The Intangible Assets Monitor

ĐKarl-Erik Sveiby 1996, 1997, 2001. All rights reserved.

The Intangible Assets Monitor is a method for measuring intangible assets and a presentation format which displays a number of relevant indicators for measuring intangible Assets in a simple fashion. The choice of indicators depends on the company strategy. The format is particularly relevant for companies with large intangible assets, such as Knowledge Organizations. For a more comprehensive discussion about the theory read the article Measuring Intangible Assets - an emerging standard.

The Intangible Assets Monitor can be integrated in the management information system. The Monitor itself should not exceed one page. It should be accompanied by a number of comments. Only a few of the suggested indicators in this chapter should be selected. The most important areas to cover are growth/renewal, efficiency and stability. The purpose is to get a broad picture, so one or two indicators in each category should be designed.

The IAM is a Stock-Flow theory, same as traditional accounting theory. When using the IAM one perceives the three Intangible Assets as "real" assets. We are interested in indicators that indicate change and knowledge flows, i.e. growth, renewal/innovation, efficiency/utilisation and risk/ stability measures. The idea is to get a "peek" into how the intangible asset(s) are developing, by designing indicators that correlate with the growth of the asset in question, its renewal rate, how efficiently we are at utilising it, and the risk of loosing it. 

The IAM's "External Structure" contains customers, suppliers and other "external" stakeholders and one selects the ones that are relevant. In most private companies this will be Customers. Public Sector organisations will use other stakeholders, such as community members and many companies have so valuable alliances with their Suppliers that they must be included too.

The indicators below are suggestions and examples, which must be adjusted to the reality of each company. They do not fit all companies or all circumstances. The Monitor can be used to design a management information system or to make an Audit.

Click on the headings in the table below for descriptions in more detail! I also recommend you to read examples of Monitors from the practice.
I have excluded the Financial indicators from the examples below, since they will not differ from traditional ones.

Intangible Assets

External Structure Indicators

Internal Structure Indicators

Competence
Indicators

Indicators of Growth

Organic Growth.

Indicators of Growth

Investment in IT
Investments in Internal Structure

Indicators of Growth

Competence Index
Number of Years in the Profession.
Level of Education.
Competence Turnover.

Indicators of Renewal/Innovation

Image Enhancing Customers
Sales to new customers

Indicators of Renewal/Innovation

Organisation Enhancing Customers.
Proportion of new products/services
New processes implemented

Indicators of Renewal/Innovation

Competence-Enhancing Customers.
Training and Education Costs.
Diversity

Indicators of Efficiency/Utilisation

Profitability per Customer.
Sales per Customer.
Win/Loss Index.

Indicators of Efficiency/Utilisation

Proportion of Support Staff

Indicators of Efficiency/Utilisation

Proportion of Professionals.
Leverage Effect.
Value Added per Employee.
Value Added per Professional.
Profit per Employee.
Profit per Professional.

Indicators of Risk/Stability

Satisfied Customers Index.
Proportion of Big Customers.
Age Structure.
Devoted Customers Ratio.
Frequency of Repeat Orders.

Indicators of Risk/Stability

Values/Attitudes Index
Age of the organization.
Support Staff Turnover.
Rookie Ratio.
Seniority.

Indicators of Risk/Stability

Professionals Turnover.
Relative Pay.
Seniority.

See examples in Celemiīs and WM-dataīs Annual Reports for 1995 and Celemi's Annual Report for 1999.

On the surface, the Intangible Assets Monitor looks similar to Kaplan/Nortonīs Balanced Score Card. There are however substantial differences. Read more about the BSC and IAM here.

Profit as a Yardstick

Measurements of profit are interesting, because they show how much is "left over" for the shareholders, when everything and everybody else have been paid for, and paid. However, as every accountant worth his salt knows, there are so many ways to distort one yearīs profit figure that the truth is in the eye of the beholder. Research and development are sometimes treated as an investment, sometimes as a cost. If a company displays increased profit, because of reduction in R&D, is that a real profit or not?

Reported profits of employee-owned companies are customarily very small, since the desire to demonstrate the organisationīs success, is more than outweighed by the desire to avoid paying a penny more in company tax than is absolutely necessary. And how do you value work in progress? Hidden factors like invoicing being delayed or brought forward can heavily influence the reported figures. Large effects on the reported profit figures are often due to unidentified changes in intangible assets. This multiply the problems even further. Profits are simply not a good yardstick for comparing companies with large intangible assets. The least helpful profit indicators are Return on Equity or Return on Assets. More useful are Profit in % Sales or (best) Profit in % Value Added.

Profit Margin

Profit margin is a key indicator that describes the profit-generating capacity of the flow of revenue. Profit margin is an important indicator of how attractive it may be to invest money in a knowledge company, but it does not tell much about the actual efficiency of its employees. Nevertheless, profit margin is generally a better measure of efficiency than return on equity or investment, for example, which is totally irrelevant in companies where financial capital plays an insignificant part.

Profit margins vary a great deal from one industry to another. Where profit margin expresses profit as a percentage of turnover, you must try to determine the composition of the revenues, for they may include varying proportions of commissions, expenses, hardware sales, etc. A better way of expressing profit margin is therefore to use the ratio of profit to value added.

Efficiency and Effectiveness

Although often used as synonyms, efficiency and effectiveness measure different things. Efficiency measures utilisation, i.e. how well an organization is using its capacity, regardless of what it produces. A criterion of efficiency, often used by consultancy firms is billable time; time billed to clients, as a proportion of time available. This measures how much time consultants are paid for. It is a simple and good indicator of short term profitability because it measures capacity usage, but it says nothing about what the consultants accomplish in that time. 

The needs of the various parties concerned may, of course, differ; shareholders are interested in dividends; customers are interested in service levels, and quality. Firms should, therefore, employ different efficiency measures, for different audiences. ROI (return on invested capital) is a criterion of efficiency popular in financial circles. It measures profit generated by the capital invested in a company, or a project and is thus a very important indicator of efficiency, to both creditors and the owners of the invested capital. For shareholders, the most important figure is what they earn after tax, in the form dividends on the capital they have put into the company; the return after tax on their own equity, often shortened ROE.

The management must also track the return on the firmīs total capital, and on particular investment projects, so that they can control their allocation of capital. Unfortunately, this technique cannot be applied to intangible assets, so various income statement, and non-monetary measurements, must be used instead to calculate efficiency.

Effectiveness measures how well an organization is satisfying the need of those it serves. It is more difficult to measure also because one must often go outside oneīs own organization. Measuring customer satisfaction for instance, an important indicator of an organisation's effectiveness, relies on customer polls. Therefore effectiveness is seldom measured. Even if it is not practically possible to measure effectiveness, it is never-the-less valuable to think in effectiveness terms. What gives the most revealing picture of performance? To focus on the costs of people or on the revenues they bring in? Cost focus is efficiency oriented, revenue focus is effectiveness oriented.