Intangible Value

Intangible assets have been described as “assets that are not physical in nature” and “something of value that cannot be physically touched”.  A more formal description is that an intangible asset is an identifiable non-monetary asset without physical substance. So when a Business transformation initiative generates an intangible asset, it needs to be measured, in the same way that firms measure their financial assets. This is particularly important when considering the fact that intangible assets constitute at least 84% of S&P 500 Assets. This is in stark contrast to the 17% that intangibles represented back in 1975. This reflects the fact that the world is becoming more digital and less physical.

The burgeoning significance of intangible assets in today’s economy cannot be overstated. Beyond the traditional valuation methodologies, innovative approaches are required to capture the full spectrum of value that these assets represent. Consider the transformative impact of brand strength, proprietary technologies, or organisational knowledge. These assets, while intangible, can propel a business to market leadership. So evaluating the success of business transformation must extend to the intangible benefits accrued.

This holistic assessment is not merely an academic exercise; it’s a strategic imperative. It feeds into more nuanced investment decisions, strategic pivots, and long-term planning. For instance, a transformation that enhances user experience might not immediately reflect in financial statements, yet it lays the groundwork for customer loyalty and market share growth. To navigate this complex valuation landscape, firms must consider indicators such as innovation rate, digital engagement metrics, and even employee expertise. The intangible assets forged through transformation become a beacon for attracting talent, partnerships, and investment.

As businesses evolve, the ability to quantify the intangible facets of transformation becomes a barometer for organisational agility and future-readiness. It’s about capturing the narrative of transformation, not just the numbers. If companies fail to measure their intangible assets, they are possibly grossly underestimating the value of their firm. Similarly, if intangibles are not measured during transformation, the reported return on investment to stakeholders, could well be much less than what has actually been achieved. At a minimum when measuring intangible value, you should, wherever possible, identify new KPIs to accommodate the intangible value that transformation can realise. Or KPIs might already exist in some areas, and these can be used as a baseline.

If there is no existing KPI or if you feel it is too difficult or expensive to set one up, then you might consider categorising the benefit to “observable” and identifying subjective criteria as a means of evaluation. This assessment should be undertaken by qualified people who are reliably able to determine whether some benefits, such as improved staff morale, have actually been realised. If you have the expertise within the company, the next level of measuring intangible value will involve the finance experts, as it gets complex.

The Financial Accounting Standards Board, which establishes financial accounting and reporting standards in the United States, recognises various classes of intangible assets. According to the generally accepted accounting principles (GAAP), intangible assets that can be identified on the balance sheet typically fall into the following broad categories: Marketing-related, customer-related, artistic-related, contract-based and technology-based. It’s important to note that for an intangible asset to be recognised on the balance sheet, it must be identifiable, meaning it is separable and capable of being sold, transferred, licensed, rented, or exchanged, or it arises from contractual or other legal rights.

It’s also worth noting that goodwill is another intangible value type that some companies such as Google report. But traditional Finance metrics are not cut out to measure these intangible value types. Which raises the question to CFOs, “how will you measure and monitor the new value drivers in today’s digital economy?” Look at some the highest growth companies in the world. They are not growing in value because of physical assets. They are growing because their intangible assets such as data, networks, intellectual property from software, talent, patents, and copyrights are growing.

Business leaders need new measures and analysis to manage performance in the digital age. To manage their intangible assets, it’s important you measure them, or at least describe them in non-financial terms. They need to measure Customer satisfaction and relationships, quality of human capital, and brand reputation, to name but a few. To measure intangibles, companies must make connections between financial outcomes and pre-financial measures, which they can use as leading indicators, usually based on a causal relationship or correlation. The KPIs that are chosen, need to be measurable, impact the business, and based on accurate data.

In terms of who should be setting the KPIs and measuring the data, it needs to be whoever owns the data, so that might be sales, marketing, finance, HR, or IT, etc. But the finance function should be supporting these data owners in their attempts to measure the new value drivers, and ensuring the validity of KPIs, before it gets onto the dashboards of senior executives. So business owners and finance leads need to collaborate to provide decision makers with data that reports value to shareholders, that enables leaders to make more informed decisions, and ultimately helps generate value for the business.

Leaders must, therefore, build robust frameworks to regularly evaluate these intangible assets. It demands a cross-functional effort, where finance, marketing, HR, and operations unite to define, measure, and articulate the intangible value creation that is pivotal to the company’s sustained growth and competitive edge.

In essence, the true measure of a company’s worth in the digital age extends far beyond the physical assets on the balance sheet. It encompasses the innovative ideas, digital capabilities, and strategic partnerships – all intangible, yet all indispensable for success in a digital-first economy. Executives must therefore elevate their understanding of intangibles, integrating sophisticated valuation methods into their strategic analysis. This not only underscores the success of digital transformations but also illuminates the path for ongoing value creation in a rapidly transforming business landscape.

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