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MEASURING THE VALUE OF INTANGIBLES

MEASURING THE VALUE OF INTANGIBLES. to discover the roots of company’s future success. Geneva, July 11, 2006. When we want to assess future potential of a company, what shall we look at?. LOOKING BEYOND FINANCIAL ASSETS.

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MEASURING THE VALUE OF INTANGIBLES

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  1. MEASURING THE VALUE OF INTANGIBLES to discover the roots of company’s future success Geneva, July 11, 2006

  2. When we want to assess future potential of a company, what shall we look at? LOOKING BEYOND FINANCIAL ASSETS... • Managing an organisation by focusing simply on its financial assets would be like driving a car looking just in the rear mirror. • Profits are fruits of the past performance – so what indicators do you have about potential and future value of a company?

  3. What are the intangibles? DEFINITION OF INTANGIBLES The factors not shown in the traditional balance sheet, but which are of critical importance for the company’s future success. We believe that future value of company depends mainly on intangibles. Different methods were developed to assess and allow benchmarking of areas that are of critical importance for the future of organisations, but still are not shown in traditional financial or operational reports.

  4. Market value, book value and intangibles TOTAL VALUE Financial capital Intangible capitals = + Other intangibles tangible Country intangible In $ billions Source: adaptation from AIAF, 2005

  5. Holistic Methods Atomistic Methods Non-monetary methods Monetary Methods Measuring the value of intangibles • Companies have to develop and utilise newaccounting methods, since those that have been implemented so far: • Are too focused on the past • Miss anticipatory “power” • Capture critical changes too late • Don’t take into adequate consideration some resources, such as intangible assets Main Intangible Assets Measuring Models Elaboration from Sveiby, 2001.

  6. Organisational structural capital Human capital Value Relational structural capital Business Recipe IC RatingTM background: the Value Platform • There are 3 main perspectives behind IC Rating Platform: • Human CapitalPeople, employees • Organisational Structural CapitalAll processes, procedures, systems and culture that are left when employees are not in place • Relational Structural CapitalNetwork of clients, suppliers and partners. • All these 3 perspectives work in the framework of particular Business Recipe(market, strategy of the firm), which is individual for every company. • Good performance in all these areas builds Financial Capital in the future. Source: Intellectual Capital Sweden www.intellectualcapitalsweden.se

  7. IC Rating™ Platform IntellectualCapital OrganisationalStructural Capital Human Capital RelationalStructural Capital BusinessRecipe IntellectualProperties Processes Manage-ment Emp- loyees Network Brand Custo- mers KEY ISSUES Business environment; - Competition - Entry threats Business idea Strategy Vision KEY ISSUES Demand from competitors Contribution from I.P. (attract customers & employees) Protection of I.P.(long term/ hard to copy) KEY ISSUES Structured and docu-mented knowledge (methods, routines and systems) Organisation & culture KEY ISSUES Business related skills Internal leadership Co-operation and comple-mentary experiences in the mana-gement team KEY ISSUES Business specific knowledge General competence Contribution to develop-ment of structural capital KEY ISSUES Business critical networks and alliances(excluding current customers) KEY ISSUES Awareness Reputation Relevant differen-tiation KEY ISSUES Loyalty Potential Strength- image enhancing- demanding Dependence Source: Intellectual Capital Sweden www.intellectualcapitalsweden.se

  8. IC Rating™: three perspectives 1. Effectiveness 2. Risk 3. Renewal and Development Present day Future Accounting Present value of IC effectiveness in creating future financial value Threat against present effectiveness * probability of threat coming true Efforts to renew and develop present effectiveness Source: Intellectual Capital Sweden www.intellectualcapitalsweden.se

  9. IC RATING™ is done using well-known Standard & Poors scales Source: Intellectual Capital Sweden www.intellectualcapitalsweden.se

  10. IC RATING™ is mainly based on interviews with people • PROCEDURE: • Rating is primarily based on interviews with carefully select 35-50 respondents who knows most about this company, of which • 2/3 is external (customers, lobby organizations, competitors, suppliers, partners, etc.) • 1/3 is internal (employees), • rating of intellectual capital is weight average of answers for more than 150 questions that are strictly connected to business performance of the company, • rating usually takes 4-6 weeks. Source: Intellectual Capital Sweden www.intellectualcapitalsweden.se

  11. IC RATING™ and IP assessment • 17 questions out of about 150 are focused on IP evaluation • Examples of key issues to be pointed out during the evaluation process: • Market awareness about company's IP • IP influence on company’s brand • Company's IP “replaceability” • Time period during which the IP has value • IP contribution to rise barriers to entry • Etc. Source: Intellectual Capital Sweden www.intellectualcapitalsweden.se

  12. Case Study: Effectiveness perspective BB Intellectual Capital A CC BB BBB BusinessRecipe Human Relation Organisation C CC BB B A BB BBB Network Brand Customers Process Management Employees Intellectual Properties Selected findings: This rating was done for start-up company. As in case of most young and small companies, structural capital is almost non-existent. But, company is operating in market with good perspectives. Good score in relation box shows that company’s network is a main source of its current advantage. Customers base as well can be assessed as satisfactory. Source: Intellectual Capital Sweden www.intellectualcapitalsweden.se

  13. RR Intellectual Capital RR - RR RRR BusinessRecipe Human Relation Organisation - - R RR - R RRR Network Brand Customers Process Management Employees Intellectual Properties Case Study: Risk perspective Selected findings: Organisational Capital shows almost no risk as its efficiency is to low to be threatened. Although efficiency of relation capital was average (BBB), the risk perspective shows that it’s strongly threatened by some aspects. It may be that there are very few customers or customers are heading to bankruptcy or many more. To discover true reason we must look closer to the Customer box and see answers to the questions of which the box is composed. Source: Intellectual Capital Sweden www.intellectualcapitalsweden.se

  14. Case Study: Renewal & Development perspective BBB Intellectual Capital BB BB A BBB BusinessRecipe Relation Human Organisation BBB BB A A BB CCC A Network Brand Customers Process Management Employees Intellectual Properties Selected findings: In renewal and development perspective we can see substantial efforts in the Human Capital box. These means that company currently conduct several initiatives, which are focused on improving human capital effectiveness. Poor renewal efforts can be observed in the brand box, which together with not so good efficiency (only BB) should make management put more attention in this area. Source: Intellectual Capital Sweden www.intellectualcapitalsweden.se

  15. Relation Interaction Non-vulnerability 80 75 86 57 Strategic Supplier 31 77 Share ofbudget 79 56 11 25 54 76 71 78 Duration of Customer Relation Process Strengthening 73 79 81 78 Competence Enhancing Image Creating Case Study: Customer relations box decomposition Company Benchmark Selected findings: It turned out that main threat for customer effectiveness comes from two things: being a strategic supplier and vulnerability for the changes. The company itself had one big customer, which generated most of the revenues. Relations with this customer was great, duration was long, it was process competence and image enhancing customers. The only thing that made the risk so high was that customer was preparing to conduct services offered by the company itself. Source: Intellectual Capital Sweden www.intellectualcapitalsweden.se

  16. RR BB + BB Affärsmiljöns tillväxt på 5 års sikt Processer för intern administration Ledningens fokus Nätverk för försäljning Nätverk för personal och kompetens 85 Kompetensutvecklande kunder 92 Kundhantering IR:s förmåga att göra oss oberoende av konkurrenternas prissättning Sakkunskaper Processer för kundhantering Affärsmiljöns lönsamhet på 5 års sikt 94 84 Vår position i affärsmiljön 80 82 75 80 65 Leverantörs- och distributionsnätverk 71 77 Imagekunder 59 59 86 63 59 59 RR BBB + B BBB BB R BBB B R RR BB B 55 86 75 65 Processer innovation IR:s varaktighet Effektivitet 51 37 79 Intern atmosfär 75 55 58 61 79 72 22 50 32 47 49 35 Sårbarhet mot kundavhopp 94 Vår lönsamhet med utgångspunkt i vårt affärsrecept Affärsmiljöns konkurrenssituation 81 70 Kännedom 36 55 62 77 86 45 IR:s förmåga att skapa inträdesbarriärer 67 Processer för distribution och logistik 82 67 100 48 67 51 55 74 80 61 Affärsegenskaper Ledningens samspel 69 85 RR BB BB BBB BB BBB B R BB B R RR BBB BB + RR CCC CC A RR B - 84 77 77 Anseende Kundbaspotential 77 76 76 Processer produktion 86 85 Processer för utveckling av medarbetarna Vår tillväxt med utgångspunkt i vårt affärsrecept Potentiella hot mot affärsmiljön Relevant differentiering Tydlighet i ledarskapet Kundlojalitet Internt ledarskap Processer för försäljning IC RATING™ - A Comprehensive View Source: Intellectual Capital Sweden www.intellectualcapitalsweden.se

  17. IC Rating™2000 Rxy = .80; p< .01 Increase in turnover 2001 (%) IC RATING™ and financial performance • A high IC RATING value, indicates a high turnover growth in the years to come. • IC RATING alone is a better predictor of future profits, than methods only using financial input data. Source: Intellectual Capital Sweden www.intellectualcapitalsweden.se

  18. Beyond IC RATING™: IP “monetization” and brand equity • Monetary evaluation of some IP forms (e.g.: brands) can complement methods like IC RATING that basically provide qualitative findings and point out improvement areas • There are many methods to evaluate the brand equity: • Based on cost criteria, oriented to the past and to the resources spent on the brand • Based on the “benefits flows”: the value of the brand is determined by the cash flows that it generates • Based on market indicators and, therefore, on ex post performances • The monetary assessment of the brand allows the company to have immediate benefits, e.g.: • Further financing from investors trough specific financial tools (e.g.: sale-lease back) • A better rating according to Basel II criteria

  19. Thanks Mauro De Bona Campus - Innova Group +39 320 6130308 mauro.debona@campusconsulting.it skype: maurodebona

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