Intangible Value

[00:00:02] Welcome to another episode of Transformation Professionals, sponsored by CXO Transform.

[00:00:08] Crafted to enhance the strategic acumen of ambitious managers, leaders, and consultants,

[00:00:13] we hope you enjoy this episode about intangible value. Here's Rob Llewellyn.

[00:00:22] Intangible assets have been described as assets that are not physical in nature,

[00:00:26] and something of value that cannot be physically touched. A more formal description is that an

[00:00:32] intangible asset is an identifiable non-monetary asset without physical substance. So when a

[00:00:40] business transformation initiative generates an intangible asset, it needs to be measured in the

[00:00:46] same way that firms measure their financial assets. This is particularly important when considering

[00:00:52] the fact that intangible assets constitute at least 84% of S&P 500 assets. This is in stark contrast

[00:01:01] to the 17% that intangibles represented back in 1975. This reflects the fact that the world is

[00:01:08] becoming more digital and less physical. The burgeoning significance of intangible assets in

[00:01:15] today's economy cannot be overstated. Beyond the traditional valuation methodologies,

[00:01:21] innovative approaches are required to capture the full spectrum of value that these assets represent.

[00:01:26] Consider the transformative impact of brand strength, proprietary technologies, or organizational

[00:01:32] knowledge. These assets, while intangible, can propel a business to market leadership. So evaluating the

[00:01:40] success of business transformation must extend to the intangible benefits accrued.

[00:01:45] This holistic assessment is not merely an academic exercise. It's a strategic imperative. It feeds into

[00:01:52] more nuanced investment decisions, strategic pivots, and long-term planning. For instance, a transformation

[00:02:00] that enhances user experience might not immediately reflect in financial statements, yet it lays the groundwork

[00:02:06] for customer loyalty and market share growth. To navigate this complex valuation landscape, firms must

[00:02:13] consider indicators such as innovation rate, digital engagement metrics, and even employee expertise.

[00:02:20] The intangible assets forged through transformation become a beacon for attracting talent, partnerships,

[00:02:27] and investment. As businesses evolve, the ability to quantify the intangible facets of transformation

[00:02:34] becomes a barometer for organizational agility and future readiness. It's about capturing the narrative

[00:02:41] of transformation, not just the numbers. If companies fail to measure their intangible assets,

[00:02:46] they are possibly grossly underestimating the value of their firm. Similarly, if intangibles are not measured during

[00:02:54] transformation, the reported return on investment to stakeholders could well be much less than what has actually been

[00:03:01] achieved. At a minimum when measuring intangible value, you should, wherever possible, identify new KPIs to accommodate

[00:03:09] the intangible value that transformation can realize. Or KPIs might already exist in some areas.

[00:03:16] And these can be used as a baseline. If there is no existing KPI, or if you feel it is too difficult or expensive

[00:03:23] to set one up, then you might consider categorizing the benefit to observable and identifying subjective criteria

[00:03:30] as a means of evaluation. This assessment should be undertaken by qualified people who are reliably able

[00:03:37] to determine whether some benefits, such as improved staff morale, have actually been realized.

[00:03:43] If you have the expertise within the company, the next level of measuring intangible value will involve

[00:03:48] the finance experts as it gets complex. The Financial Accounting Standards Board, which establishes

[00:03:54] financial accounting and reporting standards in the United States, recognizes various classes of

[00:04:00] intangible assets. According to the generally accepted accounting principles,

[00:04:05] GAAPI intangible assets that can be identified on the balance sheet typically fall into the following

[00:04:11] broad categories. Marketing-related, customer-related, artistic-related, contract-based and technology-based.

[00:04:20] It's important to note that for an intangible asset to be recognized on the balance sheet,

[00:04:26] it must be identifiable, meaning it is separable and capable of being sold, transferred, licensed,

[00:04:33] rented or exchanged, or it arises from contractual or other legal rights.

[00:04:39] It's also worth noting that goodwill is another intangible value type that some companies such as

[00:04:44] Google report. But traditional finance metrics are not cut out to measure these intangible value types,

[00:04:50] which raises the question to CFOs, how will you measure and monitor the new value drivers in today's

[00:04:56] digital economy? Look at some, the highest growth companies in the world. They are not growing in

[00:05:03] value because of physical assets. They are growing because they're intangible assets such as data,

[00:05:09] networks, intellectual property from software, talent, patents and copyrights are growing.

[00:05:14] Business leaders need new measures and analysis to manage performance in the digital age.

[00:05:20] To manage their intangible assets, it's important you measure them or at least describe them in

[00:05:25] non-financial terms. They need to measure customer satisfaction and relationships,

[00:05:31] quality of human capital and brand reputation, to name but a few. To measure intangibles,

[00:05:37] companies must make connections between financial outcomes and pre-financial measures,

[00:05:42] which they can use as leading indicators, usually based on a causal relationship or correlation.

[00:05:47] The KPIs that are chosen need to be measurable, impact the business and based on accurate data.

[00:05:54] In terms of who should be setting the KPIs and measuring the data, it needs to be whoever owns the

[00:05:59] data. So that might be sales, marketing, finance, HR or IT, etc. But the finance function should be

[00:06:08] supporting these data owners in their attempts to measure the new value drivers and ensuring the

[00:06:13] validity of KPIs before it gets onto the dashboards of senior executives. So business owners and finance

[00:06:20] leads need to collaborate to provide decision makers with data that reports value to shareholders,

[00:06:25] that enables leaders to make more informed decisions and ultimately helps generate value for the

[00:06:32] business. Leaders must therefore build robust frameworks to regularly evaluate these intangible assets.

[00:06:39] It demands a cross-functional effort where finance, marketing, HR and operations unite to define, measure and

[00:06:47] articulate the intangible value creation that is pivotal to the company's sustained growth and competitive edge.

[00:06:53] In essence, the true measure of a company's worth in the digital age extends far beyond the physical

[00:06:59] assets on the balance sheet. It encompasses the innovative ideas, digital capabilities and strategic

[00:07:07] partnerships, all intangible, yet all indispensable for success in a digital-first economy.

[00:07:14] Executives must therefore elevate their understanding of intangibles, integrating sophisticated

[00:07:20] valuation methods into their strategic analysis. This not only underscores the success of digital

[00:07:26] transformations, but also illuminates the path for ongoing value creation in a rapidly transforming

[00:07:33] business landscape.

[00:07:34] This podcast is sponsored by CXO Transform, professional development for managers, leaders and consultants

[00:07:41] who strive for excellence. If you want to perform at your very best, in the most sought-after

[00:07:47] transformation roles, visit CXOTransform.com.