Theoretically, the value of a company is the sum total of
all the assets it carries on its books. So why is the total stock
value of some companies -- especially technology firms -- as much as
50 or 100 times greater?
"That difference must be related to intangible assets," says
David Larcker, professor of accounting at The Wharton School, the
University of Pennsylvania's business school.
Assuming, as Larcker does, that the market is rational -- rather
than being in the midst of a speculative bubble right now -- the
stock market should value a company according to its current worth,
plus the factors that could contribute to its success.
Value that's intangible, however, is also subjective. And
subjective perceptions can stretch the value of a stock much higher
-- or much lower -- than the fundamental financial picture of a
company would indicate, say analysts.
Knowing True Value
Those fluctuations and the use of general accounting practices
make it very difficult to calculate a company's true value. "People
are starting to wonder if this accounting system that has served us
well for 500 years has become obsolete," says Larcker. That's
because traditional accounting is tied to bricks-and-mortar assets,
to a "what happened?" mentality, he says. But in many newer
companies, investors are interested more in people or ideas than
previous performance.
It may be true that accounting "eventually accounts for
everything," but Larcker says that notion applies more to long-term
stewardship of a company's assets than to its current market value.
Financial analysts, the U.S. Securities and Exchange Commission,
investors and many others, of course, would like to be able to
better predict and measure a company's current worth. So they're
studying a broad range of factors that could influence intangible
assets, from business metrics such as customer loyalty to more New
Age metrics like employee happiness.
Areas of Excellence
Two examples illustrate intangible value. The first is Dell
Computer Corp., which has "a superior logistical supply chain" and
"a superior ability to get people to the Web site to order," says
Larcker. Contrast Dell with Compaq Computer Corp. Compaq has much
higher revenue than Dell, but it isn't as highly valued in the
market, partly because it's still revamping its supply chain and
Web-based ordering system. Clearly the innovation or intelligence --
or however you characterize Dell's aforementioned aptitudes -- would
be an intangible asset, Larcker says.
Another example is Microsoft Corp. "The amount of knowledge they
have generated has got to be a primary asset -- it's in people's
heads there," says Larcker. But Microsoft corporate culture is also
valuable. "They have figured out what kinds of people fit into that
culture, and they have superior hiring practices," he says. That
shows how aspects of a company that are often considered mundane,
such as hiring practices, can impact a company's bottom line.
As Microsoft and Dell illustrate, even if leading companies don't
use the terms "intangible assets" or "knowledge management," they
manage those assets.
Besides striving to adopt hiring practices designed to boost the
corporate culture or implement excellent supply chain logistics or
customer-friendly Web order entry systems, many companies can begin
managing intangible assets by documenting their processes. "It's not
just a question of writing down what you know, but getting it built
into the business processes," says Henry Morris, an analyst at
International Data Corp. in Framingham, Mass.
Just studying -- and of course, retaining -- key employees is a
start, says Morris.
For example, he says, ask yourself, "What does the top sales
representative do after he lands a new account?" Gaining that
knowledge and applying it to sales representatives who don't perform
as well can help those salespeople discover previously unknown ways
to boost their productivity -- and perhaps their motivation and
happiness levels.
Using IT to Boost Assets
Knowledge management software can help sustain a company's
excellence. The term knowledge management can be applied to a range
of systems. For example, it can be a system used to document
employee best practices; it can be an online forum in which
employees share tips and tricks and a system for subsequently
indexing that forum and enabling other employees to search it; or it
can be a database that lets researchers track discoveries their
company has made so they can try to find new applications for those
discoveries.
The knowledge and experience of an information technology
department is an intangible asset in and of itself, but so is the
way IT applies that knowledge to make other departments function
more smoothly.
In situations where departments don't work well together, an IT
department could press for standardization on fewer technologies,
rather than waiting for businesspeople to come up with "airline
magazine syndrome" projects that don't contribute to productivity.
That approach likely would give the company a more stable technology
infrastructure, says Ashim Pal, an analyst at Meta Group Inc. in
Stamford, Conn. Even stability has an intangible value.
Yet the IT staffs at many companies would rather boost their
skills on new products than stick to established ones, Pal says.
"They want to do a Java project because it adds $30,000 to their
(resumes) the next time around."
Intangibles
Brand
Consumers often have an affinity for a brand irrespective of a
company's performance. Take Apple Computer Inc., General Motors
Corp.'s Saturn unit or The Coca-Cola Co., for example. The level of
recognition those brands enjoy helps make sales and has value on
Wall Street.
Corporate culture
Microsoft has established a corporate culture that produces the
results it's looking for, and it goes out of its way to hire people
who will fit into that culture, not necessarily revolutionize it.
Corporate culture also reflects knowledge gathered within a company.
Customer loyalty
Simply put, if a company's customers return often and spend a
lot, then the company is doing something right. America Online Inc.
doesn't typically give its customers cutting-edge software,
back-office architecture or points of presence, but those customers
are loyal. Accordingly, AOL does very well in the marketplace.
Environmental sustainability
An example of poor environmental sustainability is Hooker
Chemical & Plastics Corp., which dumped toxic chemical waste
near the Nigara River from 1942 to 1953 with little knowledge of the
long-term hazards such dumping posed to the environment or to human
beings. The company's value obviously suffered from the resulting
public wrath and various lawsuits. This bad public image is a
negative intangible asset.
Innovation
Pharmaceutical companies often derive enormous revenue from
already-discovered materials given new application. Examples:
Post-it notes and superglue.
Knowledge management systems
Systems or processes a company installs that help unearth best
practices, promote knowledge sharing or provide a repository for
such knowledge and make it useful to the rest of the workforce.
Product management aptitude
Systems inside a company that help deliver products more quickly,
such as excellent supply-chain logistics, order-entry systems,
fulfillment systems and customer service.
Technological sustainability
Patent on a new widget with myriad as-yet-unrealized
uses.
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