This is the first of a two part series examining the concept of intangible value and what it means for organisations.
Trends in intangible assets:
In May 2017 the European Commission’s Directorate-General for Economic and Financial Affairs released a paper that examined recent trends in investment in intangible assets and the contribution of intangibles to economic growth and productivity. Among the researchers’ key findings were the following:
- Investments in industrialised countries tend to be shifting away from traditional areas of physical assets towards more intangible/knowledge based capital.
- Trends of investment in intangibles have been stable, even during the recent economic crisis
- Intangibles are found to be vital for productivity and economic growth – in the EU-15 the contribution of total intangible assets to output growth is between one and three times as high as the contribution from tangible assets.
This graph below from the Wall Street journal reiterates the point from the EU study: in recent years intangible investment has grown where tangible investment has fallen off, and investment in intangibles has been affected far less by the financial crisis of 2008.
Intangible assets are rapidly becoming huge sources of value for organisations. Writing for the Wall Street Journal, Vipal Monga notes how in its recent bankruptcy case RadioShack valued and sold its intangibles (brand and customer data) and sold them for $26.2 million. Similarly, a huge percentage of Facebook’s worth is connected to its intangibles:
The stock market values the social-networking company [Facebook] at nearly $320 billion. As of Dec. 31, its assets minus liabilities totaled $44.2 billion. The difference between the two could serve as a proxy for the value of Facebook’s vast troves of user data, the algorithms it creates to mine that data and its brand.
But despite the growing body of evidence attesting to the value of intangible assets, there is currently no standard approach to calculating this value. In a recent interview with Forbes, David Post, a senior analyst at the Sustainable Accounting Standards Board, discussed the complexities of measuring the financial impact of intangibles on business processes:
For example, employee training looks like a cost in the short-term, but if it leads to process quality improvements, which in turn improves customer satisfaction, you’re eventually going to see the needle move on revenues, market shares and elsewhere.
The problem is clear: although the evidence suggests that intangible assets are hugely valuable to organisations, it is hard to directly measure this value, especially when offset against measurable costs that are tracked in traditional financial reporting.
This means that many organisations remain completely unaware of the value of their intangibles, leading in turn to sub-par business strategies and a failure to invest in assets with huge value potentials.
At Anmut we have been developing a method for tackling this problem. More on this next time, when we continue to explore the concept of intangibles and share more on our approach to measuring their value.