I had a lot of fun on the IC for IP panel this week at the Intellectual Property Business Congress in Boston. The level of appreciation for the links between IP and IC weren’t too surprising. What was surprising to me was how much we ended up talking about accounting.
There are many cases of millions and billions worth of patents that had literally no value in the accounting until they are sold and suddenly, voila, there’s new value on the balance sheet that wasn't there before. One woman told the story of an acquisition that involved literally billions in patents and only 12 people. The financial people struggled to show why the value made sense. These huge shifts lead to greater and greater distrust of accounting.
But the most powerful discussions were about how the patents aren’t really the source of the value—it’s the knowledge and intangibles behind them. IP is a protection that facilitates the identification and the trading of value but you have to look beyond the IP to see (and ultimately monetize) that value.
One of my co-presenters explained it by contrasting two recent acquisitions by the same buyer, a mid-sized robotics technology company. Both came with a handful of good patents. Both sets of patents added to the company’s protective legal “moat” in their core technology areas. But one deal earned a very small price and the other a very high price. The Chief Legal Officer explained that the difference in price was due to the intangible capital that came with the intellectual property. The IC in this case was the team (human capital) and the systems (structural capital) and the connections (relationship capital) that came with the acquisition. The only element they didn’t “buy” was the strategic capital. In fact, he discussed at length the need for implanting the company’s culture into the team from the acquired company. Pure knowledge has a much more limited value than knowledge put to work. These differences were mostly booked to goodwill.
Discussions like these make it more clear to me than ever that we need to continue to create an alternate system. Not to replace accounting. But to complement it. And to get managers the information they need to manage their business and, ultimately, to manage their finances. Because companies spend a lot of money on intangibles. And they need ways to measure the effectiveness of that investment.
All this is why we started a movement for ICounting, to empower teams to create their own information sets about their intangibles. The main principles are the same: inventory and measure your assets. The difference is that we are inventorying intangibles and measuring them through stakeholder ratings. When you think about it, stakeholder usefulness is the ultimate leading indicator of profitability and the direct tie back to Accounting.
Ask your Accountant if they are learning ICounting. Hire an ICountant to help you. Learn the principles yourself with our open source tools. Some day, you’ll do all three. But don’t sit and wait for the system to change. Create a system that works for you today.