Intangibles Over Tangibles

Updated January 2, 2015 by Matt H. Evans

In today's information age, the emphasis is on intangibles. We no longer live in a world where physical assets are more valuable than intangible assets. High levels of business performance are more dependent upon intangible characteristics:

· Ability to innovate
· Ability to change
· Speed to Market
· Develop and Retain the Best People
· Create a One to One Customer Relationship

The marketplace also recognizes the value of intangibles. For example, companies like Microsoft have a market capitalization driven by intellectual and intangible attributes. And companies like Microsoft have market capitalization's well above companies operating with heavy loads of physical, tangible assets.

Our primary assets, which are our software and our software development skills, do not show up on the Balance Sheet at all.” – Bill Gates of Microsoft
When Financial Analyst were asked to rank the best non-financial measurements, they listed the following:

1. Execution of Strategy
2. Management Creditability
3. Quality of Corporate Strategy
4. Innovation
5. Ability to Attract and Retain Talented People
6. Market Share
7. Management Expertise
8. Alignment of Compensation with Shareholder Interest
9. Research Leadership
10.Quality of Major Business Processes

If you look at this list, most of it relates to the intangibles within the business; things like leadership, quality of management, people, ability to innovate, etc. This is what investors are looking for within a business. So how do you manage in this world of intangibles? In comparison, the World of Intangibles is considerably different than the traditional business world of physical, tangible assets.

Tangible Assets => Readily Visible, Easy to Quantify, Reported on the Balance Sheet, Easy to Duplicate, Depreciate over time, limited application, managed through control, accumulate and store.

Intangible Assets =>Difficult to Recognize, Difficult to Quantify, Not Reported on the Balance Sheet, Difficult to duplicate, Appreciates over time if managed properly, Has multiple applications to the business, Managed by alignment, and tends to be very dynamic with a short life span.

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For financial professionals, this presents numerous challenges. For example, much more emphasis must be placed on growing the intangibles within the business. Within finance, this can involve things like rethinking the budget models, allocating resources differently, shifting the cost structure, and moving towards virtual financial functions.

The trend towards intangibles is real and extremely profound for business. In fact, Tom Peters in his Project 50 series of books declares that those organizations that survive will have to adopt these types of intangible attributes. Peters refers to these surviving organizations as “Professional Service Firms.”
These firms can be tiny or huge. But regardless of size, they perform purely intellectually based services, own damn little in the way of hard assets, and sometimes deposit billions of $$$$ on the bottom line. Those who survive – on or off a corporate payroll will jettison (almost) everything they've learned and adopt the attributes / attitudes of a PSF / Professional Service Firm“ - Reinventing Work: The Professional Service Firm 50 by Tom Peters
The Marketplace is clearly indicating a preference for intangibles over tangibles when it comes to running a business. Therefore, businesses will have to recognize new drivers of value, such as customer led business processes, increased specialization, and an emphasis on knowledge workers. Physical assets, which are easy to duplicate in the marketplace, will no longer provide a competitive advantage. This shift from tangible to intangible is one of the reasons we are experiencing so much change. If you expect to manage change, you will have to function in the World of Intangibles.

matt evans photo Written by: Matt H. Evans, CPA, CMA, CFM | Email: matt@exinfm.com | Phone: 1-877-807-8756


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