Over the last few decades commerce has changed from being biased towards tangible assets (such as factories, stock, property and physical products) to more intangible assets (such as intellectual property, marketing brands, IT systems and the data that resides in them). Research from the US, has shown that the average market-to-book ratio of companies in the S&P 500 rose from just over one in the early 1980’s, 3.5 in the mid 1990’s to 6 by 2000, falling back to 4.5 by late 2003. A market-to-book ratio of 4.5 implies that the tangible assets of a business account for less than 25% of the value that investors are placing on a company. In essence intangible assets have supplanted tangible assets as the key value drivers in today’s economy.
During the same period traditional accounting has remained tied to tangible assets. This means, in my opinion that a significant percentage of an organisations assets are under reporting in the company’s accounts. It is a generally agreed management view that you can not manage what you can not measure. Therefore many of the assets that are most responsible for creating organisational value are not managed very well.
The classification of intangible assets is in its infancy. Based on the current research in this area four areas of intangible assets can be identified:
- Knowledge: intellectual property (patents, recipes, product research), industry experience and knowledge (such as manufacturing and operating guides and manuals), IT systems and the data that resides in them.
- Business processes: innovative business models, manufacturing techniques and supply chain operations.
- Market Positioning: contracts, distribution rights, licences (eg third generation telecom licences), import quotas, government permits etc.
- Brand and Relationship: trade names, trademarks and trade symbols, domain names, design rights, trade dress, packaging, copyrights and the brand relationship with the consumer.
I intent in future blogs to come back to this subject and explore the value of data as an intangible asset. This post on my blog is more of a warning shot of more to come.