The Critical Importance of Intangible Asset Management (IAM) Systems
By Andrew J. Sherman
Posted: 4th January 2013 10:58
In my new book, Harvesting Intangible Assets, the critical paradigm shift of the global balance sheets of both large and emerging growth companies is discussed in considerable detail. What was once a mere ten to follow percent of the overall net worth of a companies now closer to ninety percent and growing. Leaders of the companies and their advisors need to be as committed to developing management systems for their intangible assets as they currently have in place for their intangible assets.
Ask any farmer managing his crops or any CEO making her widgets whether he or she has a system in place to manage inventories and the person will look at you as if you are insane. Of course, either will respond, “How could we not have systems, processes, and protocols in place to protect, manage, track, and distribute our tangible assets?” To not have systems in place would be gross mismanagement and a travesty with respect to a manager’s fiduciary obligations to shareholders. So why then, in a society driven by knowledge, brands, know-how, and intangible assets, do we not have the same disciplines and duties in place regarding assets that we can’t necessarily touch and feel but that are clearly driving the lion’s share of the market value for Apple®, Google®, IBM®, 3M®, Amazon®, Netflix®, and Priceline®? Why, at a time and place in our evolution when intangible assets are the key premiere drivers of revenue, opportunity, and profits, can leaders of companies not manage them like any other asset?
Cash is an asset, and we have CFOs, comptrollers, financial analysts, accountants, and clerks on hand to manage it. People are an asset, and we have chief administrative officers, HR managers, personnel specialists, and administrators to manage them. But, for the crops of knowledge, brands, systems, protocols, processes, know-how, show-how, channels, relationships, protocols, and best practices, we have no parallel positions on most organizational charts and no parallel systems to properly manage and extract value from these assets.
A few “enlightened” companies may have chief knowledge officers, but these are often glorified IT executives who apply principles of knowledge management (KM) to better manage and organise databases and perhaps gather internal best practices. Some truly progressive companies have chief innovation officers who are responsible for driving R&D and stimulating a creative culture, but these are often glorified HR executives or engineers who may understand either technology development or human performance and team work but rarely have cross-functional knowledge of both areas and who may be lacking experience in developing harvesting strategies. We build organisational charts and allocate resources to departments as if we were still doing business in 1975 instead of leaning into the future and building a team and a business model that is ready for 2015 and beyond.
When I speak at business conferences around the world to companies of all sizes and in all industries and ask them whether they have an intellectual asset management (IAM) system in place, I am typically greeted with blank stares. When a few feeble hands go up, I then ask whether their IAM systems have been effective and yielded profitable opportunities, and even fewer hands rise. When I ask whether their organisational chart has been retooled to reflect the transformational shift toward an intangible asset–driven economy, they look at me as if I just arrived from Mars. And, finally, when I ask them to name the person in the company who serves as the “CHIPPLE” (Chief Intellectual Property Protection and Leveraging Executive), they look at me as if I were from Venus. I am not aware of any extraterrestrial roots of my parents or grandparents, so I am pretty sure that I am not the one in the room at that point who is clueless and helpless. How can we as leaders of companies and as fiduciary guardians of the entity’s assets on behalf of our stakeholders continue to completely ignore the management and leveraging of our most important strategic assets? How long will it take for lawsuits to be filed against the boards and leaders of companies for the “gross under-management and under-leveraging” of the company’s most important assets before we finally make this a top priority?
The time for companies of all sizes and in all industries around the globe to commit time and resources for the deployment of an effective multidisciplinary IAM system to properly cultivate, manage, and harvest intellectual assets, is now. As stewards, guardians, and fiduciaries of the assets of the company, managers have a basic duty and obligation to maximise the value of these assets, especially in a post-Sarbanes-Oxley regulatory environment.
CEOs and business leaders of companies of all sizes are often guilty of committing a serious strategic sin: failure to properly protect, mine, and harvest the company’s intellectual property. This is especially true at many technology-driven and consumer-driven companies. During the dot.com and Web 1.0 Internet boom, from 1997 to 2001, billions of dollars went into the venture capital and private equity markets, and the primary use of these proceeds by entrepreneurs was the creation of intellectual property and other intangible assets. Ten years later, however, emerging growth and middle-market companies have failed in many cases to leverage this intellectual capital into new revenue streams, profit centers, and market opportunities because of a singular focus on the company's core business or a lack the strategic vision or expertise needed to uncover or identify other applications or distribution channels.
Entrepreneurs and growing company leaders may also lack the proper tools to understand and analyse the value of the company's intellectual assets. Imagine the consequences and opportunity cost if you were to prepare to eventually sell your business (or even structure an investment with a venture capitalist or strategic investor) and 95 percent of your inherent value got left on the table! This gap in capturing and reflecting this hidden value points out the critical need for a legal and strategic analysis of on emerging company's intellectual property portfolio.
The inversion of the ratio of tangible to intangible assets as a percentage of total company value has been dramatic. In 1978, tangible assets (e.g., property, plant, equipment, inventory) made up approximately 80 percent of the value of a typical Standard & Poor’s 500 stock index company. By 2002, this was reduced to 20 percent of the total value, and the numbers continue to drop, especially in a web-centric, virtual world. Today, for small- to-mid-size enterprises (SMEs), the ratio of intangible to tangible assets can be as high as 8 or 10 to 1.
The harvesting of intellectual capital is a strategic process that must begin with the taking of an inventory by the company's management team and qualified outside advisers in order to get a comprehensive handle on the scope, breadth, and depth of the company's intangible assets. In these times of distrust and disappointment by shareholders in the management teams and boards of publicly held companies, corporate leaders have an obligation toward these shareholders to uncover hidden value and make the most of the assets that have been developed with corporate resources. The leadership of the company will never know whether it has a "Picasso in the basement" unless it both takes the time to inventory what's hiding in the basement and has a qualified intellectual capital inventory team capable of distinguishing between a Picasso and your children's art project. Once these assets are properly identified, an intellectual asset management system should be developed to ensure open communication and strategic management of these assets. At that point, the company is ready to engage in the strategic planning process to determine how to convert these assets into profitable revenue streams and new opportunities that will enhance and protect shareholder value. IAM helps growing companies ensure that strategic growth opportunities are recognised, captured, and harvested into new revenue streams and markets.
Andrew J. Sherman is a Partner in the Washington, D.C. office of Jones Day, with over 2,700 attorneys worldwide. Mr. Sherman is a recognised international authority on the legal and strategic issues affecting small and growing companies. Mr. Sherman is an Adjunct Professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University where he has taught courses on business growth, capital formation and entrepreneurship for over 23 years and won numerous teaching awards at both schools. Mr. Sherman is the author of 26 books on the legal and strategic aspects of business growth and capital formation. His 23rd book, Harvesting Intangible Assets, Uncover Hidden Revenue in Your Company’s Intellectual Property, (AMACOM) was published in October of 2011. His 24th book, Raising Capital, 3rd edition was published in the Spring of 2012, 25th book, Essays on Governance published in late Spring of 2012. His 26th book, co-authored with Elizabeth Vazquez, Buying For Impact, How Buying From Women Will Change the World, is due to be published in late Autumn of 2012.
Mr. Sherman can be contacted by phone on +1 202-879-3686 or alternatively via e-mail at firstname.lastname@example.org.