MEASURING THE VALUE OF INTANGIBLES

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MEASURING THE VALUE OF INTANGIBLES
to discover the roots of companys future success
Geneva, July 11, 2006
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When we want to assess future potential of a
company, what shall we look at?
LOOKING BEYOND FINANCIAL ASSETS...

• Managing an organisation by focusing simply on
  its financial assets would be like driving a car
  looking just in the rear mirror.
• Profits are fruits of the past performance so
  what indicators do you have about potential and
  future value of a company?

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What are the intangibles?
DEFINITION OF INTANGIBLES
The factors not shown in the traditional balance
sheet, but which are of critical importance for
the companys future success.
We believe that future value of company depends
mainly on intangibles. Different methods were
developed to assess and allow benchmarking of
areas that are of critical importance for the
future of organisations, but still are not shown
in traditional financial or operational reports.
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Market value, book value and intangibles
TOTAL VALUE
Financial capital
Intangible capitals


Other intangibles
tangible
Country
intangible
In billions Source adaptation from AIAF, 2005
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Measuring the value of intangibles

• Companies have to develop and utilise new
  accounting methods, since those that have been
  implemented so far
• Are too focused on the past
• Miss anticipatory power
• Capture critical changes too late
• Dont take into adequate consideration some
  resources, such as intangible assets

Main Intangible Assets Measuring Models
Elaboration from Sveiby, 2001.
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IC RatingTM background the Value Platform

• There are 3 main perspectives behind IC Rating
  Platform
• Human CapitalPeople, employees
• Organisational Structural CapitalAll processes,
  procedures, systems and culture that are left
  when employees are not in place
• Relational Structural CapitalNetwork of clients,
  suppliers and partners.
• All these 3 perspectives work in the framework
  of particular Business Recipe (market, strategy
  of the firm), which is individual for every
  company.
• Good performance in all these areas builds
  Financial Capital in the future.

Source Intellectual Capital Sweden www.intellec
tualcapitalsweden.se
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IC Rating Platform
IntellectualCapital
Human Capital
OrganisationalStructural Capital
RelationalStructural Capital
BusinessRecipe
Network
Brand
Custo- mers
Processes
Emp- loyees
Manage-ment
IntellectualProperties
KEY ISSUES Demand from competitors Contribution
from I.P. (attract customers employees) Protecti
on of I.P.(long term/ hard to copy)
KEY ISSUES Structured and docu-mented knowledge
(methods, routines and systems) Organisation
culture
KEY ISSUES Business related skills Internal
leadership Co-operation and comple-mentary
experiences in the mana-gement team
KEY ISSUES Business specific knowledge General
competence Contribution to develop-ment of
structural capital
KEY ISSUES Loyalty Potential Strength- image
enhancing- demanding Dependence
KEY ISSUES Awareness Reputation Relevant
differen-tiation
KEY ISSUES Business critical networks and
alliances(excluding current customers)
KEY ISSUES Business environment - Competition -
Entry threats Business idea Strategy Vision
Source Intellectual Capital Sweden www.intellec
tualcapitalsweden.se
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IC Rating three perspectives
1. Effectiveness
2. Risk
3. Renewal and Development
Present day
Future
Accounting
Present value of IC effectiveness in creating
future financial value
Threat against present effectiveness
probability of threat coming true
Efforts to renew and develop present effectiveness
Source Intellectual Capital Sweden www.intellec
tualcapitalsweden.se
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IC RATING is done using well-known Standard
Poors scales
Source Intellectual Capital Sweden www.intellec
tualcapitalsweden.se
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IC RATING is mainly based on interviews with
people

• PROCEDURE
• Rating is primarily based on interviews with
  carefully select 35-50 respondents who knows most
  about this company, of which
• 2/3 is external (customers, lobby organizations,
  competitors, suppliers, partners, etc.)
• 1/3 is internal (employees),
• rating of intellectual capital is weight average
  of answers for more than 150 questions that are
  strictly connected to business performance of the
  company,
• rating usually takes 4-6 weeks.

Source Intellectual Capital Sweden www.intellec
tualcapitalsweden.se
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IC RATING and IP assessment

• 17 questions out of about 150 are focused on IP
  evaluation
• Examples of key issues to be pointed out during
  the evaluation process
• Market awareness about company's IP
• IP influence on companys brand
• Company's IP replaceability
• Time period during which the IP has value
• IP contribution to rise barriers to entry
• Etc.

Source Intellectual Capital Sweden www.intellec
tualcapitalsweden.se
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Case Study Effectiveness perspective
BB
Intellectual Capital
A
BB
CC
BBB
Human
Relation
BusinessRecipe
Organisation
A
BBB
BB
CC
BB
B
C
Process
Management
Network
Brand
Customers
Employees
Intellectual Properties
Selected findings This rating was done for
start-up company. As in case of most young and
small companies, structural capital is almost
non-existent. But, company is operating in market
with good perspectives. Good score in relation
box shows that companys network is a main source
of its current advantage. Customers base as well
can be assessed as satisfactory.
Source Intellectual Capital Sweden www.intellec
tualcapitalsweden.se
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Case Study Risk perspective
Selected findings Organisational Capital shows
almost no risk as its efficiency is to low to be
threatened. Although efficiency of relation
capital was average (BBB), the risk perspective
shows that its strongly threatened by some
aspects. It may be that there are very few
customers or customers are heading to bankruptcy
or many more. To discover true reason we must
look closer to the Customer box and see answers
to the questions of which the box is composed.
Source Intellectual Capital Sweden www.intellec
tualcapitalsweden.se
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Case Study Renewal Development perspective
BBB
Intellectual Capital
A
BBB
BB
BB
Human
Relation
BusinessRecipe
Organisation
A
BB
BB
A
CCC
A
BBB
Process
Management
Employees
Network
Brand
Customers
Intellectual Properties
Selected findings In renewal and development
perspective we can see substantial efforts in the
Human Capital box. These means that company
currently conduct several initiatives, which are
focused on improving human capital effectiveness.
Poor renewal efforts can be observed in the brand
box, which together with not so good efficiency
(only BB) should make management put more
attention in this area.
Source Intellectual Capital Sweden www.intellec
tualcapitalsweden.se
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Case Study Customer relations box decomposition
Company
Benchmark
Selected findings It turned out that main threat
for customer effectiveness comes from two things
being a strategic supplier and vulnerability for
the changes. The company itself had one big
customer, which generated most of the revenues.
Relations with this customer was great, duration
was long, it was process competence and image
enhancing customers. The only thing that made the
risk so high was that customer was preparing to
conduct services offered by the company itself.
Source Intellectual Capital Sweden www.intellec
tualcapitalsweden.se
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IC RATING - A Comprehensive View
Source Intellectual Capital Sweden www.intellec
tualcapitalsweden.se
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IC RATING and financial performance

• A high IC RATING value, indicates a high turnover
  growth in the years to come.
• IC RATING alone is a better predictor of future
  profits, than methods only using financial input
  data.

Source Intellectual Capital Sweden www.intellec
tualcapitalsweden.se
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Beyond IC RATING IP monetization and brand
equity

• Monetary evaluation of some IP forms (e.g.
  brands) can complement methods like IC RATING
  that basically provide qualitative findings and
  point out improvement areas
• There are many methods to evaluate the brand
  equity
• Based on cost criteria, oriented to the past and
  to the resources spent on the brand
• Based on the benefits flows the value of the
  brand is determined by the cash flows that it
  generates
• Based on market indicators and, therefore, on ex
  post performances
• The monetary assessment of the brand allows the
  company to have immediate benefits, e.g.
• Further financing from investors trough specific
  financial tools (e.g. sale-lease back)
• A better rating according to Basel II criteria

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Thanks
Mauro De Bona Campus - Innova Group 39 320
6130308 mauro.debona_at_campusconsulting.it skype
maurodebona