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.
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.