Since the middle of the 20th century, the developed world has experienced a substantial shift from manufacturing-based economies to a global services- and knowledge-driven economy. Along with this shift has come a shift in valuation for large enterprises. Whereas manufacturing companies’ value is driven by fixed, tangible assets like buildings, factories and machinery, assets in the Information Age are more difficult to nail down. These intangible assets that drive the valuation of knowledge- and service-driven organizations are represented by less fixed, harder-to-measure concepts like the customer loyalty, corporate branding, leadership capabilities and the knowledge and skills of the workforce.
“The proportion of tangible assets to intangible has dramatically shifted even over the ’80s and ’90s,” said Peter Cheese, managing partner of Accenture’s Human Performance Service line. “For example, at the beginning of the ’80s, intangible assets for the S&P 500 amounted to about 38 percent of total market value, whereas 62 percent was tangible assets. By the end of the ’90s, that had shifted around so only 16 percent of market value in the S&P 500 is based on tangible assets, and 84 percent is intangible.”
This major shift has led to confusion and challenges for top executives around the world, according to a recent global survey from Accenture, a global management consulting, technology services and outsourcing companies. The survey revealed that half of senior executives believe managing intangible assets is one of the top three management issues companies face.
Representing more than 50 industries, the 120 mostly C-level executives surveyed were asked to share their views on the value they place on management of both tangible and intangible strategic assets. Cheese said that while academic circles have been discussing the management of intangible assets for a number of years, “it is something which has actually got much greater relevance today as something that top executives frankly need to understand much better.”
A vast majority of the respondents to the survey, 94 percent, said managing intangible assets and/or intellectual capital is an important management issue, with 37 percent saying it was one of the top three issues. “The vast majority of chief executives say it’s in their top three issues, trying to get a better handle on understanding intangible assets because they understand that it is actually a critical driver of share price, and if they understand it better, they can do something about it in terms of maximizing future performance,” Cheese said.
In fact, nearly half (49 percent) of survey respondents said that intangible assets are the primary source of long-term shareholder wealth creation for their companies, and 48 percent said companies that invest in intangible assets are rewarded on the stock market. Almost all of respondents, 96 percent, said that managing these assets is important to the success of high-performing companies. Cheese said the reasoning behind these findings is that intangible assets are a better predictor of future performance than tangible assets. “Your people, your customers, your reputation, your brand—all those sorts of things are very critical elements in actually driving future performance versus your factories and other assets,” Cheese explained. All of this is further exaggerated, he said, due to the shift of balance toward intangible assets.
But although executives are aware of the value of intangible assets, 95 percent said they did not have a robust system with which to measure the performance of their intangible assets. In fact, 33 percent had no system in place at all. “People see it as an issue, but they are struggling with how to measure it,” said Cheese.
A large part of intangible assets is represented by human capital—the skills, knowledge, experience and capabilities of the people employed by an organization, said Cheese. The ramification for learning and development professionals is that they must understand how to maximize their investments in human capital in order to drive business success. “If you think about it in terms of how people would look at a fixed asset, say I’m an old motor manufacturer, clearly you would invest in fixed assets and machinery. You make sure it’s properly maintained, and when it needs upgrading, you go upgrade it,” Cheese said. “You almost need to translate—not literally, but in conceptual terms—some of that robustness of thinking to training and development and human capital.”
How do you make that translation? “It leads to a strengthening of the idea that you should be able to look at training not as a nice-to-have, which I think we’ve seen to often in the past is an area that can be cut back in the lean times, but that it is a critical investment in growing your human capital capability, which is to say, it is a critical part of your total intangible assets,” said Cheese
So what does this mean for chief learning officers? According to Cheese, they can expect to see increasing pressure from CEOs and CFOs to help them understand how to measure human capital capability, what can be done to improve human capital capability and how to ensure a return on critical investments in human capital, like training and development. “We talk a lot to the CLOs and HR directors about this whole area,” Cheese said. “How can I get a better understanding of my human capital capabilities? Where am I strong? Where am I weak? Where do I need to invest, and how can I then show a return on that investment? Whether CLOs think about it from a perspective of intangible assets or not, the result is a pressure to do just that.”
But the increasing emphasis on intangible assets—and chief executives’ recognition of its importance—is not only a challenge for learning professionals, it also represents an opportunity, Cheese said. “When we think about the future positioning of HR and learning leadership,…this is their platform of opportunity,” he said. “If they can get their heads around this stuff and really show some insight and understanding and ability to measure this stuff, I think it’s a great opportunity to position HR and learning much higher up the value-adding and strategic spectrum of an organization, which is where they need to be, given the importance of human capital as a key asset of an organization.”
Emily Hollis is managing editor for Chief Learning Officer Magazine. She can be reached at firstname.lastname@example.org.
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