue is the ageing of both the our
performers and our audience.• The pricing strategy is brilliant…set in relation to
comparable training opportunities.• As long as they are in the business of selling
hours they will be susceptible to problems. The biggest opportunity is in information products.
Issues on the table at Event Co.
• How to connect with the huge market opportunity
• How to profit from latent IP
• New business/old business balance
• Management succession plan
IC Rating™
Case Studies
Process innovation
• A large entertainment company wanted to cut costs, without jeopardizing value offering
• Used IC RatingTM to learn future potential in all business units
• IC RatingTM showed a varying degree of potential, and a variety of issues in the business units.
• Through benchmarking, possible improvement areas and opportunities for cross-learning were targeted
• In each targeted area, development budgets were reduced, since systems/know-how could be leveraged from another business unit to another
• 5 major areas for internal cross-learning have been identified
• In total, costs have been cut by >Euro30 million
• Management is convinced that this was achieved without jeopardizing value offering
Situation Action Result
Competitiveness
• A company was facing new competition and felt the need to improve its image and service levels.
• The company used IC Rating™ to identify areas of potential improvement in order to become successful in a competitive environment.
• IC Rating™ displayed severe problems in the corporate culture and the management’s internal practices.
• On the other hand, the management was rated as strong. The company network and brand also received strong ratings.
• With this result at hand the executive team identified and pursued a number of initiatives.
• By strengthening the internal leadership with new management and training, the employee pride for the organization was enhanced and service improved – in the end increasing productivity by almost 20%.
Situation Action Result
• Used IC RatingTM to identify current strengths and weakness as well as its future potential
• Wanted to use the results of IC RatingTM to support merger talks with another large food wholesaler.
• IC RatingTM showed strength in the sales force and merchandizing abilities, backed by the strong leadership of CEO
• Weakness was identified in the process area. Since potential merger partner was famous for its state-of-the-art systems, the rating strengthened the perception of potential synergies.
• The sales organization was changed to solution-based, from the old style ”geographic-based” sales units
• Also introduced Skandia’s Navigator (and Dolphin system) to become more focused on the vision and strategies
• Helped get the merger deal done at favorable terms
Situation Action Result
Company Profile- Wholesale subsidiary of a large food and low-temperature
warehouse and logistics company
- Market suffering from low margins and severe competition
Strategic Fit
Market Valuation
• The number three IT company on the OM Stockholm Stock Exchange aimed to help the market better understand its potential as a knowledge-based company.
• All 35 subsidiary companies which comprise the Group were rated
• IC Rating™ divided the IT-Group into four different categories for potential.
• By supplementing this information to the annual report they increased transparancy: both strong and weak sides were exposed, increasing understanding for potential as well as increasing trust of the Group.
• The Group used results to benchmark and navigate the companies into the future.
• The Group’s overall goal of 10% margins was individually revised depending on the potential shown in IC Rating™.
• The day when the result of the rating was first shown, the share value of the IT company increased by 8%.
Situation Action Result
Buy-side support
• Major investment fund with two similar companies in the portfolio, Company A and Company B
• Only interested in continuing with one of them in a second round
• Used IC RatingTM to evaluate future potential in both companies
• IC RatingTM showed a very high potential (high rating), in Company A. Company B had serious issues, particularly in the process capital area.
• The recommendation was clear: support Company A in second round. Divest Company B.
• The investment fund kept Company A
• Company A financially outperformed industry averages after the second round
• Company B, despite finding funding elsewhere, underperformed and eventually went bankrupt
• The investment fund ROI exceeded 60%
Situation Action Result
Sell-side support
• A large communication company needed to sell off five business units
• There was no interest from the market so the seller withdrew the companies and did an IC Rating™ on each
• Used IC RatingTM to identify future potential in all five business units
• IC RatingTM showed a varying degree of potential in the business units.
• Seller was very transparent, presenting potential buyers with the full range of findings including strengths and weaknesses, opportunities and risks
• All five units were sold
• In total, a 20% premium was on the P/E multiple was received, compared to similar deals at the same time
• The buyer attributed the premium to the transparency, which reduced buy-side risk.
Situation Action Result
Measuring knowledge assets helps you find the path to future success
For more information
Visit www.icrating.com
Visit www.icknowledgecenter.com
Contact Mary Adams
781-729-9650