Knowledge Assets: Can you measure the intangible

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Knowledge AssetsCan you measure the intangible?

• Mary Adams
• Trek Consulting LLC
• KM Forum, July 20, 2006

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Measuring Knowledge Assets

• Why?
• What?
• How?
• Case studies

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The need to measure knowledge assets is acute
Data Ned Davis Research, Inc.
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Today, 80 of corporate value is intangible
Data Ned Davis Research, Inc.
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Our information paradigms are based on an
antiquated system
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Accounting systems provide several distinct
advantages

• Objective standards
• Quantitative measures
• Consistent methodology
• Consolidated presentation

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Pacioli helped us measure value creation based on
tangible capital
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Today, the value creation process is driven by
intellectual capital
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Human capital is the creative engine
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Relationship capital connects you with the market
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Structural capital is the holy grail
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Structural capital is an infinite resource
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The value of structural capital is limited only
by its market potential
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The last, critical element is the business recipe
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What to measure? The full IC value system
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How to measure?
Pacioli would advise us to start with an
inventory
Paciolis Summa as seen in http//www.martini-dr
apelli.it/lucapacioli1.htm
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Today there are three available approaches

• Valuations
• Scorecards
• Assessments

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Valuations
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Scorecards start by mapping intangible drivers of
financial performance
Source Kaplan, Robert S. and Norton, David P.,
Strategy Maps Converting Intangible Assets into
Tangible Outcomes, (Boston, MA Harvard Business
School Press, 2004
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Metrics are assigned for each category
Source Kaplan, Robert S. and Norton, David P.,
The Balanced Scorecard Translating Strategy into
Action, (Boston, MA Harvard Business School
Press, 1996).
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Assessments look at the full IC portfolio
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By Paciolis standards
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Quantitative measures are only part of the picture
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Case Study

• IC Rating
• Events business

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IC Rating looks at three perspectives
Present day
Accounting
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Methodology

• Interviews with internal (1/3) and external (2/3)
  stakeholders
• Questions include
• Closed questions that lead to a letter rating
• Open questions that yield answers that are
  summarized anonymously in final report

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Scale similar to bond or credit ratings
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Event Co.s overall IC had high efficiency
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IC renewal/development were rated average
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Risk of decline in IC efficiency is moderate
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Employee competence is high
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Employees need support to prepare for new
challenges
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Management is an important force
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Comments from Stakeholders

• The sky is the limit in this market.
• We could be dead in the water if something
  happens to our founders.
• S. has an intuitive sense for picking talent.
• The brand is still not known in the media.
• Big issue is the ageing of both the our
  performers and our audience.
• The pricing strategy is brilliantset in relation
  to comparable training opportunities.
• As long as they are in the business of selling
  hours they will be susceptible to problems. The
  biggest opportunity is in information products.

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Issues on the table at Event Co.

• How to connect with the huge market opportunity
• How to profit from latent IP
• New business/old business balance
• Management succession plan

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IC RatingCase Studies
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Process innovation
Action
Result
Situation

• A large entertainment company wanted to cut
  costs, without jeopardizing value offering
• Used IC RatingTM to learn future potential in all
  business units

• IC RatingTM showed a varying degree of
  potential, and a variety of issues in the
  business units.
• Through benchmarking, possible improvement areas
  and opportunities for cross-learning were
  targeted
• In each targeted area, development budgets were
  reduced, since systems/know-how could be
  leveraged from another business unit to another

• 5 major areas for internal cross-learning have
  been identified
• In total, costs have been cut by gtEuro30 million
• Management is convinced that this was achieved
  without jeopardizing value offering

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Competitiveness
Action
Result
Situation

• A company was facing new competition and felt the
  need to improve its image and service levels.
• The company used IC Rating to identify areas of
  potential improvement in order to become
  successful in a competitive environment.

• IC Rating displayed severe problems in the
  corporate culture and the managements internal
  practices.
• On the other hand, the management was rated as
  strong. The company network and brand also
  received strong ratings.
• With this result at hand the executive team
  identified and pursued a number of initiatives.

• By strengthening the internal leadership with new
  management and training, the employee pride for
  the organization was enhanced and service
  improved in the end increasing productivity by
  almost 20.

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Strategic Fit

• Wholesale subsidiary of a large food and
  low-temperature warehouse and logistics company
• Market suffering from low margins and severe
  competition

Company Profile
Action
Situation
Result

• Used IC RatingTM to identify current strengths
  and weakness as well as its future potential
• Wanted to use the results of IC RatingTM to
  support merger talks with another large food
  wholesaler.

• IC RatingTM showed strength in the sales force
  and merchandizing abilities, backed by the strong
  leadership of CEO
• Weakness was identified in the process area.
  Since potential merger partner was famous for its
  state-of-the-art systems, the rating strengthened
  the perception of potential synergies.

• The sales organization was changed to
  solution-based, from the old style
  geographic-based sales units
• Also introduced Skandias Navigator (and Dolphin
  system) to become more focused on the vision and
  strategies
• Helped get the merger deal done at favorable terms

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Market Valuation
Action
Result
Situation

• The number three IT company on the OM Stockholm
  Stock Exchange aimed to help the market better
  understand its potential as a knowledge-based
  company.
• All 35 subsidiary companies which comprise the
  Group were rated

• IC Rating divided the IT-Group into four
  different categories for potential.
• By supplementing this information to the annual
  report they increased transparancy both strong
  and weak sides were exposed, increasing
  understanding for potential as well as increasing
  trust of the Group.
• The Group used results to benchmark and navigate
  the companies into the future.

• The Groups overall goal of 10 margins was
  individually revised depending on the potential
  shown in IC Rating.
• The day when the result of the rating was first
  shown, the share value of the IT company
  increased by 8.

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Buy-side support
Action
Result
Situation

• Major investment fund with two similar companies
  in the portfolio, Company A and Company B
• Only interested in continuing with one of them in
  a second round
• Used IC RatingTM to evaluate future potential in
  both companies

• IC RatingTM showed a very high potential (high
  rating), in Company A. Company B had serious
  issues, particularly in the process capital area.
• The recommendation was clear support Company A
  in second round. Divest Company B.

• The investment fund kept Company A
• Company A financially outperformed industry
  averages after the second round
• Company B, despite finding funding elsewhere,
  underperformed and eventually went bankrupt
• The investment fund ROI exceeded 60

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Sell-side support
Action
Result
Situation

• A large communication company needed to sell off
  five business units
• There was no interest from the market so the
  seller withdrew the companies and did an IC
  Rating on each
• Used IC RatingTM to identify future potential in
  all five business units

• IC RatingTM showed a varying degree of potential
  in the business units.
• Seller was very transparent, presenting
  potential buyers with the full range of findings
  including strengths and weaknesses, opportunities
  and risks

• All five units were sold
• In total, a 20 premium was on the P/E multiple
  was received, compared to similar deals at the
  same time
• The buyer attributed the premium to the
  transparency, which reduced buy-side risk.

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Measuring knowledge assets helps you find the
path to future success
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For more information

• Visit www.icrating.com
• Visit www.icknowledgecenter.com
• Contact Mary Adams
• 781-729-9650
• adams_at_trekconsulting.com