How to measure intangible assets

(This article first appeared in Knowledge Management Review KM Review; reprinted by permission.)

Knowledge itself cannot be managed. But knowledge that is captured and turned into an asset (tangible or intangible) is indeed a commodity that one can count on, literally, to improve the performance of the company and help generate profits.

Sweden-based Celemi is a developer of learning processes that enable people to quickly understand the changing needs of the business and react accordingly. As a knowledge-based business, we at Celemi realized early on that our financial statement did not represent the true value of our firm. Where was it reflected that we were a team of highly skilled professionals who provided effective service to our clients? Where would a stakeholder be able to assess the value of the unique learning processes that we were creating for our clients? Where did we account for the value of our loyal and growing customer base?

At about the same time that we were wrestling with these questions, we began working with Dr. Karl Erik Sveiby, a leading researcher and author on knowledge asset values, to create a learning process that would simulate the real-life challenges of managing a knowledge-driven company and help people understand the nature of this unique business environment as well as the value of their own intangible assets. The simulation, called Tango, was introduced in 1994, the same year our board of directors decided to begin measuring Celemi's own intangible assets and publishing the findings annually. First, we identified three key areas that we believed provided our company with a competitive edge and which we would attempt to measure:

*Our Customers: based on the value provided by the growth, strength and loyalty of our customer base; * Our Organization: based on the value derived from our systems, processes, creation of new products and even management style; * Our People: based on the value to the company provided by the growth and development of employee competencies, and how well these competencies match customer needs.

In the years since we began reporting our findings in our Intangible Assets Monitor have seen a dramatic transformation within our company as well as our whole business environment. First, there is a deeper understanding throughout our organization about our business, and which factors drive our success. Everyone has a strong business sense which allows us to build high quality relationships with clients. Such relationships may result in a Fortune 100 leader recommending Celemi to others, enhancing our image; or our employees gaining competence from a challenging project; or the creation of a new simulation model which addresses an emerging business issue and can be reused as a "universal application" for other clients with similar needs.

As the CEO, I also value our Intangible Assets Monitor as a way to make stakeholders aware that we have identified our success factors, and build their confidence in our ability to make more effective strategic decisions.

I am frequently asked how we developed our Monitor and how we decided which intangible assets to measure. The answer is deceptively simple. We took a close look at how Celemi generates revenues and immediately identified two key areas: first, we had the clients or customers who buy our services; and second, we had our consultants and designers who provided the customers with the effective solutions to their business challenges.

The supporting link in all of this is the organization itself - basically a collection of learning processes and simulations based on our learning methodology, and a unique management style based on the insight and experience of the company's top leadership. If you look at our Intangible Assets Monitor, you will see that these three areas are represented across the top as Our Customers, Our Organization and Our People. These are the areas that we have identified as being the fundamental factors, or drivers, of our continued success.

The left column, Our Customers (our external structure), provides us with a picture of how our relationships with clients impact revenues, growth, competence and image. (Of course, a company's external structure can be expanded to include suppliers and other external relationships.)

The right column, Our People, (our competence) provides us with a picture representing the combined competence of Celemi's employees and their ability to act in a wide variety of situations.

The middle column is Our Organization. This represents the internal corporate structure, including systems and processes, business tools, patents, trademarks and our company culture.

Of course, we don't own our customers or our employees, and the value they provide to our company cannot be considered a measurable asset until it's captured and converted into something that the company can own - any new knowledge or skill that can be reused of applied in other areas, from new learning processes to new systems, policies and procedures.

The challenge for our organization then is to capture as much in the way of company-owned assets as possible from these two primary sources: customers and employees.

If we understand the value of intangible assets, we can see that a customer project is worth more than the financial capital it generates. Managed correctly, we can use our relationships with customers to educate our people, create new solutions and ensure continued knowledge and revenues growth for the company. As managers, we can then take a look at each of these areas and use our understanding of them to make the most appropriate strategic decisions.

Likewise, we must capture the skills and knowledge of employees and transfer them into company-owned assets. For example, the team members who created Tango may one day leave Celemi, but we have captured their expertise, their knowledge, in the form of a tangible simulation that we can continue to sell long after they are gone. Once we capture these assets, however, we need to account for them, and this is what is expressed in our Intangible Assets Monitor.

In contrast to the traditional financial statement, which is a lag indicator, Celemi's Intangible Assets Monitor is a lead indicator. It's a tool that we use to clarify our key assets, which happen to be largely intangible, and to guide us in our efforts to move the company forward in an effective and profitable manner.

Celemi's consolidated income statement for 1997, for example, shows that sales were up 22% for the year. This rate of growth, while healthy, slowed from the previous year when sales had risen significantly by 50%. Traditionally, the story would end there, leaving us to wonder if Celemi had peaked or if the downward trend would continue. But our Intangible Assets Monitor provides us with a more comprehensive look into the company's current position and gives an indication of our ability to generate future income.

Consider the Growth/Renewal information found under each of the three headings in Figure One. There you will find indications of very positive trends in all three areas, as well as some explanation for the slower rate of growth due to long-term commitments and investments for the future. Taking Our Customers, Revenue Growth this year is lower than it was in 1996.

However, the amount of business generated by image-enhancing customers has grown considerably (we calculate a 70% share of revenues currently come from this group), positioning Celemi favorably for future sales because these customers build our image and reputation in the market.

Turning to Growth/Renewal under Our Organization, you can see that the figure for organization-enhancing customers is on the rise (this group currently accounts for a 49% share of our revenues). These are customers who add to Celemi's company-owned knowledge by requiring that we develop new systems, processes and templates for simulations and other learning tools. This, in turn, helps ensure our continued ability to meet market demands.

Growth/Renewal under Our People also shows some positive trends. The increase seen in competence-enhancing customers (currently a 65% share of revenues) provides Celemi's growing staff with experience at all levels and increases everyone's ability to deliver Celemi solutions, thereby increasing sales. But to fully understand the long-term impact of our management decisions, you must also consider the other two factors within each main area: Efficiency and Stability.

Since 1995, Celemi has undergone rapid growth and has been recruiting new people to meet growing worldwide demand for our services. This places a burden on the company as we must educate each of these new employees and help them apply their own unique competencies in the most effective way.

To accomplish this, senior sales consultants are asked to help educate new employees, cutting into time spent on sales activities. In addition, it takes time for new employees to locate information quickly and use internal systems efficiently. In the 1997 Monitor, we can see how these two situations contributed to a decrease in the company's efficiency and had an impact on the rate of sales growth.

At the same time, we are building the stability of our company. Repeat orders (Our Customers) are on the rise. Our Expert Turnover (Our People) is down significantly, while seniority for both Experts and Administrative staff is up (Our People and Our Organization). We now have many more qualified people in place who can go out and sell our services and deliver effective learning processes.

I have found our efforts in monitoring our intangible assets to be an exciting, rewarding and inspiring practice. Management and other stakeholders can gauge how well we are moving in line with the strategic goals we have set. We can discover trends in our business development perhaps years before it would otherwise have been possible. Our employees can refer to the Monitor as a constant source of information about the key factors driving our business. But more specifically, the Monitor helps individuals at all levels of the organization make effective business decisions.

For example, when we study the impact of our customers, the process we go through to reach a value also provides us with a wealth of information in terms of the types of clients we are attracting and which clients we should try to target to support our strategic goals.

With this information, we can guide the organization as a whole to attract and support certain important clients. Of course, this link to strategic planning and individual actions is not automatic. Before we started measuring our intangible assets, we had to help everyone understand what our intangible assets were, and what impact they had on the performance of the company. Once people have this knowledge, they are able to interpret the information and make effective decisions in line with the strategic plan. At the same time, they will develop their own extraordinary business sense -- an essential key to how we meet our challenges as a leading innovator in a global environment.

Margareta Barchan is President and CEO of Celemi. In 1997 Ms. Barchan was named Business Woman of the Year for Sweden and Celemi was listed in Europe's 500, a list of the fastest growing companies in Europe. Celemi is one of the few companies in the world to measure its intangible assets and publish them in its annual report.