The Intangible (But Very Real) Market Opportunity for
Consultants
by Mary Adams
You are familiar with Peter Drucker’s
writings on knowledge work. You got through The
World is Flat last year. You know that we
are moving to a global, knowledge-based economy in which
success is no longer about access to raw materials, machinery,
and factories. Today it’s about a new kind of raw
material that helps businesses build knowledge and innovation.
But what makes up this new raw material of success and
innovation? How do companies figure out if they have what
it takes to succeed? Where will the information come from?
The answer to these questions can and should come from management
consultants. We have both an opportunity and an obligation
to help guide our clients to success in this quickly changing
world.
The Shift
One of the simplest ways of illustrating the shift to a
knowledge economy is to look at the stock markets. Thirty
years ago, there was a tight correlation between a company’s
stock price and the book value of its assets. Today, only
20 percent of the stock price of S&P 500 companies can
be explained via their balance sheet book value. Most people
don’t think about the implication of this discrepancy
because it has been so long since we had a useful balance
sheet and we have lost track of why it exists.
Ever since merchants in fifteenth century Venice started
using financial statements, income statements have kept
score on past operations. Balance sheets have been used
to detail the resources with which a company will build
its future. If you were a merchant, your balance sheet showed
what you had in inventory and what you paid for it—so
it also gave a great view into your potential earnings for
the coming year. If you were a manufacturer, your balance
sheet also showed your investment in plant and equipment,
again a good indicator of your future potential.
Today, balance sheets cannot provide this view of a company’s
potential because the most critical resources in the knowledge
economy don’t qualify for accounting treatment. What
are those intangible resources?
- Human Capital—Includes both employees and managers
- Structural Capital—Knowledge, including intellectual
property, know-how, processes, systems, and software
- Relationship Capital—Brands and relationships
with customers, and external partners such as suppliers,
distributors, and development partners.
Today, even for an “industrial” company like
GE, intellectual capital is more important (GE’s book
value is around 30 percent of its stock price). Intellectual
capital drives innovation, earnings, growth, and competitive
advantage across every sector of our economy. There is information
about these resources scattered throughout most companies.
HR groups track personnel. Marketing and sales own information
about customers. And so on. But none of these items appear
in a consolidated report.
The Gap
Can you imagine a merchant without an inventory report,
having to sell product without knowing the quantity or price
of goods he owns? Yet this is the position that most corporate
leaders are in today. They lack basic consolidated information
about their most important resources: Do we have the right
people, network, and knowledge to meet our goals? Are we
positioned for continued innovation? Where are we at risk?
Boards of directors, investors, and analysts are in the
same boat. They are forced to analyze the future potential
of a company with incomplete and inconsistent information.
This information gap leads to vague statements by corporate
leaders such as:
- We have great people
- We have the best technology available
- Our IP is a core advantage
- We have close relationships with our customers.
How do companies get away with this—especially at
a time when US corporations are obsessing about Sarbox compliance
and regulators are demanding ever more exact reporting?
Why don’t stakeholders demand that management back
up its statements with real information? It’s because
very few people are aware of how to provide objective information
about intangible resources. Luckily, the field of intellectual
capital is coming to the rescue.
Early writers about intellectual capital (IC) include Tom
Stewart, now the editor of the Harvard Business
Review. IC has since become a separate field
of management studies. There is an academic journal dedicated
to the subject (Journal of Intellectual Capital).
The AICPA has joined an international consortium that has
an initiative on performance measurement approaches related
to intellectual capital. A new degree program at a management
school in England focuses on performance management, also
an outgrowth of the field.
The Solution
The research and work coming out of the IC world is helping
to shed light on how to assess these valuable but intangible
resources. Although the field of IC is still developing
at a fast pace, there is already a strong set of recommendations
on how to create good inventory approaches for intellectual
capital. These principles include:
- Look at IC as a portfolio. Information
in silos is not nearly as valuable as a single presentation
that shows the relative strength and weakness of each
of the components of the entire portfolio.
- Assess, don’t measure. It is
more important to assess adequacy of resources than to
count them. (Would you rather know a headcount, or whether
the company has the right mix of employees to deliver
on its strategy?)
- Use a broad sample. Assessing implies
that you are tapping into subjective judgments. Don’t
rely on just a handful of sources.
- Tap into both internal and external knowledge.
One of the biggest mistakes many management teams make
is relying exclusively on internal judgments. External
sources bring greater objectivity and perspective to any
analysis.
- Use consistent criteria. The value
of data is increased if you can compare it across divisions,
companies, and across time.
A good system also looks beyond where the company is today
to analyze improvement efforts and highlight areas of risk.
A standardized system such as IC Rating™, also gathers
information about competitors at the same time that information
is gathered on the company itself.
So who is in the best position to create this type of assessment
and inventory? Analysts don’t try—it’s
not their job. And, until they get better information, they
will continue to focus primarily on earnings. Accountants
can’t do it—their ability to track intangible
assets is extremely limited under today’s standards.
Most managers can’t do it—they don’t have
the right kind of internal reporting and lack objectivity.
That leaves the door open to the consulting industry.
The Consulting Opportunity
Today, it is often said that many companies have less of
a need for consultants because management education has
become so pervasive. Companies have indeed formed strong
internal competencies in common management tools developed
during the industrial era.
That is not the case when it comes to intellectual capital
measurement and management. Consultants can make a huge
difference for their clients in the area of IC and, frankly,
for the growth of their own businesses. Take the time to
learn more about the field of IC. Consider developing competence
in IC assessment and inventories. Position your clients’
(and your own) businesses for success in the 21st century.
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Mary Adams is a founder of both Trek Consulting
LLC and the IC Knowledge Center, an internet resource where
companies learn to profit from their intellectual capital
portfolios. Find out more at www.icknowledgecenter.com.
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