ĐKarl-Erik Sveiby 15 May 1996, updated 20 December 1997. 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 described in the
article Measuring
Intangible Assets and it is particularly relevant for Knowledge
Organizations.
On the surface, the Intangible Assets Monitor looks
similar to Kaplan/Nortonīs Balanced Score Card. There are however big
differences. Read more about
the BSC and IAM here.
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.
We are interested in indicators that indicate change, i.e.
growth, and renewal as well as efficiency and stability measures. The indicators
in the following chapters 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 heading in the table below for a
description in more detail!
See examples in Celemiīs
and WM-dataīs
Annual Reports for 1995 and Celemi's
Annual Report for 1999.
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 organizationīs 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 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.
Although often used as synonyms, efficiency and effectiveness measure
different things. Efficiency is calculated solely on input variables;
effectiveness is calculated with both input, and output variables. Efficiency
measures of show 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. Effectiveness
measures how well an organization is satisfying the need of those it
serves.
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 is difficult to measure also
because one must often go outside oneīs own organization. For measuring customer
satisfaction, an important indicator for effectiveness, one must rely 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.
Read more about Measuring
Intangible Assets.