MEASURING THE VALUE OF INTANGIBLES Geneva, July 11, 2006 to discover the roots of companys future success

MEASURING THE VALUE OF INTANGIBLESMEASURING THE VALUE OF INTANGIBLES

Geneva, July 11, 2006

to discover the roots of company’s future successto discover the roots of company’s future success

2

When we want to assess future potential of a company, what shall we look at?

LOOKING BEYOND FINANCIAL ASSETS...

• Managing an organisation by focusing simply on its financial assets would be like driving a car looking just in the rear mirror.

• Profits are fruits of the past performance – so what indicators do you have about potential and future value of a company?

3

What are the intangibles?

DEFINITION OF INTANGIBLES

The factors not shown in the traditional balance sheet,

but which are of critical importance for the company’s future success.

We believe that future value of company depends mainly on intangibles.

Different methods were developed to assess and allow benchmarking of areas that are of

critical importance for the future of organisations, but still are not shown in

traditional financial or operational reports.

4

Market value, book value and intangibles

TOTAL VALUE

=Financial capital

+Intangible capitals

PaeseMarket value

Book Value

% tangibile

Brand value

Altri intangibles

% intangibile

Coca Cola US 104,8 11,8 11% 69,64 23,36 89%

Microsoft US 264,9 55,8 21% 64,09 145,01 79%

IBM US 138,2 22,8 16% 51,19 64,21 84%

General Electrics US 277,4 63,9 23% 41,31 172,19 77%

Intel US 112,3 35,3 31% 30,86 46,14 69%

Nokia Finland 71,1 15,4 22% 29,97 25,73 78%

In $ billions

Source: adaptation from AIAF, 2005

Country

tangible intangible

Other intangible

s

5

Measuring the value of intangibles

Companies have to develop and utilise

new accounting methods, since

those that have been implemented so

far:

Are too focused on the past

Miss anticipatory “power”

Capture critical changes too late

• Don’t take into adequate

consideration some resources,

such as intangible assets

Elaboration from Sveiby, 2001.

Non-monetary methods

Holisti

c

Meth

od

sA

tom

isti

c M

eth

od

sMonetary Methods

AFTF TM

TVC TM

The Valueexplorer TM

IntellectualAsset

Valuation

TechnologyBroker

InclusiveValuation

Methodology

CitationWeightedPatents

IC - index TM

Value ChainScoreboard TM

IntangibleAssetsMonitor

HumanCapital

Intelligence

BalancedScorecard

SkandiaNavigator TM

Tobin’s Q

Market toBook value

IAMV TM

.

KnowledgeCapital

Earnings

EVA TM

CalculatedIntangible

Value

VAIC TM

HRCA

Main Intangible Assets Measuring Models

6

IC RatingTM background: the Value Platform

Relationalstructural

capital

Humancapital

Organisational structural

capital

BusinessRecipeBusinessRecipe

ValueValue

Source: Intellectual Capital Sweden

www.intellectualcapitalsweden.se

There are 3 main perspectives behind IC

Rating Platform:

1) Human Capital

People, employees

2) Organisational Structural Capital

All processes, procedures, systems

and culture that are left when

employees are not in place

3) Relational Structural Capital

Network of clients, suppliers and

partners.

All these 3 perspectives work in the

framework of particular Business Recipe

(market, strategy of the firm), which is

individual for every company.

Good performance in all these areas builds

Financial Capital in the future.

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IC Rating™ Platform

KEY ISSUES

Demand from competitors

Contribution from I.P. (attract customers & employees)

Protection of I.P.(long term/ hard to copy)

KEY ISSUES

Structured and docu-mented knowledge (methods, routines and systems)

Organisation & culture

KEY ISSUES

Business related skills

Internal leadership

Co-operation and comple-mentary experiences in the mana-gement team

KEY ISSUES

Business specific knowledge

General competence

Contribution to develop-ment of structural capital

KEY ISSUES

Loyalty

Potential

Strength- image enhancing- demanding

Dependence

KEY ISSUES

Awareness

Reputation

Relevant differen-tiation

KEY ISSUES

Business critical networks and alliances(excluding current customers)

IntellectualCapital

BusinessRecipe

Human Capital

OrganisationalStructural Capital

Network BrandCusto-mers

Processes

RelationalStructural Capital

Emp-loyees

Manage-ment

IntellectualProperties

KEY ISSUES

Business environment; - Competition - Entry threats

Business idea

Strategy

Vision



8

IC Rating™: three perspectives

Present day

Accounting

1 .Effectiveness

Present value of IC effectiveness in creating future financial value

2. Risk

Threat against present effectiveness * probability of threat coming true

3 .Renewal and Development

Efforts to renew and develop present effectiveness

Future



9

IC RATING™ is done using well-known Standard & Poors scales



10

IC RATING™ is mainly based on interviews with people



PROCEDURE:

• Rating is primarily based on interviews with carefully select 35-50

respondents who knows most about this company, of which

2/3 is external (customers, lobby organizations, competitors,

suppliers, partners, etc.)

1/3 is internal (employees),

• rating of intellectual capital is weight average of answers for more

than 150 questions that are strictly connected to business

performance of the company,

• rating usually takes 4-6 weeks.

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IC RATING™ and IP assessment



• 17 questions out of about 150 are focused on IP evaluation

• Examples of key issues to be pointed out during the evaluation

process:

Market awareness about company's IP

IP influence on company’s brand

Company's IP “replaceability”

Time period during which the IP has value

IP contribution to rise barriers to entry

Etc.

12

Case Study: Effectiveness perspective



Process Management Employees Network Brand Customers

Human RelationOrganisationBusinessRecipe


Intellectual Capital

A BBBBB

BB

CC

A

BBB

BBCC

C

BBB

Selected findings: This rating was done for start-up company. As in case of most young and small companies, structural capital is almost non-existent. But, company is operating in market with good perspectives. Good score in relation box shows that company’s network is a main source of its current advantage. Customers base as well can be assessed as satisfactory.

13

Case Study: Risk perspective



Selected findings: Organisational Capital shows almost no risk as its efficiency is to low to be threatened. Although efficiency of relation capital was average (BBB), the risk perspective shows that it’s strongly threatened by some aspects. It may be that there are very few customers or customers are heading to bankruptcy or many more. To discover true reason we must look closer to the Customer box and see answers to the questions of which the box is composed.





-

R

RR-

R RR RRR

RR

RR

RRR

--

14

Case Study: Renewal & Development perspective



Selected findings: In renewal and development perspective we can see substantial efforts in the Human Capital box. These means that company currently conduct several initiatives, which are focused on improving human capital effectiveness. Poor renewal efforts can be observed in the brand box, which together with not so good efficiency (only BB) should make management put more attention in this area.





A

A BBB

BB

BBBB

BB

BBB

ACCC

ABBB

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Case Study: Customer relations box decomposition



Selected findings: It turned out that main threat for customer effectiveness comes from two things: being a strategic supplier and vulnerability for the changes. The company itself had one big customer, which generated most of the revenues. Relations with this customer was great, duration was long, it was process competence and image enhancing customers. The only thing that made the risk so high was that customer was preparing to conduct services offered by the company itself.

80

75

79

78

78

73

71

77

57 8686

7979

5454

25251111

8181

7676

56563131

Relation

Interaction

Duration of

Customer

RelationImage CreatingCompetence Enhancing

ProcessStrengthening

StrategicSupplier

Non-vulnerability

Share ofbudget

Company

Benchmark

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IC RATING™ - A Comprehensive View



BB +

BB

BB BB BB

BBBBB + BBB

BBB BBB CC A

BB

BB BB +

B B

B B B

BBBB

BBB CCC

RR

RR RR

RR RR RR RR

R R

R R-

80

59

3236

74

50

55

Affärsmiljöns tillväxt på 5 års sikt

Affärsmiljöns lönsamhet på 5 års sikt

Affärsmiljöns konkurrenssituation

Potentiella hot mot affärsmiljön

Vår tillväxt med utgångspunkt i vårt affärsrecept

Vår lönsamhet med utgångspunkt i vårt

affärsrecept

Vår position i affärsmiljön94

77

72

77

77

86

77

100

79

5937 51

3570

454867

86

49

55

Processer för intern administration

Processer för kundhantering

Processer innovation

Processer för distribution och logistik

Processer för utveckling av medarbetarna

Processer för försäljning

Processer produktion

IR:s förmåga att skapa inträdesbarriärer

IR:s förmåga att göra oss oberoende av

konkurrenternas prissättning

IR:s varaktighet

85

84

79

82

7776

80

75

75

59

58

62

6151

55

61

59

Ledningens fokus

Kundhantering

Effektivitet

Ledningens samspel

Tydlighet i ledarskapetInternt ledarskap

Affärsegenskaper

Intern atmosfär

Sakkunskaper92

82

86

94

85

7685

84

81

86

8065

6365

22

6755

6967

47

75

71

Nätverk för försäljningNätverk för personal

och kompetensLeverantörs- och

distributionsnätverk

Kännedom

Anseende

Relevant differentiering

Kundlojalitet

Kundbaspotential

Sårbarhet mot kundavhopp

Imagekunder

Kompetensutvecklande kunder

• • •Förmåga att förmedla visioner, värderingar, strategier och mål:”De har långsiktiga mål och vill vara fristående och oberoende.””Ledningen skulle vinna på att bli mer synlig i organisationen, att gå omkring i högre utsträckning ochtala med medarbetarna.”

Dedikering:”Man har löst de problem som uppkommit på ett rakt och snyggt sätt. Man är engagerad på alla nivåer.””Företagets högsta ledning engagerar sig personligen i kunderna och bryr sig.”

Ledningens incitament:”De får sina incitament genom den ökande börskursen.””Optionsprogram som fungerar väl.”

Samspel och gemensamma mål:”Väl fungerade samspel.””Bra kommunikation i ledningen men ej bra kommunikation nedåt. Ledningen måste ändra sig och fåaffärsidé och strategi att genomsyra hela organisationen.””De har delat upp ansvarsområdena väl men VD har det övergripande ansvaret.””De har en gemensam målbild till 90%.”

Ledningspersonerna kompletterar varandra:”Bra att kvalitetschefen är personligen ansvarig för processer och metodik, dvs uppbyggnad avprocesskapitalet.”

Delegeringsförmåga:”De är bara fyra stycken i ledningen vilket är mycket bra.”

Förmåga att förmedla visioner, värderingar, strategier och mål:”De har långsiktiga mål och vill vara fristående och oberoende.””Ledningen skulle vinna på att bli mer synlig i organisationen, att gå omkring i högre utsträckning ochtala med medarbetarna.”






Förmåga att förmedla visioner, värderingar, strategier och mål:”De har långsiktiga mål och vill vara fristående och oberoende.””Ledningen skulle vinna på att bli mer synlig i organisationen, att gå omkring i högre utsträckning ochtala med medarbetarna.”






17

IC RATING™ and financial performance



Rxy = .80; p< .01

Increase in turnover 2001 (%)Increase in turnover 2001 (%)

IC R

ati

ng

IC R

ati

ng™™

2000

2000

IC R

ati

ng

IC R

ati

ng™™

2000

2000

• A high IC RATING value,

indicates a high turnover

growth in the years to come.

• IC RATING alone is a better

predictor of future profits, than

methods only using financial

input data.

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Beyond IC RATING™: IP “monetization” and brand equity

• Monetary evaluation of some IP forms (e.g.: brands) can complement methods like IC RATING that basically provide qualitative findings and point out improvement areas

• There are many methods to evaluate the brand equity:

Based on cost criteria, oriented to the past and to the resources spent on the brand

Based on the “benefits flows”: the value of the brand is determined by the cash flows that it generates

Based on market indicators and, therefore, on ex post performances

• The monetary assessment of the brand allows the company to have immediate benefits, e.g.:

Further financing from investors trough specific financial tools (e.g.: sale-lease back)

A better rating according to Basel II criteria

19

Thanks

Mauro De Bona

Campus - Innova Group

+39 320 6130308

[email protected]

skype: maurodebona

Documents

MEASURING THE VALUE OF INTANGIBLES Geneva, July 11, 2006 to discover the roots of companys future success