Measuring Intangible Assets

A new approach looks for value through the prism of company strategy.

How valuable are a company's IT systems, employee skills, culture? For many, they are worth far more than the physical and financial assets that can be tallied on a balance sheet. Measuring the value of intangible assets has been the Holy Grail of accounting, but in February's Harvard Business Review, Robert S. Kaplan and David P. Norton, who created the balanced scorecard, propose a new approach. "You cannot 'value' intangible assets," says Kaplan, "but you can certainly measure them and their alignment with value-creating strategies."

Kaplan, the Marvin Bower Professor of Leadership Development at Harvard Business School, showed Kathleen Melymuka how the balanced scorecard—a methodology used to analyze business performance from four perspectives: financial, customer, business process, and learning and growth—can help you measure those intangibles.

You point out that one of the problems in attempting to value intangibles is that their worth differs for different people. Can you explain? With tangible assets like buildings or machines, the value is relatively similar for different kinds of users. If I can't get the maximum use out of those assets, I can sell them to someone else who can. Their value is somewhat independent of use.

Intangible assets don't create value by themselves, so they're not easily tradable or salable to others. Their value comes only in the context of the organization and has to be linked to organizational strategy and to all the other intangible and tangible assets the organization has.

Robert S. Kaplan of Harvard Business School
Robert S. Kaplan of Harvard Business School
You note that intangible assets seldom affect financial performance directly. How do they affect it? You can't link investments in intangible assets directly to a financial return on investment. Improvements in people, systems or reward systems of the organization work by improving processes, which in turn create more value for customers, and that finally results in higher revenues and margins.

You have to work through this indirect chain with a valid strategy before you can realize improved financial performance from your IT investment.

You suggest that a useful way of measuring the value of intangible assets is to estimate how closely aligned those assets are with the company's strategy. Can you explain? If you're following a low-cost strategy, you want people trained in quality and process improvement so they can reduce the cost of processes and products. You want IT applications that promote continuous improvement and quality improvement, incentives that reward people for lowering costs and improving quality, and a culture of continuous improvement. Then you have intangible assets aligned to a low-cost strategy.

If you have a product-innovation strategy, you want people trained in the science and technology of the underlying product. You want information systems such as three-dimensional simulation and virtual prototyping. And you want a culture and reward system aligned around innovation and creativity.

You call that alignment of assets and strategy "strategic readiness." How is strategic readiness related to the concept of liquidity in accounting? Accountants organize balance sheets around a hierarchy that puts cash, accounts receivable, inventory at the top, followed by longer-term assets like property, plants and equipment.

The hierarchy is based on liquidity: how quickly these assets can be converted to cash. Intangible assets can also use this measure. If you have a very well-trained workforce with all the IT applications and infrastructure they need, you can deliver value on strategy very quickly. You have a high degree of strategic readiness.

If you move to a new strategy, and employees have to be retrained and reskilled and you need a new set of IT applications, there's a low degree of strategic readiness. It will be a long time before intangible assets are fully capable of delivering value. So it's a measure of how quickly people, systems and culture can create value with a strategy.

You focus on three types of intangible assets: human capital, information capital and organization capital. When you look at the strategic readiness of information capital, what are you trying to measure? In the internal perspective of a balanced scorecard, an organization identifies the five to 12 critical processes that are most important to deliver the customer value proposition and determine the success of a strategy.

For a company that is following a complete-customer-solution strategy, does it have the information systems to understand the customer, including data mining capabilities and tracking of all the relationships it has with the customer?

Fifteen years ago, when Procter & Gamble started to work with Wal-Mart intensively, it didn't have customer-focused systems. Each brand knew Wal-Mart as a customer, but it was coded differently in each factory. Procter & Gamble couldn't even add up all its sales with Wal-Mart. How can you have a customer-focused strategy without an integrated system?

If you're going to have a customer-focused strategy, you're going to need IT systems that are very customer-focused. If you're following a low-cost strategy, you need IT systems that support cost reduction and process improvement. Strategic readiness measures the alignment of IT resources and capabilities with the organization's strategy.


Focusing on Strategic Readiness

Melymuka is a Computerworld contributing writer. She can be reached at

This is the latest in a series of monthly discussions with Harvard Business Review authors on topics of interest to IT managers.

Copyright © 2004 IDG Communications, Inc.

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