In all sectors of the modern economy, the key to the survival and competitiveness of anorganization lies in how well its people are able to manage, coordinate and market their collectiveknow-how.
To this end, traditional company evaluation methods are no longer sufficient to the task. Forinstance, in 1997, the market value of Microsoft was higher than the combined market value ofBoeing, McDonald's, Texaco, Time-Warner and Anheuser-Busch, even if Microsoft's traditional"tangible" assets, those included in standard balance sheets, amounted to no higher than 7% of itstotal market value. So what is to be made of the remaining 93% of Microsoft?
This considerable gap that exists between the Market Value and the Book Value of a company is exactly the area that an organization's Intellectual Capital covers. It is these soft, intangible aspectsthat make the difference when it comes to accurately evaluating the true Market Value of a modern company.
The Intangibles of a company are its most important assets. The business world has changedsignificantly over the past decade; unfortunately many approaches to management have not kept upwith this change. There is no doubt that what differentiates superior organizations from theiraverage peers is the way they understand and leverage their Intangibles, such as knowledge, skills,relationships, networks, culture, internal processes and routines, as well as the intellectual propertiesthat provide a critical source of competitive advantage.
Value, organizational performance and bottom-line success are not created by narrowly focusing onfinancial numbers, profit margins and the like. In reality, success is the result - the outcome - of anumber of organizational performance drivers and the way in which they are applied. However, capitalizing on these intangible value drivers in business and understanding how they impact the bottom-line is often not well understood. In order to harness the potential of these often hiddenvalue drivers, organizations need to identify which ones are critical for themselves and thenascertain how to maximize their respective#00228C performance benefits.
Empirical economic analysis reveals that from the onset of the 1990s the source of value creation inthe industrialized economies has shifted from tangible to intangible assets. Whereas, as recently as1982, the value of tangible assets, reported on the balance sheet of Standard & Poor's top 500 U.S.companies, on average, still made up most of their market value.
To be exact, 62% of the market value of S&P 500 companies in the U.S. in 1982 was covered by thevalue of tangible assets. Since 1998 this ratio has been totally turned around. Currently, only 15% of the market value of the S&P 500 are represented through the value of their tangible assets, where as 85% is the portion of market value that is assigned to their intangible assets.
In the Knowledge Economy, in order to remain competitive, a sound management system needs tokeep a clear, up-to-the-minute picture of these intellectual assets in order to fully exploit theirpotential. Numerous studies have shown that it is these managers, who invest in the measurementand management of theirIntellectual Capital,who have the key advantage with which to dominate their industries.
The traditional evaluation model,the economist's standard balancesheet, which has gone largelyunchanged since the advent of theIndustrial Age, obviously leaves a bitto be desired in terms of its abilityto determine the value of a modernorganization. For much the samereason, it is also largely incapable oftelling us anything relevant about a company's vitality or future value. Very often, to the continueddetriment of management, company shareholders and the larger investment community, they caneven be misleading. New approaches are therefore necessary, able to measure the factors that reallyguarantee the present vitality and the future competitiveness of a modern organization.
It is in this context and for these reasons that the Intangible Balance Sheet was developed.
The Intangible Balance Sheet of a company, in the knowledge economy, needs to be structuredto overcome the traditional hard elements, in order to focus on the following four macro-areas:
Human Capital Social Capital Structural Capital Relationship Capital
In establishing an Intellectual Capital System, for each of these macro-areas, several key-indicatorsare identified (Intangibles Key Indicators).
The originality of this approach proposed by Summit-IMM, lies in its avoidance of making anecessity out of benchmarking everything with competitors, which is very often unfeasible due tothe specificity of the IC structure of each company. The Intangible Balance Sheet, elaborated in thisway, allows for:
the measure of the Vitality Level of an organization; the definition of a series of Intangibles Key Indicators to be monitored periodically in order toevaluate the present and, more importantly, the future value of a company; the provision of a powerful communication tool to the outside investment community; the codification of management performance evaluation systems for maintaining enterprisevitality "conditio sine qua non" toward profitability and longevity
A full understanding of the value of an organization's Intellectual Capital, is the first step towardenacting appropriate management policies. The key issue here is not the level of Intellectual Capitalper se, but the change rate in company's economic performances induced by investments inintellectual capital. Above all, this generates the possibility of predicting a company's future value,something that today, in a full net-economy revolution, is assuming a crucial role, especiallyconcerning the relationship between a company and its stakeholders. Whoever is able to optimizethe ratio between investment and rate of change, will be able to survive the new hyper-competitivemarket scenario.
This necessity prompted the IASB (International Accounting Standards Board) to conduct researchin order to define the measurement criteria of Intellectual Capital, resulting in the development of anew international standard of evaluation (IAS 38).
The proposed solutions, however, fore see the insertion of only a certain number of intangible assets into final balance sheets. The problem lies in utilizing an old approach to face a radically new challenge. As a matter of fact, the traditional double-entry book keeping system, already over 500 years old, only allows for the registration of the most "visible" intangibles, only those suitable to transactions, not accounting for the real nature of Intellectual Capital: its immateriality. For this reason the Security and Exchange Commission declared the necessity of elaborating new forms of reporting.
The solution, presented below, is the realization of a document designed to accompany thetraditional balance sheet, able to fully expressall of the soft sidesof an organization. These assetscannot be itemized in a standardized form, because they relate to the character of an organization,something that is not replicable nor easily distinguishable from company to company.
An organization's value can be evaluated from 3 different points of view
- From an accountant's perspective this value can be calculated by adding Book Value to Goodwill.
- Managers tend to focus on recent performance measured through economic and financial indicators.
- Investors have an external perspective based on a variety of indicators.
An increasing number of industry leaders are taking advantage of an Intangibles Balance Sheetincluding Skandia, Nokia, Carl Bro Group, Coloplast, Hofman-Bany, COWI, Dansk IndustrySystems, Dow Chemical, PLS Consult, Celemi, Ericsson, ABB, and in Italy, with the support ofSummit-IMM: Brembo, the world leader in advanced breaking systems, Ferrari-Maserati, the creatorof the world's fastest automobiles, and SAPA Autoplastics, a leader in plastic components in the automotive sector.
Human Capital