To date, economists have focused on measuring intangibles at the macroeconomic level. And they have developed compelling data showing the growing importance of intangibles to economic growth.
But accountants and business leaders have been slow to pick up on this. The only widespread application of intangibles measurement comes through the Balanced Scorecard approach and the growth of the performance management field. The problem that I have with both of these approaches is that they are ignoring the powerful starting point of intangibles value creation that the economists have laid out for us: investment.
That’s why I was thrilled to finally meet Jonathan Haskel at the recent New Building Blocks conference and hear about his recent paper that took this research to the firm level with over 800 firms in the U.K. I sincerely hope that there is soon comparable research in the U.S. (There is also a link to download the questionnaire–go ahead, try it for yourself!)
Overall, the leading investments by type were in training, software and reputation/branding. For those of you that follow intangible capital, you’ll note that all three of the major categories of IC are represented: human, structural and relationship capital. However, the leading type by investment amount was by far and away R&D (much of by product rather than service companies). The survey also asked companies to estimate the useful life of these investments. Estimates ranged from 2.6 for reputation building in service companies to 5.5 for R&D in product companies.
Accountants should be horribly embarrassed by this research. This is information that every business should have–from their accountant, not from an economist.
Yet no businessperson today has this basic information about how much it cost to build intangible infrastructure. The reason is that our antiquated accounting doesn’t contemplate the knowledge era and the rise of intangibles. So, rather than trying to fix it, the accountants just ignore the problem.
Investors should be demanding this kind of information. It gets to the heart of how management is building corporate capacity.
We have discussed the topic of measuring intangible investment in the abstract in the past. Does this change how you think? Would you like to see more research along these lines?
Such work can help expand thinking and, one hopes, expectations in the direction you describe, Mary. An under-utilized source of knowledge, IMO, is found right at the start of employment: the hire file. If competency-based hiring is in place, it is there that the gap beween sought after competencies and obtained competencies (in the new hire) is evident. Surely this is step one in building capacity...to know that gap and strive to fill it. Practical intangible management, supported by an evidential base generated as a byproduct of business process. Such practical angles, I believe, combined with papers that illuminate IC management, will help place IC on the radar screens of managers. As important as IC evaluation is, it can seem quite remote from the day-to-day challenge of managing and organization.
Revealing that we already manage IC (to greater and lesser degrees) and developing how that can be done transparently and consistently using existing or modifiable systems has great value. (I'm not an economist. My interest is in weaving IC into the fabric of organizational and societal systems, in part through raising the awareness of influential individuals ).
Thanks for posting this link, Mary!
So nice to hear from you!
Can you clarify what IMO stands for? Any new stories you've seen that help make that connection with the day-to-day work?
I share your feelings about some of the IC research out there. But I put the work being done by Haskel, Corrado, Hulten, Sichel and others in a different category. This is because they are actually trying to tease out how much is spent in the real world by corporations each year in building intangibles. This is data that accountants can understand. And it's the real world kind of data that we collectively need to make the connection between ideas about IC and the real world.
I would love to meet those in the accounting world open to talking about this. To whom should we be listening?