Intangible assets are some of the most important contributors to a firm’s profitability growth and continued market power.
Some hit a snag as they futilely attempt to quantify the value of intangibles and thus remain guarded on the prospect of intangible-driven earnings. But not everyone agrees. Many industry experts today insist that everything can be quantified—including intangibles notoriously seen as immeasurable.
Just a year ago, intangible value represented “70% of the global economy,” industry experts say.
Investment in intangibles is still rising strongly in many sectors—and the value of such assets will continue to reach new heights. Whether it consists of technical know-how, company reputation, or a remarkably skilled workforce, intangibles are recognized as salient drivers of long-term profitable growth. For those clamoring for market power in a resurgent economy, intangible assets are also important sources of competitive advantage and higher returns.
The Impact of Intangibles on Organizational Value Is Clear. The Proper Valuation Mechanisms Not So Much
Intangible-rich companies drive improved organizational value, but many tend to have difficulties in quantifying such gains. Some rely on inadequate valuation mechanisms that often result in mismeasurement. Others leave intangibles largely unassessed due to the lack of proper quantification methods. In both cases, industry players act too slowly in recognizing and addressing a pressing priority: turning to efficient mechanisms for valuing intangible assets.
The reliance on flawed asset quantification results constantly stirs fears of under or overvalued intangibles. These fears are justified; a firm’s inability to measure the fair value of an intangible asset leaves it vulnerable to abrupt declines in profitability and financial performance. This growing problem forces industry players to seek answers to a fundamental question: Is it possible to accurately determine the current value stemming from a firm’s intangibles?
Paolo De Angeli, the Head of Commercial Excellence at Borealis AG, makes an encouraging statement in a keynote session at Copperberg’s 9th Annual Manufacturing Pricing Excellence event:
“Everything can be quantified! Maybe it is difficult—really difficult!—but nothing is impossible to quantify.” — Paolo De Angeli, Head of Commercial Excellence at Borealis AG
The absence of viable methods for quantifying intangibles remains the prime obstacle to efficient valuation, meaning firms may need to double efforts to identify coherent measurement approaches for each value driver.
This article shares a few pointers aimed at helping industry players develop a mechanism for calculating the value of their intangibles.
Making Sure No Value Is Left Behind
A possible first step towards quantifying intangibles is to systematically align these assets with the company’s prime objectives and strategies.
The authors of “Strategy Maps: Converting Intangible Assets into Tangible Outcomes” wrote that the value of intangibles stems from “how well [the assets] align to the strategic priorities of the enterprise, not by how much it costs to create them.”
This strategic alignment helps in making sure that no value is left behind. Industry players within an organization need to take stock of all the value creation opportunities available, and the alignment between intangibles and core business objectives is necessary so that the firm’s invisible advantage doesn’t remain unknown or underutilized.
It is also rather impossible to move forward with valuing intangibles without fully understanding how they fit in the overall value creation process.
Tapping into Value-Based Strategies to Quantify the Seemingly Unquantifiable
Intangibles are, incontestably for many, well worth the investment. Firms investing more heavily in intangible assets are likely to acquire higher profits at a potentially faster rate.
But how can a firm determine the fair worth of its intangibles?
Paolo De Angeli’s expert perspectives on “How to Quantify the Intangible Elements of Value”, which were presented at this year’s Manufacturing Pricing Excellence conference, principally center on:
- Being curious about the business of each customer
- Understanding what the firm ultimately brings to a customer’s profit
Part of the issues related to quantifying intangibles can be solved by dialing up efforts to better know customers. Having an authentic interest in their customer base will allow industry players to identify which value drivers matter the most to each client. Once firms gain a better understanding of how to create differential value for customers, experts suggest adopting a value-based pricing strategy that is grounded on this knowledge.
Paolo De Angeli strengthens this observation in a few telling notes on why industry players need to price according to the differential value delivered:
- The pricing strategy is fair (both to the company and its customers!) and more profitable in the long run.
- Pricing is based on something solid—more precisely, the company’s differential value proposition.
- Customers typically care about the value a company delivers, not about its costs.
All measurement systems for intangibles should be rooted in a concrete understanding of how the firm’s customers perceive value. But the company behind these plans must also be able to clearly and continuously demonstrate differential value to clients.
“Ask this question: What does it mean for your customer? This helps you break down the problem into more pieces and transform what is intangible into something that is very concrete and can be brought to customers. [Then] go to your customers, explain how you think you are helping them in being more profitable, and have an open discussion on their business, problems, and needs—and eventually show that what you are doing is delivering differential value.” — Paolo De Angeli, Head of Commercial Excellence at Borealis AG
A huge part of converting intangibles into tangible outcomes is investing in value-based approaches to earn a differentiated worth of the firm’s assets.
Intangibles Influence an Increasingly Larger Part of a Firm’s Present and Future Value, Making Efficient Valuation More Critical By the Day
The rise of intangibles is projected to accelerate even further in the coming months. Intangible-driven earnings, however, aren’t yet in the bag.
Plans of profitability growth are fragile without the ability to fairly quantify intangible assets.
Experts are firm in pointing out that the seemingly immeasurable elements of asset value can always be correctly measured, albeit with some difficulty. Central to valuing a company’s intangible assets is to relentlessly think of value—not of cost!—as well as how to turn that value into concrete and differentiated sources of growth.