IT and the Power of Intangible Assets

What gives organizations a competitive edge in an uncertain economy is not something they can see or touch. Today’s competitive weapons are intangible assets, and IT plays a critical role in generating, developing, and tracking them.

Businesses have always had intangible assets management talent, organizational capability, and intellectual capital but these are now being valued as never before. Today, the primary drivers of value in an organization are nonfinancial assets, such as brands, innovation, customer loyalty, and research and development (R&D).

Technology is at the very heart of intangible value. It provides:

• The connectivity, speed, flexibility, reach, and economical value-creating activities that underlie intangible value
• The structure and the engine for information flow that feeds creativity
• The transactional excellence that enables a host of “soft” assets related to customers and operations to emerge and drive value for the firm

IT makes a huge contribution to intangible assets, and those assets have a huge influence on gaining advantage in today’s markets. The challenge for organizations and IT suppliers is to assess intangible asset value and IT’s role in it. Two factors driving attention to intangibles relate directly to wealth creation.

First, intangibles matter to investors. Intangible assets can provide leading indicators for what the market values most: predictable future earnings. A study conducted by Cap Gemini Ernst & Young found that 70 percent of buy-side investors used nonfinancial measures to determine share prices and company valuations and that nonfinancial data drove at least 30 percent of their investment decisions. Some of these factors included the following:

• Brand equity: Market position, expandability, customer relationships and loyalty
• Alliances and networks: Strategic alliances, supply chain relationships
• Human capital: Talent, workforce retention, employee relations, compensation
• Technology and processes: IT capabilities, flexibility, reengineering, quality
• Innovation: R&D pipeline, new product development, knowledge creation

Second, intangibles have been shown to be correlated with earnings. Researchers at the Center for Intangibles Research at NYU’s Stern School of Business identified “five major drivers of intangibles-driven earnings (IDE): R&D, advertising (brand enhancement), capital expenditure (intangibles embedded in physical assets), IT, and technology acquisitions.” They used data for about 2,000 companies from a range of industries from 1989 to 1999 (see Feng Gu and Baruch Lev, .Intangible Assets: Measurement, Drivers, Usefulness )

What role does IT play in this rich source of value? IT and IT-related initiatives can help organizations to become smarter and work faster and even become smarter faster. Examples of intangible assets from the smart use of IT include:

• Collaborative alliance relationships to leverage value
• Innovation spurred and supported by IT
• High individual skills/expertise and enhanced organizational competencies
• Performance measurement systems aligning operations with goals
• Intellectual property commercialized and managed

Much IT spending can be considered investment in “soft” assets that combine IT and cultural factors to produce what Erik Brynjolfsson, professor of management and co-director of the Center for eBusiness at MIT’s Sloan School of Management, calls a productive and innovative “digital organization.” Companies can use IT for open information access, distributed decision making, and continual training to cultivate intangible assets, such as an empowered and adaptable workforce.

It is important to remember the two-way relationship between IT value and intangible assets. IT drives intangible asset development; intangible assets working with IT help to drive the results IT is expected to deliver. Organizations that can measure and manage their intangibles can claim greater strategic advantage. To start the ball rolling, C-level executives and business managers need to:

• Determine which intangible assets will help to accomplish the organization’s goals
• Consider how intangible asset development (and measurement) relates to core processes and to the organizational competencies that make the firm competitive
• Identify which technologies, in relation to which activities, are instrumental in moving them to their objectives for intangible value

Finally, it is important to put intangibles in the context of corporate wealth. All intangible assets must convert to currency to have value. That value may cross functional and enterprise boundaries and accrue over time, but in all its forms it settles on the bottom line in profit streams and cash flow for the benefit of the organization. Any efforts to track and manage intangible assets need to link results to organizational objectives and measures of currency. Some questions to ask follow:

• Are you on track toward what you want to accomplish? Is the asset growing or diminishing the company’s ability to create value, or even its ability to reap value in the form of financial results, competitive advantages, or sustainable performance?
• Are your intangibles bringing you real dollars? Indicators of R&D for a new product or technology, customer loyalty, or employee commitment must all translate into what currency can capture (e.g., increase/decrease in revenue, overhead, profit).
• How do you look to the market? The better an organization is seen to manage its intangible assets itself affects the firm’s market valuation, but performance data on intangibles is even better.

Measuring and managing intangible assets as key determinants of competitive advantage is the new critical management skill. It is nothing less than the ability to increase the value of a company by converting intangible assets into financial returns for the organization.

If you have any questions or would like more information, please contact Michael Hyjek at IDC at 1-888-432-2812 or mhyjek@idc.com