Sep
20
Tools for Measuring and Managing Intellectual Capital
Filed Under Business Ideas, Resources, Principles, etc., Favorite Books, Free Book Summary - Online
I’ll never remember these measures when I return overdue Intellectual Capital to the Library today so I’m recording them here:
Measures of the Whole
Market-to-book ratios: If Microsoft is worth $85.5 billion and its book value is $6.9 billion, then its intellectual capital is $78.6 billion. Three problems: 1) The stock market is volatile. 2) Evidence that book and market values are understated because acquired companies cost a premium over market capitalization. 3) While it’s nice to say Microsoft has $78.6 billion in Intellectual Capital, so what? What can I do with that info?
Tobin’s Q: Compare the cost of asset replacement with the market value of the assets. The closer to 2, the more you can command a price. You have something they don’t have. That could be a monopoly or that could be your intellectual capital.
Companies Fixed Assets and add back accumulated depreciation and account for inflation. This will show you what’s happening to a company over time. How well are they using their assets? A measure of Intellectual Capital.
Calculated Intangible Value: An elegant way developed by NCI Research. They wanted a way to convince to put money into businesses with very few tangible assets. This is a way to calculate the value of a brand. For example with Merck:
1. Calculate average pretax earnings for 3 years. $3.694 billion.
2. Go to the balance sheet and get the average year-end tangible assets for 3 years: $12.953 billion.
3. Divide earnings by assets to get the ROA: 29 percent.
4. For same 3 years, find the industry average ROA (for pharmaceuticals, 10 percent – if company below average -> STOP NCI method won’t work)
5. Calculate the “excess return.” Multiply the industry-average ROA (10 percent) by the company’s average tangible assets ($12.953 billion) to understand what the average drug company would do with the assets. Now subtract that from this company’s pretax earnings from step 1 ($3.694 billion). We get $2.39 billion.
6. Pay Uncle Sam. Calculate the three-year-average income tax rate, and multiply this by the excess return. Subtract the result from the excess return, to get an after-tax number. This premium is attributable to intangible assets. For Merck (average tax rate:31 percent), that’s $1.65 billion.
7. Calculate the net present value of the premium. You do this by dividing the premium by an appropriate percentage, such as the company’s cost of capital. Using an arbitrarily chosen 15 percent rate, that yields, for Merck, $11 billion.
That would be Merck’s calculated intangible value. This CIV permits company-to-company comparisons using audited financial data. A weak or falling CIV might hint that you’re spending too much on brick and mortar and not enough on R&D or brand-building. A rising CIV can help show that a business is generating the capacity to produce future cash flows, perhaps before the market–or budget committee–has recognized it. Over time, Tobin’s q out to be parallel to CIV. “Knowing a company’s CIV could help you judge whether a low price-to-book ratio reflects a fading business, or one that’s rich with hidden value that isn’t yet reflected in the stock.”
Human Capital Measures
Employee Attitudes: Correlation between happy employees and strong financial performance. Though not proven as cause, people who feel they are learning, needed, and useful will be more productive than people who are idle and uncertain of their role in the company’s success; they’re also likely to treat suppliers, customers and each other better.
So conduct employee surveys but be careful that some just generate what’s on people’s minds at the moment, which can be useful data.
Tenure, Turnover, Experience, Learning: Celemi International measures using the following:
1. Average years in profession.
2. Turnover among experts.
3. Senority among experts.
4. Value-added per expert and per employee.
5. Percentage of customers who are “competence-enhancing” or challenge the company to learn more.
6. Rookie raio (percentage of employees with less than two years experience).
Questionaire:
1. Among the many skills possessed by your employees, which do customers value most? Why?
2. Which skills and talents are most admired by your employees? What accounts for any difference between what customers value and what employees value?
3. What emerging technologies or skills could undermine the value of your proprietary knowledge?
4. Where in your organization do high-potential managers most want to be assigned? Where do they least want to work? How do they explain their preference?
5. What percentage of managers have completed plans for training and developing their successors?
6. What percentage of all employees’ time is spent in activity of low value to customers? What percentage of expert employees’ time is spent in activity of low value to customers?
7. When competitors are hiring, do they hire from you?
8. Why do people leave you to accept jobs elsewhere?
9. Among experts in your labor market–including headhunters–what is your company’s reputation vis-a-vis its competitors?
The Knowledge Bank: Alan Benjamin, former director of SEMA group, one of Europe’s leading computer service companies, developed a measure of the value of the knowledge bank of a company. This is what Benjamin does:
1. Treats capital spending as an expense, not an investment.
2. Calculates the employee’s salary seeding the future as an investment and book it as capital spending.
3. Conservatively estimates the value added by R&D
4. Draws a new bottom line and calculates the knowledge bank which the company can call on in the future.
Traditonal
Sales $2.7 million
-Overhead $500,000
-Capital Spending $100,000
-Labor $1.5 million
Surplus would be about $600,000
For Benjamin
Deferred Labor (added to knowledge bank): + $800,000
Expensed Labor (no residual value): -$700,000
Sales $2.7 million
-Overhead $500,000
-Capital Spending $100,000
-Labor $700,000
+R&D value added $40,000
Surplus would be about $1,540,000
($600,000 cash and the rest in banked knowledge) Determining the bank is the first step. Then we find out our return-on-human-capital (knowledge bank divided by profit) which should be lower than ROA conventionally measured.
Structural Capital Measures
To picture this, you need measures of the value of accumulated stocks of corporate knowledge, and measures of organizational efficiency (the degree to which the company’s systems augment and enhance the work of its people rather than obstruct them).
Valuing Stocks of Knowledge: Anson considers structural capital in 3 groups: 1) a technical bundle (trade secrets, formulas, proprietary test results, etc.) 2) a marketing bundle (copyrights, corporate name and logo, warranties, advertising, package design and copyrights, trademark registrations, etc.) and 3) a skills and knowledge bundle (databases, manuals, quality control standards, asset managment processes, security systems, business licenses, noncompete clauses, proprietary management information systems, etc.) Three basic tests to the value of an asset: Does it differentiate your product or service? Does it have value to someone else? Would someone else pay a fee for it? Price the assets not by cost but by their comparable value in your industry. Then rate the relative strength of your asset versus the comparables using the scorecard called the Valmatrix. (0-5 scale, 100 total possible points, breadth of product line, barriers to entry, etc.)
Working Capital Turns: The ability to substitute inventory for information. Like Dell 
Be careful to measure everything. The goal is to see how much you save compared to others who have more inventory.
Measuring Bureaucratic Drag:
Suggestions made versus suggestions implemented.
Time-to-market.
Ratio between revenues and SG&A costs.
Set-up times, minimum profitable lot sizes, etc.
Measuring the Back Office: Value added=Change Don’t write 2X2X2, write 2
Customer Capital Measures
Customer Satisfaction: Loyalty (retention rates), increased business (share of wallet), and insusceptibility to your rival’s blandishments (price tolerance).
Measuring Alliances: Savings for both parties from shared processes such as inspection and electronic data interchange, figures on inventories for both buyer and seller and availability all help establish the value of intimate relationships between you and your customers or your suppliers. Keep track of your customers’ financial strength and growth and your share of their business: If you are a key supplier to a strong customer, you have a valuable asset.
What’s a Loyal Customer Worth?: What is the net present value of your customer base? How much is a new customer worth? How much is it worth to keep an old one?
1. Meaningful period of time over which to do the calculations.
2. Calculate the profit your customers typically generate each year you keep them. Both costs and profits. If possible, segregate this number into age, sex and other useful information.
3. Then chart the life expenctancy.
4. Once you know the profit per customer per year and the customer retention figures, calculate the net present value of a customer. Pick a discount rate–if you want a 15 percent annual return on assets, use that, since customer capital is an asset. Apply the discount rate to each year’s profit, adjusted for the likelihood that the customer will leave. In year one, the NPV will be profit / 1.15. In year n, the last year in the period you chose, the NPV is the nth-year’s profit/ 1.15n. The sum of years 1 through n is how much your customer is worth–the net present value of all the profits you can expect from his tenure: In effect, it’s what someone else would pay to get the customer.
You can use this information to determine how much it costs to acquire new customers. This is invaluable information.
Keep it simple. No more than three measures for each.
Be strategic in your measures. Measure those things that give you your competitive edge.
Measure activities that produce Intellectual Wealth.