Knowledge Assets:

Can you measure the intangible?

Mary AdamsTrek Consulting LLC

KM Forum, July 20, 2006

Measuring Knowledge Assets

• Why?

• What?

• How?

• Case studies

The need to measure knowledge assets is acute

Components of

- 2,000 4,000

6,000 8,000

10,000

12,000 14,000

1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Market Premium Intangible Book Value Tangible Book Value

Components of S&P 500® Market Capitalization

- 2,000 4,000

6,000 8,000

10,000

12,000 14,000

1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

S&P

500

Mar

ket C

ap ($

bill

ions

) Market Premium Intangible Book Value Tangible Book Value

Data: Ned Davis Research, Inc.

Today, 80% of corporate value is “intangible”

S&P500®Intangible Value as % of Market Capitalization

16.8%32.4%

68.4%79.7%

0%

20%

40%

60%

80%

100%

1975 1985 1995 2005

S&P500®Intangible Value as % of Market Capitalization

16.8%32.4%

68.4%79.7%

0%

20%

40%

60%

80%

100%

1975 1985 1995 2005

Data: Ned Davis Research, Inc.

Our information paradigms are based on an antiquated system

Accounting systems provide several distinct advantages:

• Objective standards

• Quantitative measures

• Consistent methodology

• Consolidated presentation

Pacioli helped us measure value creation based on tangible capital

Today, the value creation process is driven by intellectual capital

Human capital is the creative engine

Relationship capital connects you with the market

Structural capital is the holy grail

Structural capital is an “infinite” resource

The value of structural capital is limited only by its market potential

The last, critical element is the business recipe

HumanCapitalHumanCapital

Organizational Structural

Capital

Organizational Structural

Capital

Relational Structural

Capital

Relational Structural

Capital

FinancialCapital

BusinessRecipeBusinessRecipe

FinancialCapital

BusinessRecipeBusinessRecipe

What to measure? The full IC value system

How to measure?

Pacioli’s “Summa” as seen in http://www.martini-drapelli.it/lucapacioli1.htm

Pacioli would advise us to start with an inventory

Today there are three available approaches:

• Valuations

• Scorecards

• Assessments

Valuations

Scorecards start by mapping intangible drivers of financial performance

Financial Perspective

Customer Perspective

Internal Perspective

Learning and Growth Perspective

Source: Kaplan, Robert S. and Norton, David P., Strategy Maps: Converting Intangible Assets into Tangible Outcomes, (Boston, MA:

Harvard Business School Press, 2004

Metrics are assigned for each category

Source: Kaplan, Robert S. and Norton, David P., The Balanced Scorecard: Translating Strategy into Action, (Boston, MA: Harvard Business School Press, 1996).

Assessments look at the full IC portfolio

IntellectualCapital

BusinessRecipe

Human CapitalOrganizationalStructural Cap.

Network BrandCusto-mers

Process

RelationalStructural Cap.

Employ-ees

Manage-ment

IntellectualProperties

By Pacioli’s standards…

Objective Quantitative ConsistentMethodology

Consolidated

Valuations

Scorecards

Assessments

Quantitative measures are only part of the picture

Case Study:

IC Rating™

Events business

IC Rating looks at three perspectives

Present day

Accounting

1. Efficiency

Present value of IC efficiency in creating future financial value

2. Risk

Threat against present efficiency * probability of threat coming true

3. Renewal and Development

Efforts to renew and develop present efficiency

Methodology

• Interviews with internal (1/3) and external (2/3) stakeholders

• Questions include: – Closed questions that lead to a letter rating– Open questions that yield answers that are

summarized anonymously in final report

Scale similar to bond or credit ratings

Efficiency

A A A

A A

A

B B B

B B

B

C C C

C C

C

D

EfficiencyEfficiency

A A AA A A

A AA A

AA

B B BB B B

B BB B

BB

C C CC C C

C CC C

CC

DD

A A A

A A

A

B B B

B B

B

C C C

C C

C

D

A A AA A A

A AA A

AA

B B BB B B

B BB B

BB

C C CC C C

C CC C

CC

DD

Risk

_

R

RR

RRR

Risk

__

RR

RRRR

RRRRRR

RenewalRenewal

Event Co.’s overall IC had high efficiency

AA BBB A BBB

BBB

Customers

A

BBB

Human Capital

BBB AA BB A

Bus. Recipe

Intellectual Capital

Relational

I.P Process Management Employees Network Brand

Organisational

IC renewal/development were rated average

Bus. Recipe

Intellectual Capital

Relational

I.P Process Management Employees Network Brand

Organisational

BBB

Customers

BB

BBB

Human Capital

BB CC B AA

BBB BBB CCC BBB

Risk of decline in IC efficiency is moderate

R R R R

No value R

Customers

R

Human Capital

RR R RR R

Bus. Recipe

Intellectual Capital

Relational

I.P Process Management Employees Network Brand

Organisational

Employee competence is high…

93

78

76

84

71

71

87

77

85

85

0 20 40 60 80 100

Event planning

Community dev.

Strategic networking

ID/cultivate talent

Long range vision

Fundraising

Service quality

Creative problem solving

Knowledge of storytelling

High-touch culture

Employees need support to prepare for new challenges…

83

74

39

74

55

57

Experience in corecompetencies

Ability tackle new projects

Training/education

Equal competence level

Vulnerability defection

Renewal of productivity

Management is an important force…

85

59

57

49

80

34

Strong driving force

Focus on businessidea/strategy

Internal communication

Delegation ability

Inspires support for strategicgoals

Ability to handle loss of a keymanager

Comments from Stakeholders

• The sky is the limit in this market.• We could be dead in the water if something

happens to our founders.• S. has an intuitive sense for picking talent. • The brand is still not known in the media.• Big issue is the ageing of both the our

performers and our audience.• The pricing strategy is brilliant…set in relation to

comparable training opportunities.• As long as they are in the business of selling

hours they will be susceptible to problems. The biggest opportunity is in information products.

Issues on the table at Event Co.

• How to connect with the huge market opportunity

• How to profit from latent IP

• New business/old business balance

• Management succession plan

IC Rating™

Case Studies

Process innovation

• A large entertainment company wanted to cut costs, without jeopardizing value offering

• Used IC RatingTM to learn future potential in all business units

• IC RatingTM showed a varying degree of potential, and a variety of issues in the business units.

• Through benchmarking, possible improvement areas and opportunities for cross-learning were targeted

• In each targeted area, development budgets were reduced, since systems/know-how could be leveraged from another business unit to another

• 5 major areas for internal cross-learning have been identified

• In total, costs have been cut by >Euro30 million

• Management is convinced that this was achieved without jeopardizing value offering

Situation Action Result

Competitiveness

• A company was facing new competition and felt the need to improve its image and service levels.

• The company used IC Rating™ to identify areas of potential improvement in order to become successful in a competitive environment.

• IC Rating™ displayed severe problems in the corporate culture and the management’s internal practices.

• On the other hand, the management was rated as strong. The company network and brand also received strong ratings.

• With this result at hand the executive team identified and pursued a number of initiatives.

• By strengthening the internal leadership with new management and training, the employee pride for the organization was enhanced and service improved – in the end increasing productivity by almost 20%.

Situation Action Result

• Used IC RatingTM to identify current strengths and weakness as well as its future potential

• Wanted to use the results of IC RatingTM to support merger talks with another large food wholesaler.

• IC RatingTM showed strength in the sales force and merchandizing abilities, backed by the strong leadership of CEO

• Weakness was identified in the process area. Since potential merger partner was famous for its state-of-the-art systems, the rating strengthened the perception of potential synergies.

• The sales organization was changed to solution-based, from the old style ”geographic-based” sales units

• Also introduced Skandia’s Navigator (and Dolphin system) to become more focused on the vision and strategies

• Helped get the merger deal done at favorable terms

Situation Action Result

Company Profile- Wholesale subsidiary of a large food and low-temperature

warehouse and logistics company

- Market suffering from low margins and severe competition

Strategic Fit

Market Valuation

• The number three IT company on the OM Stockholm Stock Exchange aimed to help the market better understand its potential as a knowledge-based company.

• All 35 subsidiary companies which comprise the Group were rated

• IC Rating™ divided the IT-Group into four different categories for potential.

• By supplementing this information to the annual report they increased transparancy: both strong and weak sides were exposed, increasing understanding for potential as well as increasing trust of the Group.

• The Group used results to benchmark and navigate the companies into the future.

• The Group’s overall goal of 10% margins was individually revised depending on the potential shown in IC Rating™.

• The day when the result of the rating was first shown, the share value of the IT company increased by 8%.

Situation Action Result

Buy-side support

• Major investment fund with two similar companies in the portfolio, Company A and Company B

• Only interested in continuing with one of them in a second round

• Used IC RatingTM to evaluate future potential in both companies

• IC RatingTM showed a very high potential (high rating), in Company A. Company B had serious issues, particularly in the process capital area.

• The recommendation was clear: support Company A in second round. Divest Company B.

• The investment fund kept Company A

• Company A financially outperformed industry averages after the second round

• Company B, despite finding funding elsewhere, underperformed and eventually went bankrupt

• The investment fund ROI exceeded 60%

Situation Action Result

Sell-side support

• A large communication company needed to sell off five business units

• There was no interest from the market so the seller withdrew the companies and did an IC Rating™ on each

• Used IC RatingTM to identify future potential in all five business units

• IC RatingTM showed a varying degree of potential in the business units.

• Seller was very transparent, presenting potential buyers with the full range of findings including strengths and weaknesses, opportunities and risks

• All five units were sold

• In total, a 20% premium was on the P/E multiple was received, compared to similar deals at the same time

• The buyer attributed the premium to the transparency, which reduced buy-side risk.

Situation Action Result

Measuring knowledge assets helps you find the path to future success

For more information

Visit www.icrating.com

Visit www.icknowledgecenter.com

Contact Mary Adams

781-729-9650

adams@trekconsulting.com