“The most valuable assets of a 20th-century company were its production equipment,” said renowned management expert Peter Drucker back in 1999. “The most valuable asset of a 21st-century institution will be its knowledge workers and their productivity.”
Was Drucker right? Can we measure shifts in value from tangible assets like production equipment to intangible assets like knowledge?
Yes we can. Investment banking firm Ocean Tomo conducts an Annual Study of Intangible Asset Market Value. In 1975 they estimated that more than 80% of the value in the S&P 500 consisted of tangible assets such as land, plant and equipment.
Well, things have changed.
Intangible Asset Market Value (2015)
Earlier this month, Ocean Tomo released the 2015 update to their annual study. By 2015 more than 84% of the value in the S&P 500 consisted of intangible assets, an increase of 4 percentage points over the last ten years and an incredible 52 percentage points since the corresponding study conducted in 1985.
The chart below summarizes the trend over the past forty years.
What are intangible assets? As Wikipedia explains, there are two primary forms: legal intangibles and competitive intangibles. Legal intangibles are often referred to as “intellectual property” and include things like: trade secrets, customer lists, copyrights, patents, trademarks, etc. They can be legally protected and defended in the courts. Competitive intangibles are legally “non-ownable”. They include things like: knowledge, company culture, know-how, collaboration activities, business methodologies, and customer relationships.
Both kinds of intangible assets are created by knowledge workers and are pivotal drivers of competitive advantage and shareholder value. Drucker's far-sighted observation highlights the reality that 21st century enterprises are competing in a “knowledge economy” where intangible value is rising.
Variation by Industry
The dramatic growth in intangible assets partly reflects the rise of new industry sectors such as e-commerce and mobile communications where some firms have sky-high intangible asset values. As an extreme example, consider messaging company Whatsapp, purchased in 2014 by Facebook for $19bn. Whatsapp had only 55 employees at the time of the sale. It’s safe to say the company’s tangible assets — the employees’ computers, desks — made up a very small portion of that $19 Bn.
But it would be wrong to think that only internet companies had high ratios of intangible to tangible values. The table below, created by Sonecon, shows intangible assets as a fraction of total industry sector market value.
(Intangible assets as defined here include intellectual property (patents; copyrights; databases; R&D) and the firm-specific knowledge and practices of managers and workers, their economic competencies.)
We see from the table that intangible assets of ten industries account for at least 90 percent of their market value; but among those ten, only software and pharmaceuticals also hold intangible assets valued at $800 billion or more. In other words, they have a high percentage of intangible value but also a huge absolute dollar amount of intangible value.
It is perhaps not surprising that software and pharmaceuticals should be at the top of these lists – they have both become huge industries where the return on smart decision-making is high. For me though, the takeaway from the table is that intangible assets are hugely important in all industries.
Importance of managing intangible assets
As the knowledge economy grows and the pace of competition accelerates, managing intangible assets has become increasingly important. There are whole disciplines around this subject: measurement of intangibles; accounting for intangibles; tax issues for intangibles…. And senior managers have to think strategically about managing the different components of intangible value: people, brands, R&D, intellectual property, and so on. This is difficult because intangibles are literally invisible, inherently hard to quantify, not easily recorded in company accounts, etc.
These are big topics but the point I want to make in today’s post concerns the common theme linking the components of intangible value. That theme is information. Without relevant, timely information, today’s knowledge workers would quickly be left behind by their counterparts in competing firms. The firm’s competitive advantage would quickly erode. The ability to manage information is a key success factor in today’s world. Perhaps the key success factor.
Importance of managing information
It is perhaps a little curious that information management seems to receive less C-level attention than do the other components of intangible value. There is much emphasis on topics like brand management, human capital management and corporate reputation management for example, but less discussion about best practices in information management. Perhaps this is because C-level executives believe information management is more straightforward than these other processes.
Managing information sounds straightforward but is more complex than many realize. Let’s take for example the process of finding relevant information for knowledge workers, which is just one element of the overall information management process. Where is this information? In many, many places, both internal and external to the enterprise: in emails, in corporate intranets, in SharePoint sites, in Knowledge Management infrastructure, in journals and newspapers, on competitor websites, in social media, in the vast reaches and long tail of the internet. It exists in different silos and different formats. It exists in great quantities such that users who search without the right filters are quickly swamped in irrelevant material.
Our current information management systems have a hard time dealing with this multitude of sources and formats. But as the value of information rises, it is more important than ever that organizations put in place systems and platforms that can transition seamlessly across different sources and formats and that can simplify the process of discovering and distributing high-quality relevant information to the right people at the right time in the context of their work.
“Information – and the ability to manage it – is one of the highest-value intangible assets of any company, in any sector.”
This observation is only going to become more true.