Attempts across the world to create solutions to the intangible valuation problem have left a smorgasbord of ill-equipped, ineffective, and incorrectly formed management and valuation techniques that are simply extensions on existing accounting, finance, and management practices, and are therefore not true solutions.  The result is that many “intangible solutions” do not, and cannot, provide required solutions as they are mathematically inconsistent, academically unsound, and practically unsuitable to solving the significant problems intangibles have created. There are two types of valuation method that currently exist:  (1) subjective valuation measures and (2) objective valuation measures.
 

Subjective measures (strategy-dependent intangible valuation measures) seek to measure performance based on key performance indicators (KPIs) formed in accordance with the current strategic focus of the organization.  Such measures must change, whenever strategy changes, or whenever the competitive environment changes.  KPI based-systems require frequent self-destruction as competitive strategies require constant change to remain viable and relevant.

Objective measures (strategy-independent intangible valuation measures) value performance based on (1) financial transactions, (2) time transactions, or (3) the interactions between time and money. It is a centuries old notion that “time is money” and “money is time”.  It is also known that knowledge assets (what you know) and relationship assets (who you know) only become valuable when leveraged over time.  The value of a person’s knowledge does not rest in its potential, but in its practical application through relationships.  The value of a person’s network of contacts (relationships) does not rest in its size, but in its practical leverage by using knowledge. Intangibles (knowledge assets and relationship assets) are only valuable when used. Measuring potential value is an academic exercise as it produces financial valuations that typically cannot be substantiated; and exhibit significant variability if different methods are used (consider conventional methods for valuing intellectual property: cost method, income method, market value method – these methods when applied to the same piece of IP can generate wildly different valuations).  Objective measures, based in the disciplines of intangible accounting, intangible finance, intangible economics, and intangible management show how intangibles have been used to generate actual financial performance. They are therefore objective as they explain actual financial performance.

Subjective measures cannot be used as valuation measures due to being affected by a substantial number of serious problems.   Before the Intangible Management Operating Standards, subjective measures were used as a basis of intangible valuation.   The Intangible Management Operating Standards acknowledges that the strength of subjective measures is in their ability to assist organizations manage intangibles, not value them.  Hence, Intangible Management Operating Standards acknowledge, but not support or promote, subjective measures as a valuation method for intangibles.  The 24 issues below explain why the Intangible Management Operating Standards cannot, and will not, use subjective measures as the basis of valuation.

1.      Subjective measures are typically composed of numerous individual point-measures, or KPIs, (such as the number of PCs per employee, percentage of employees with advanced degrees, time taken to fulfill customer order, etc). KPIs are created by selecting a small sample of measures from a much larger pool of potential measures.  Chosen KPIs are supposed to represent milestones towards the progress strategic outcomes.  KPIs are therefore sample methods, not population measures.  As measures ignored may be more important than measures chosen, sample based selection of what to measure is unacceptable.  The purpose of Intangible Management Operating Standards is to ensure that intangible valuations are formed in accordance with population measures not sample measures.  This ensures that subjectivity (formation through omission) is not possible.

2.     A collection of KPIs can be transformed into a single measure called an index (such as a human capital index, a structural capital index, etc).  An index is typically created by combining and weighting individual point measures into a single number.  Indices disobey the law of mathematical consistency and assert that meaningful comparisons of “apples to oranges” can be made.  Such an exercise is not only flawed, it is false and mathematically incorrect.  The purpose of Intangible Management Operating Standards is to ensure that intangible valuations are made obeying the law of mathematical consistency.

3.     Subjective intangible valuation measures are literally “snapshots in time” of strategic direction.  The nature of strategy requires that different departments and divisions will require different strategic directions and objectives (Marketing & Sales, will require different measures than Research & Development, and Accounting & Finance, etc). It is this fundamental problem that creates significant weakness in using strategic dependent measures.  The primary weakness in this approach is that different parts of the business will require different measures.  The purpose of Intangible Management Operating Standards is to ensure that different divisions of an organization use the same measures to measure their performance.  This ensures that intangible performance can be meaningfully compared from one division to another, one geographic region to another, one country to another.

4.     As strategy changes, the underpinning KPI components (and therefore index components) will require constant addition, deletion, and reweighing. It is the requirement to continually change, modify, and adjust underlying components in subjective intangible valuation measures that makes such measures impractical, expensive to maintain, and strategically valueless to the organization implementing them.  The purpose of Intangible Management Operating Standards is to ensure that investments in intangible valuation are kept to a minimum on an ongoing basis, by ensuring that additions and subtractions in components does not occur as components are not used in objective valuation.

5.     Due to the way in which subjective valuation methods are formed, such methods cannot be meaningfully compared over time.   The purpose of Intangible Management Operating Standards is to ensure that investments in intangible valuation are kept to a minimum on an ongoing basis, by ensuring that additions and subtractions in components does not occur as components are not used in objective valuation.

6.     Financial valuations become usable and practical only when they can be used to create (1) comparisons and (2) trends.  Subjective valuation measures cannot be used as a point of comparison (cannot compare KPIs from Accounting & Finance, to those of Marketing & Sales, or those in Production & Manufacturing, etc).  Hence, meaningful comparisons are not possible. As comparisons are not possible, it is also not possible to meaningfully interpret trends over time.  The purpose of Intangible Management Operating Standards is to ensure that intangible valuations are formed in such as way as to meaningfully, and practically, permit comparisons and trends to be formed.

7.     Subjective valuation methods cannot be meaningfully compared different organizations with different strategies, even if those industries are in the same competitive space.  This makes ratio analysis (relative performance ranking of one competitor to another) an academic exercise with little practical or actionable merit.  As each organization typically uses a different strategy, or uses the same strategies in different ways, comparison of such subjective measures is meaningless.  The purpose of Intangible Management Operating Standards is to ensure that intangible valuations are formed in such a way as to meaningfully, and practically, permit comparisons between different firms in different industries over time.

8.     Subjective valuation methods for the reasons stated above lack investor confidence.  As a result incorporation into annual reports of such measures is more a public relations and marketing exercise than a method of reporting true value.  The purpose of Intangible Management Operating Standards is to create intangible valuations that can be incorporated into the annual reporting processes in such as way as to support existing financial information and increases investor confidence.

9.     Dynamic markets, such as those that practically all organizations operate in today, are continually transformed by new technologies, competitive pressures, new customer preferences, and new management methods.  As such, it is essential to have the basis of objective measures based on the timeless components of organizational performance, not just the latest trend.  Intangible Management Operating Standards base intangible valuations on the linkage between time and money.  The population understands that time and money are two scarce resources that require continual management. The focus of Intangible Management Operating Standards is to assist organizations understand how the effectiveness of time (as measured by the quality of knowledge assets and relationship assets) creates organizational performance.

10.    The knowledge-based economy (KBE) has shifted ownership of production assets and the value creation processes from the organization to knowledge workers. Most current valuation methods ignore anything that cannot be owned.  The traditional reliance on assets (such as return on equity, return on assets, is testament to this fact).  The KBE is focused on influence, not ownership.  Intangible Management Operating Standards financially value the factors of production that dominate the knowledge-based economy, namely: knowledge, relationships, emotions, and time. Conventional systems value the traditional factors of production, namely land, labor, and capital.  Hence, the interaction between Intangible Management Operating Standards and existing accounting/finance standards allows the full value creation process to be better understood.   

11.   Some objective valuation methods are incorrectly focused.  For example, the true value of reducing training time is not a saving in wage costs, but the potential productivity increases that result from increased time effectiveness as evidenced by higher quality knowledge assets. Wages as a proxy for intangible valuation is incorrect and misleading and therefore not endorsed, or supported, by Intangible Management Operating Standards standards.

12.   Many objective measures are not productivity based.  Productivity is the lifeblood of all organizations, and key driver of economic growth.  Productivity embodies the quality and effectiveness of the transfer of knowledge and relationships into value.  A productivity focus allows organizations to move past comments on potential, to actual operational results.    The purpose of Intangible Management Operating Standards is to create highly useful relevant intangible valuations.  The primarily focus is not on potential (which is intrinsically difficult to financially value and therefore subjective), but on actual performance.

13.   Brand value is an incorrect representation of intangible value.  In 2003, Microsoft’s brand value was $65.2 billion, and the market value was $278.664 billion.  It is common mistake to associate brand value with intangible value.   Intangible value is different than brand value.  The purpose of Intangible Management Operating Standards is to show how brand value is different from intangible value.

14.   DCF (discounted cash flow) analysis is often used to estimate future financial value.   There are substantial problems with DCF analysis as small changes in the discount rate can lead to substantial changes in valuation.   The purpose of Intangible Management Operating Standards is to prove intangible value without a reliance on discounting techniques, such as discounted cash flow analysis.

15.    Current accounting methods do not analyze the productivity of expenses. Expenses can be productive or non-productive, depending on their impact on the impact of knowledge assets and relationship assets effectiveness on productivity.  The purpose of Intangible Management Operating Standards is to financially determine the productivity of expenses on productivity.

16.    Current accounting methods treat revenue and expenses as independent variables.  The standard profit equation (revenue less expenses equals profit) creates unsustainable and irresponsible behavior by executives as they seek to artificially decrease expenses in order to boost short term revenue. The purpose of Intangible Management Operating Standards is to show the interdependent nature of revenue and expenses on profit.   This fundamental change in the accounting equation is designed to create more intelligent decision-making systems, and reward managers for balancing short-term and long-term performance.

17.    Financial performance as measured by conventional accounting systems represents diluted financial performance - or financial performance after intangible costs.  Intangible costs are productivity costs that result from opportunity costs generated from ineffective knowledge assets, ineffective relationship assets, ineffective emotional assets, and ineffective time assets. The purpose of Intangible Management Operating Standards is to estimate the amount of diluted financial performance inherent within the business structure.

18.   Intangible costs represent a substantial source of latent performance and productivity.  Such costs are not “bad costs” but are a source of performance that can yield the organization substantial performance gains.  The purpose of Intangible Management Operating Standards is to help executives and investors understand that intangible costs illustrate the future value potential of an organization – such costs are “good” costs if correctly managed and a source of long-term latent value creation. When intangible costs are converted into actual productivity, they allow an organization to “work smarter” and “more productively” with minimal additional costs and the same number of employees. The effectiveness increase in converting intangible costs into productivity (a process known as artificial employment) will be a dominant source of wealth creation in the 21^st century.

19.    Revenue potential, or total intangible costs, is an important measure of long-term financial performance and needs to be reported in financial analysis.  The purpose of Intangible Management Operating Standards is to report revenue potential as measured by intangible costs.

20.    In the 21^st century, employees are the creators of wealth in organizations.  As employees cannot be owned, but only influenced, by management it is critical that emotional assets are correctly managed.   The quality of emotional assets dictates the level of employee satisfaction which in turn significantly impacts customer service and customer loyalty.  Emotions are the oil that greases the wheels of commerce in the 21^st century.  The purpose of Intangible Management Operating Standards is to ensure that the key role emotions play in the value creation process is understood and leveraged by organizational executives.  Part of this process involves minimization of emotional costs such as stress, politics, depression, etc.

21.    It is essential for organizations to manage intangible value on a daily basis as intangibles create organizational performance.  The purpose of Intangible Management Operating Standards is to provide employees with knowledge, skills, and tools to manage intangible value on a daily basis in a time effective manner.

22.    ICT (information and communication technologies) technologies allow workers to telecommute, work offsite, on the road, or from home as effectively as they would in the office.   The nature of distributed workforces poses substantial problems to existing management systems and employee performance systems.  The purpose of Intangible Management Operating Standards is to ensure that organizations can capture the value that ICT technologies provide by updating their accounting, management, performance, and remuneration systems to become compliant with the realities of the 21^st century.

23.    Work-life balance and quality of life issues are starting to dominate employment decisions.  As life-long employment has been replaced by job insecurity, employees are seeking to increase job security by becoming self-employed, contractors, or consultants.  The purpose of Intangible Management Operating Standards is to assist organizations understand the strategic importance emotional leadership plays in retaining employees, reducing turnover, and self-generated competition (employees who leave a company to set up as a rival firm).

24.    As intangibles are the dominant source of value creation, intangible benefits also dominate the value proposition of most products and services sold today.  The purpose of Intangible Management Operating Standards is to assist organizations independently estimate, and certify, the soft benefit value proposition of their goods and services.