A hard look at soft issues

Susanna Mitterer warns that Britain has fallen behind Europe and the US in
learning how to measure intangible assets

The DTI’s Accounting for People initiative has certainly got some early UK
adopters talking about how to put a value on a company’s intangible assets. And
high time too.

Scandinavian, German and Austrian companies are already required to produce
an intangible capital statement. Italy will follow in 2005, and already boasts
one of the gurus of intangibles, Franco D’Egidio, a prolific author and speaker
on the subject.

Cass Business School in London is a leading contributor to the work of
PRISM, a EU-sponsored foundation, whose goal is the adoption of a worldwide
standard for measuring intangibles. Yet there is very limited UK Government
involvement or support for the initiative.

American law

The US is already ahead of Europe, with American law requiring goodwill and
values to be examined annually in an impairment test. The DTI report on the
subject summed it up – ‘we need to learn to capture all that is valuable and
not currently included in the balance sheet.’

It is time for the UK to play catch-up, and the HR community has a key role
to play in ensuring the work starts now. Here are two simple facts:

– Today’s economy is a knowledge economy. In most EU countries, 60 to 80 per
cent of GDP is attributable to knowledge businesses and the service sector,
which have no tangible product

– Sustainable competitive advantage is usually grounded in the accumulation
and creative exploitation of so-called intangibles or non-price factors
(patents, brands, trademarks, customer service).

Historically, TMI has only measured financial performance. And, as author
Peter Drucker warned, we only manage what we measure. TMI believes the vitality
of an organisation is more important and a better predictor of future
performance than any measure currently reported in a balance sheet.

Company vitality is evidenced in factors such as employee satisfaction,
corporate identity, innovation and learning, and customer satisfaction and
loyalty. These are the factors that are not shown in the traditional balance
sheet but which are of critical importance to a company’s sustainability and
future success.

Thus, TMI would argue that the following factors contributing to
intellectual capital should be measured, reported in an intangible balance
sheet and managed with the same rigour as the financial aspects:

– Business recipe: business ideas, vision and strategy

– Human capital: employees, management and leadership capability, mental
attitudes, intellectual vivacity – that is the ability to transform ideas in
profitable products and services

– Relationship capital: networks, brands and customers

– Organisational capital: intellectual property including licence and
patents, processes and systems.

For now, little attention is being paid to these intangibles by UK plc. This
is HR’s chance to speak the language of your chief executive and chief
financial officer, and put HR firmly on the company’s balance sheet.

Clearly, HR must be involved since so many intangible assets revolve around
people. A reliable and widely accepted approach to measuring human capital will
help to demonstrate the true value of your HR and training departments’
interventions.

Compelling argument

The ability to link investment in employee and organisational development
programmes and HR management processes to the growing value of your
organisation’s intellectual capital – which is then publicly reported –
provides a compelling argument for embracing this particular opportunity.

It is recommend that the measurement system adopted considers three areas:
the company’s current potential for creating future value; the threats to that
potential; and proposed initiatives and efforts designed to overcome any
threats and maximise opportunities.

TMI’s experience suggests that a sound IC (intellectual capital) rating is a
better predictor of future profits than any methods that rely only on financial
data.

Ultimately, the use of intangible asset management will also make your job
easier, enabling you to align your department’s planning and investment more
closely with your organisation’s strategic goals. It will also allow you to
select processes and interventions that demonstrably improve the value of the
business’s overall intellectual capital – its intangible assets will be
intangible no more.

Comments are closed.