Celemi`s Intangible Assets Monitor

The following text and tables are extracts from Celemi´s Annual Report 1995. Only the hypertext links have been added.
Celemi's annual report 1996 is available from their web site.

Celemi`s Intangible Assets

"Celemi`s 'Invisible' Balance Sheet contains intangible assets that can be classified under three main headings:

Our Customers, are an external structure of relationships with customers and suppliers, brand names, trademarks and reputation or im age. This structure is constantly being created by Celemi´s employees. The value of customer relations is primarily influenced by how well Celemi solve customers' problems. Some of these structures are Celemi´s legal property, but most bonds are not so strong because investments in customer relationships cannot be made with a full degree of confidence.

Our Organization, is a corporate internal structure consisting of patents, concepts, models, and computer and administrative systems, including general management. Also this structure is a creation by Celemi´s employees and its com ponents are generally owned by Celemi. Decisions to develop or invest in the organization can be made with some degree of confidence, because the work is done in-house, or bought from outside.

Our People, is the combined competence of Celemi´s employees, such as their ability to act in a wide variety of situations. The value of people is that they are the only true agents in busi ness; all assets and structures, whether visible or invisible, are the result of human action and depend on people´s competence and energy for their continued existence. People are however not a corporate "asset" like the two structures above, because people can not be owned.

Even if the value of intangible assets in money terms can only be estimated with a great degree of uncertainty, Celemi´s Invisible balance sheet is much larger than the visible one.

What is of great interest to know for Celemi´s stakeholders is therefore whether the intangible assets are increasing in value and whether they are utilized efficiently. This can be established with more certainty, and this is the aim of Celemi´s Intangible Assets Monitor.

Invisible Revenues

Just as visible revenues improve the tangible equity, invisible revenues (see also PLS Consult) improve the efficiency and the value of Celemi´s intangible assets. By canvassing such customers, rather than those that merely contribute money, Celemi is able to actively improve its intangible assets. One way to capture the impact of customers is to calcu late the proportion of revenues from three categories of customers:

Image enhancing customers who improve Celemi ´s potential to find new customers or reduce the marketing costs involved. Such customers are well regarded in their industry and references or testimonials from them are very valuable. They improve the external structure.

Organization enhancing customers who demand state-of-the art solutions, which are new to Celemi and thus contribute to Celemi´s R&D, or who have very large projects which involve many Celemi experts and thus enable transfer of tacit expert competence. Such custom ers improve the internal structure.

Competence enhancing customers who bring learning to Celemi´s employees, because the projects challenge their skills. These cus tomers are valuable because they improve the individual competence of the people.

Our Customers (External Structure)

Image enhancing customers contributed 40% of Celemi ´s revenues in 1995. These customers are large and very well known multinational cor porations, with a very high potential for further growth.

Colour codes: Black= Normal, Red= too low or too high, Green= very good, Blue= excellent, but probably not sustainable in the long term.

The customers are loyal, and buy more of Celemi´s services. One indicator is the level of repeat orders. No less than 66% of the revenues in 1995 came from customers who had been with Celemi also in 1994. Considering the rapid growth in revenues, this is a very high propor tion indeed. A high level of repeat orders also indicates that canvassing costs can be kept low.

The most cost efficient way to grow is therefore to improve the sales per customer. In 1995 it grew by only 4%, which is too low.

The five largest customers account for 41% of the revenues which is a large proportion. Celemi does not want to become too dependent on a few key customers, so the indicator sgould not be allowed to be much higher.

Summarizing, Celemi´s external structure is probably the most valuable part of the intangible assets. It seems stable and with a large potential to generate intangible revenues in the future.

Our Organization (Internal structure)

Celemi is changing from a small firm, depending on a few highly skilled and very efficient sen ior individuals, to a larger corporation with an internal structure that can support a larger number of experts and which can take on larger projects on a global basis. To achieve this goal Celemi invested no less than 33% of the value added in new products, IT and new subsidiaries in 1995. It is an ambitious goal and one that marks 1995 as the first year of transition for Celemi.

Customers contributed to this transition by trusting Celemi with some very large projects and support for new products. Management estimates that some 44% of the revenues in 1995 came from customers enhancing the structure, which is a very high proportion. One effect of rapid growth is low seniority of admin. staff, at present only 3 years. Another is the Rookie ratio (proportion of all people employed less than 2 years), a very high 64%. Both numbers indicate high costs for recruiting and developing new people in 1995. If the new people stay with the company, the numbers will improve in the coming years, re flecting improved stability.

Colour codes: Black= Normal, Red= too low or too high, Green= very good, Blue= excellent, but probably not sustainable in the long term.

That a transition costs in short term inefficiency is displayed by the organizational efficiency Celemi´s administrative staff handles fairly large volumes, in 1995 7.6 MSEK per person, which however was a decrease by -20% compared to 1994. The proportion of sales to admin. staff increased only 4%. Both numbers reflect investment in new staff and indicate that Celemi now has administrative capacity for future growth.

Summarizing, Celemi´s new organization seems not yet stable and is not yet up to full efficiency. However, it has a high potential for volume growth and efficiency improvement in the coming years.

Our People (Competence)

Also the people indicators in the Monitor reflect 1995 as a year of transition. Celemi had 50 employees at December 31st 1995, a growth of no less than 92% compared with 1994. The total competence of the Experts, measured as years of professional experience, increased by 43%, which is very much.

Celemi has been recruiting primarily younger people, the median age is now a healthy 34 years down from 39 years in 1994. The average professional experience of the experts therefore went down by -25%, which normally would indicate problems in serving the customers. However, the average professional experience is still a high 7.8 years, Celemi has retained all the senior experts and the turnover among experts was a healthy 10% in 1995 . This indicates that Celemi´s competence is still in good overasll order,, despite the rapid growth.

Celemi´s people are well educated. Two thirds of the experts have a university degree. The average for all employees is between secondary (2) and tertiary (3) levels, the average is 2.3 for all employees, unchanged compared to last year, which too low considering the management´s ambition to improve the education level through recruiting.

Colour codes: Black= Normal, Red= too low or too high, Green= very good, Blue= excellent, but probably not sustainable in the long term.

The output of Celemi´s people is quite high. The value added per expert was 867 TSEK in 1995, which is high in this particular industry, but it slipped by -13%. Again this is a reflection of the organizational changes and the efficiency should improve in 1996.

Some 43% of total revenues in 1995 come from competence enhancing customers which is very good and valuable, particularly for the many new recruits.

Summarizing, Celemi´s rapid growth in people compared to previous years is a management accomplishment that will profoundly change and revitalize the company. The newcomers are well educated and on a steep learning curve.

The Process

This is the first year that Celemi calculates and presents the Celemi Intangible Assets Monitor. It is intended to reflect the development in the company´s intangible assets and it is not possible to compare this years numbers with previous years.

To change the accounting system from one that primarily reflects tangible assets into one, that also takes intangible assets into account is a major effort, and a process that will take several years of experimentation. Some desired indicators have for instance not been possible to cal culate this year because Celemi is such a young organization. The choice of indicators in the Monitor 1995 must also be tested against reality in the future and against their relevance for our strategy.

Since this is the first year that Celemi calculates and presents the Celemi Intangible Assets Monitor, we have asked Dr. Karl-Erik Sveiby to do this year`s Monitor in the form of an "Audit". The choice of indicators, the analysis and the opinions expressed in the text above are his.

Definitions

Administrative staff: all other than experts.

Customers: categorized under three headings. The indicator is calculated as % -share of revenues.

Educationlevel: The average of employees with Primary education (calculated as =1), Secondary (=2) and Tertiary ( = 3).

Experts: Employees working directly with customers in projects. Top managers are regarded as experts, since they work actively with customers.

Five largest customers: Share of revenues from 5 largest customers.

Number of staff: Two definitions: Average number employed during year for efficiency indicators, year end numbers for growth/renewal and stability indicators.

Professional competence: Number of years in current profession.

Proportion of admin. staff: Number of admin. staff divided by number of staff at year end.

Repeat orders: Customers existing also in 1994 (those representing 2/3 of revenues).

Rookie ratio: Number of employees with less than 2 years seniority.

Sales per admin. staff: Total revenues divided by total number of admin. staff.

Sales per customer: Total revenues divided by average number of customers.

Seniority: Number of years as Celemi employees.

Staff turnover: Number of leavers divided by number at beginning of year.

Value Added: The value produced by Celemi`s em ployees after payment to all outside vendors.

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