We all know about the increasingly competitive business terrain in which intangible assets, e.g., intellectual, structural, and relationship capital have become the dominant drivers (producers) of most company’s value and sources of revenue.  This economic reality is influencing, as well it should in my view, entrepreneurially-minded management teams to re-examine the relevance and applicability of a conventionally structured business plan.

Let’s be clear, I am not suggesting business plans are irrelevant because they can serve as useful and descriptive (projective) roadmaps of what one wants a business to eventually look like and how to get there!

The issue, in my judgment, is that there is an inclination on the part of many management teams, c-suites, boards, and other stakeholders to symbolize a business plan in somewhat of a constitutional law context as if Justice Scalia was debating whether it is a living document that’s malleable and flexible as circumstances warrant or a more static (stationary) document that should only be interpreted relative to its original intent.

Personally, I am finding more management teams, at least those which I have the pleasure of engaging, exhibiting a greater sense of responsiveness, adaptivity, and preparedness to rapidly execute to accommodate the immediacy which business opportunities are, with more regularity, being framed.   Put simply, there appears to be less interest in – necessity for being bound to the rigidity associated with a conventional business plan.  In other words, there appears to be more emphasis on the tactical, while not overlooking or neglecting the strategic!

Let me be clear though, most of my engagements, by choice, are with small, mid-size, and early stage companies where assembling a structured and strategically focused business plan may be subordinate to merely trying to remain viable in this this extended economic downturn (recession).

Respectfully, business plan development and construction is still portrayed in many college (business) textbooks and curricula, as being the very first step one should take toward starting a business. Interestingly, in an MBA (business management) course I’ve taught numerous times, this somewhat alternative view about business plans was purposefully presented to classes in which there were numerous ‘entrepreneurial spirited’ students who aspired to start their own business, with some already in the early stages.

For many, my (alternative) view prompted numerous, but generally opposing reactions, particularly from individuals who had already toiled over writing a business plan and now felt wedded to it.  Such reactions are understandable and respected.  Some types of businesses, whether large, midsize, or small may require more structure than others, thus a strong and detailed business plan may be necessary.

But again, it’s simply not uncommon to find myself visiting companies which, at first blush, appear to be, for lack of a better term, somewhat ‘rudderless’ in that they are continually evolving, emerging, and even, what appears to some I’m sure, as being in a perpetual state of ’re-inventing themselves’. The reason or rationale for this still, rather un-conventional management style is that it works for some firms, pure and simple!  This translates to the necessity to retain sufficient flexibility and maneuverability internally to accommodate their particular transaction – business space as quickly and effectively as circumstances warrant.

Of course, I attribute much of this change to company management teams that have achieved confidence in identifying and using their intangible assets which don’t always mesh well, in my view, with conventional, highly structured, and inflexible ‘roadmap’ perspectives found in a business plan. Admittedly too, a substantial portion of the lending community finds little, if anything, to be enamored with this alternative view.  For them, a well-developed and practical business plan serves as the starting (focal) point for most any lending discussion.

All that said, this alternative view does require, in most instances, much more attention and oversight from a management team and board. That is, they need to literally epitomize (embrace) flexibility, intellectually and conceptually, by being prepared to adapt, change, and have the necessary information, at the ready, to make sound decisions as rapidly as a new deal, proposal, or circumstance warrants.

There should be little question now that intangible assets have become the key and irreversible underlier to the success and profitability of most companies, that is, if the intangible assets being produced are recognized, developed, and used (exploited) effectively.   An important marker for demonstrating the effective use of intangible assets, in my view, occurs when management teams…

• recognize intangibles as being very maneuverable, flexible, adaptable, and ‘bundable’ to accommodate the development and execution of a new product, service, or transaction.
• know when, where, and how to use them best to achieve particular objectives, i.e., the wisdom, timing, and sense of foreseeability.

In other words, there should be a ‘company culture’ in place that, among other things, includes consistent stewardship, oversight, and management of intangible assets!

While visiting  my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) .  Should you find particular topics of interest or relevant to your circumstance,  I would welcome your inquiry at  314-440-3593 or m.moberly@kpstrat.com

Want to elevate investor confidence?  Start by ensuring your intangible (IP) asset house is in order!  One consequence of management teams, c-suites, and boards of emerging growth firms not recognizing and exploiting the intangible assets their company produces and possesses is that it will have a bearing, usually adverse, relative to prospective investor’s ‘invest, don’t invest’ decision criteria.

The conventional assumption that investors are, by their nature, more accepting of risk is, in my view, much overplayed.  I have yet to meet an investor who does not have a fully developed internal ‘smell test’ to gauge a prospective transaction’s risk and return potential.  Too, I see increasing numbers of seasoned investors…

• requiring a target’s intangible asset and IP house be in order as a requisite to investment consideration.
• recognizing intangible assets are crucial contributors to a target’s profit potential, share price, market position, and competitive advantage.
• assigning more weight to differentiating intangible assets from tangible (physical) assets.
• recognizing that transaction due diligence must include pre and post components for monitoring any fluctuations in asset value, control, or ownership.

To emphasize these realities, I refer to a previous ‘Howery Survey of Investor Attitudes on IP Protection’  in which a significant number of respondents reported that companies which lack an effective IP (intangible asset) strategy has a detrimental effect on company performance.  In fact, one in four of the Howery Survey respondents reported they had actually turned down investment opportunities due to the target company’s inadequate approach to IP and other intangible assets.

Fully 95% of the Howery survey respondents report that it is no longer sufficient, in the context of their investment decision, for a target company to merely own IP with no (aligned, integrated) protection, managerial, or competitive advantage peripherals.

So, in my view, the proverbial bottom line (in conjunction with the Howery Survey’s findings) is this:

companies that presume conventional IP issuances and enforcement protections are sufficient, standing alone, to attract investors are finding instead that an increasingly important requisite to attracting and satisfying the demands of serious investors relative to their invest – don’t invest decision criteria, is the existence of comprehensive plans, practices, and procedures which…

• demonstrate the about-to-be-purchased/invested assets, have effectively safeguarded from their inception.
• reflect today’s increasingly aggressive, predatorial, and winner-take-all business transaction environment.
• are seamlessly aligned with – integrated into a viable and strategically competitive business strategy that encompasses (intangible) asset development, acquisition and utilization, and exploitation.

(Adapted by Michael D. Moberly from the work of Howery, Simon, Arnold & White’s Survey Of Investor Attitudes on IP Protection)

I recently read a National Bureau of Asian Research report titled, ‘China’s IP Transition: Rethinking Intellectual Property Rights in a Rising China’ and found it to be an insightful strategic window into China’s national policy intellectual property (innovation agenda).

The reports’ executive summary and main argument reads as follows…

China’s drive to promote indigenous innovation has given IP its creation, utilization, management, and protection a prominent position in the nation’s policy agenda.

In conjunction with its ambitious policies to support indigenous innovation, China launched a major IP strategy in 2008 to support the creation, utilization, management, and protection of IP.

While I do not wish to dispute the thoroughness of the research which the reports’ authors obviously conducted and articulated so well, I do find the word indigenous disconcerting in the context of applying it as a broad descriptor of how China has achieved and intends to sustain its innovation strategy – policy agenda.

I was in China (Shanghai) in 2008 when that policy ‘went public’.  It was the lead story on (English language) CCTV for several days with extended segments devoted to showcasing various, presumably government sponsored, gatherings to convey awareness for this ‘transition to intellectual property’.  Most of the events appeared to be held in Beijing.  Interesting to me, in several of the CCTV stories, large scale education initiatives about intellectual property were being planned.

As most anyone knows who has visited China in this decade, one does not have to walk far in a city to see evidence of entrepreneurism and entrepreneurial thinking which could understandably be characterized as – assumed to be indigenous. However, my work, research, and writing on information asset protection and economic espionage issues for 25+ years influences me to suggest that the term predatorial is also a relevant and objective descriptor of – contributor to China’s innovation policy agenda.

It is not my intent that the term predatorial, as I have chosen to apply it here, be interpreted as anti-China!  Rather, I am merely suggesting the term predatorial should also be applied because of its indigenously embedded nature over a 3000 – 5000 year span of developing a (business) culture.  At minimum, the word predatorial serves as, at least, a partial explanation for China’s phenomenal and rapid business – economic – innovation growth which some western researchers – writers describe as the world’s largest and most rapid transfer of wealth.

After all, we do live and work in an increasingly knowledge (intangible) asset based global economy wherein 65+% of most company’s value, sources of revenue, and ‘building blocks’ for growth, wealth creation, and sustainability evolve directly from intangible assets, of which IP is just one.

I assume ‘indigenous innovation’ is a phrase Chinese policy makers carefully selected and cultivate.   But, I believe the term predatorial used to describe how countries supplant – achieve rapid growth in innovation is applicable to numerous global actors, not just China.

China, in my view, is now immersed in what I respectfully call the ‘third quarter of a generation that recognizes]/ private property, let alone intellectual property’.  But, in China, as in numerous other countries with communist – socialist legacies, there is virtually no intellectual property legacy to follow.  And, China, like many other countries, has countless ‘legacy free players’, a phrase I first saw applied in Thomas Friedman’s books.  While I am certainly not positioning myself to be an arbiter of Friedman’s work, I have consistently used this phrase in a context of describing various countries’ and actors who have yet to fully embrace and consistently practice what I  refer to as an ‘intellectual property rights protection and respect ethic’.

China is no doubt, moving in the right direction, with respect to intellectual property rights. But, it has a ways to go yet for me to broadly use the term indigenous to describe the paths and strategies they have taken to achieve the intent and spirit of the language found in their national innovation agenda.

I encourage all those interested to read the report and draw their own conclusions at…

www.nbr.org/publications/element.aspx?id=520.

All too frequently the contributions’ intangible assets make to a company’s value and serve as sources of revenue are overlooked, neglected, or outright dismissed.  Equally unfortunately, those attributes are often obscured by intangible assets’ (a.) lack of physicality, and (b.) not knowing precisely where and how intangibles ‘fit’ on balance sheets and financial statements, or even reported at all.  Too, with equal frequency, the assets’ proprietary and competitive advantage features go unrecognized, un-protected, undervalued, or not valued at all.

I often characterize intangible assets to company management teams as being akin to the proverbial ‘hand in front of our face in a pitch dark room’. That is, they’re often developed internally, sometimes over time and embedded in a company’s routine operations, processes, and functions that, in many instances, fall under a management teams’ mba – tangible (physical) asset oriented radar.  Just as frequently, company’s engage in HR functions and other types of business transactions in which the intangible asset components of either go unnoticed, unused, and seldom effectively exploited.

So, why, or how is it beneficial and necessary for company management teams, c-suites, and boards to acquire a familiarity with intangible assets now?  And, how will such familiarity produce (translate as) multiplier effects and risk mitigators as the title of this post claims?

The key objectives are, of course, to position and exploit a company’s intangible assets in order to extract as much value and competitive advantage as possible throughout the assets’ value – functionality (life) cycle.

In my view, this occurs when management teams achieve two things:

• begin exercising consistent, effective, and sufficient stewardship, oversight, and management of their company’s intangible assets, as the basis for
• sustaining control, use, ownership, and monitoring the value and materiality of the assets

Other useful outcomes, i.e., risk mitigators and multipliers of effective and consistent (intangible) asset management include…

• Elevating transaction due diligence quality by (a.) recognizing how to rapidly identify, unravel, and safeguard valuable – revenue producing assets in (b.) both pre and post (transaction) contexts.
• Adding predictability to transaction outcomes by being able to recognize and assess asset (a.) stability, fragility, sustainability, and defensibility, and preferably mitigate risks, and (b.) relevance to achieving projected returns. competitive market position, anticipated synergies and efficiencies, and exit strategies.
• Reducing the probability intangible assets (and IP) will incur unnecessary risk, i.e., (a.) become entangled and/or ensnared in costly, time consuming, and momentum stifling legal challenges, (b.) that can erode and/or undermine asset value, performance, or competitive advantages.
• Providing a stronger foundation for aligning the utilization and exploitation of a company’s intangible assets with (a.) continuity-contingency plans, (b.) organizational resilience – risk management planning, and (c.) strategic business objectives.
• Contributing to building a ‘company culture that’is (a.) attuned to intangible assets, their value, and contributions to (company) sustainability and profitability, and (b.) treats intangible assets as business decisions, rather than solely legal or accounting processes.
• Strengthening the convergence of computer/IT security and intellectual property and intangible asset safeguards to achieve timelier awareness and pursuit of (IP) rights- ownership violations.
• Providing a foundation for more effective application of (a.) knowledge management initiatives, and (b.) balanced scorecard approaches.

While visiting  my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) .  Should you find particular topics of interest or relevant to your circumstance,  I would welcome your inquiry at  314-440-3593 or m.moberly@kpstrat.com

I have yet to encounter a company or a management team that does not want to survive this extended recessionary period. While that statement may appear absurd and self-evident to most, I must admit that I have encountered numerous management teams who express virtually no or little interest in the economic fact – business reality that an increasingly significant key to sustaining, even strengthening, their business for the remainder of this recession, is to understand their cheese has indeed, been moved.  That is, their company’s success and sustainability is more attributed to intangible assets than tangible assets.

For those unfamiliar with this ‘cheese movement notion’, there is a very brief, but extraordinarily reflective book authored by Spencer Johnson and Kenneth Blanchard titled Who Moved My Cheese?: An Amazing Way to Deal with Change in Your Work and in Your Life.  Those who have already read it, as well as those who haven’t, may the 30 minutes it requires to read, time well spent. ‘Cheese’ of course is a metaphor for what one want’s to have in life…whether it is a good job, money, a possession, health, or peace of mind, etc.

Should you elect to read Johnson and Blanchard’s thought provoking book, I offer a suggestion to make the concept of ’who moved my cheese’ more relevant to busy, time constrained business decision makers and management teams.  That is, substitute the words ‘tangible’ or ‘intangible assets’ every time the word ‘cheese’ appears in the (book’s) narrative. This exercise facilitates readers identifying with their company’s intangible assets and the importance of recognizing how those assets, sometimes individually, but more often collectively play a role and contribution to company value, revenue, and sustainability.

Thus, the ’cheese that’s been moved’ are a company’s tangible assets!  That is, for an overwhelming majority of company’s (globally) their tangible (physical) assets, i.e., property, buildings, equipment, inventory, etc., have been permanently, and to add emphasis, irreversibly moved to playing lessor contributors to company value and revenue sources.

In other words, tangible assets no longer, as they have in previous decades (i.e., the industrial age), represent the dominant drivers or sources of most company’s value, revenue, and/or ‘building blocks’ for growth, wealth creation, and sustainability.

Instead, for most, and a continually growing percentage of companies globally, their primary sources of value and revenue have transitioned, largely as a product of the increasingly ‘knowledge-based’ economies worldwide, to intangible assets. Intangible assets include such things as brand, reputation, image, intellectual property, intellectual, structural, and relationship capital, etc. (To see a representative list of intangible assets go to http://kpstrat.com and ‘click on’ brochure and scroll to ‘what are intangible assets’.)

To bring further clarity to these points, I recently I attended a seminar for entrepreneurs. The keynote speaker was a well-known and highly successful area restaurateur. For those listening carefully to the 30 minute presentation, at least 20 minutes included the speakers’ obviously heart felt and experienced sense of the restaurant chain’s culture he contributed to developing which we know literally underpins the sustained success and profitability supporting his 35+ year career in the restaurant business. Without exception however, each of the factors the speaker identified as being embedded in his company’s (dining experience) culture contributed to building and maintaining this restaurant pattern of success, even during the current recession and the increasingly competitive dine out market space.  All of the factors the speaker identified were of course, clearly intangible assets that he and his fellow founders developed.  However, not once did the speaker utter the words intangible assets!

Another example is also worth noting. During another seminar I attended, much like the one described above, a very successful business person (speaker) offered a somewhat emotional characterization (sort of a laundry list) of factors that collectively, over a period of time, were deemed the foundations of this company’s success, profitability, and sustainability, again, even during this recessionary period.  Being the avid note taker I am, I noted 17 factors which the speaker identified as contributors to the success his company enjoyed and would likely continue for the foreseeable future.  As you may have concluded already, all 17 factors were in fact, intangible assets.  Unfortunately however, like the previous speaker, not once were the words ‘intangible assets’ uttered during the presentation, nor did they appear in the extensive Q&A that followed.

Clearly, in my view, these represent examples of c-suites’ genuinely needing to know how they and their company should react ’when their cheese has been moved’. That is, it’s an economic fact that 65+% of both of these company’s value, sources of revenue, and ‘building blocks’ for growth and sustainability evolve directly from the business leaders’ ability to recognize, and sustain control, use, ownership, and monitor the value and materiality of their intangible assets even though neither referred to those factors as the intangible assets they were.  In both examples, their collective success is attributable to each company’s intellectual and structural capital and a particularly strong company culture built on compliance and relationship capital.

For those dedicated to elevating awareness, use, and accountability for their company’s intangible assets, the process starts with management teams literally acknowledging and verbalizing their success and profitability is attributed to, in large measure, the effective and sustained development and utilization of intangible asset cheese!

As an intangible asset advocate, one of the more frustrating aspects to the continual campaign of elevating awareness and use of intangibles’ is the rather unhelpful and esoteric language used to formally define them, e.g., they

• are the non-physical things of value that a company owns.
• have no set monetary value and no physical measurement.
• lack physical existence/presence, they can’t be seen or touched.

True, intangible assets can be a source of frustration for company management teams, and, not just the so-called ‘knowledge intensive’ firms.  I think this is primarily because intangible assets do, in fact, (a.)  lack a conventional sense of physicality, and (b.) their performance and value is challenging to objectively measure.

I have encountered countless situations in which management teams, boards, investors, and employees alike, literally struggle, to make sense of what the British often describe as the invisibles. In part that characterization is very understandable because, seldom, if ever, are intangible assets reported on company balance sheets or financial statements. That is, unless they’ve been acquired or ‘lumped together’ as goodwill.

Still, business leaders today would be hard pressed to deny the reality that steadily rising numbers of companies have fewer tangible (physical) assets in their inventory.  Instead, their inventory in most instances has been filled with intangible assets!

Nonetheless, intangible asset strategists routinely say, and I might add, quite correctly so, the development and effective use of intangible assets is absolutely essential to most companies’ near and long term success, i.e., viability, sustainability, and profitability.  To those unfamiliar with intangibles however, or those suspect or dismissive about the assets’ contributory role and value, definitions like those cited above, standing alone, contribute little to achieving the much needed ’ah ah’ moments of, I get it!, that we seek.

Most companies, through their management teams, c-suites, and employees create a substantial number of assets, a majority of which are intangible!  Unfortunately, such creativity exists less in conventional ‘brick and mortar’ dominated firms that remain largely dependent on physical – tangible assets as their key sources for building (company) value and developing sources revenue.

In my view, there are infinite types of intangible assets, many of which are knowledge-based or, more specifically, the intellectual capital held between our ears, stored on our CD’s, issued to our company as intellectual property, or the accumulation of experience and specialized know how when prudently and optimally linked to understanding how and when to use that know how effectively, efficiently, and profitably.

Whether we’re operating a successful business or conducting a scientific project, we tend to seek a comfort zone comprised of facts, numbers, formulas, and ratios, etc.  In other words, the qualitative and quantitative. Under these circumstances, our comfort zone is fairly easy to sustain because the measurement tools we are accustom to using and relying on for decision making and/or analyzing research findings tend to be somewhat tangible wherein a high number or percentage means one thing and a low number or percentage means something different.

But sometimes, that comfort zone of ‘hard numbers’ may be obscure or more fuzzy than we are accustomed, in other words, intangible. In such instances, management teams, boards, and employees alike, are challenged to push our conventional understanding beyond the tangible to the intangible relative to the relationship and contributory value the latter delivers to our companies and organizations.

So, welcome to the specialized, but ever expanding corner of the information age and its outgrowth, the knowledge-based economy, wherein intangible assets now routinely play key roles as contributors – facilitators to most company’s value, sources of revenue, competitive advantages, sustainability, and ‘building blocks’ for growth and future wealth creation.

But, despite the rising importance of intangible assets and the contributions they consistently deliver to companies in all (industry) sectors, they unfortunately remain, for some management teams and boards, challenging to define, recognize, distinguish, and measure.

 (Adapted by Michael D. Moberly from the work of Thomas A Stewart, ‘Trying To Grasp The Intangible’.)

Here’s an interesting perspective offered by Ashok Jain, a principal in the (IP) valuation services unit of Deloitte.  Mr. Jain suggests that interactions he has had with large U.S. companies lead him to draw this conclusion…

most profess a fairly high-minded level of IP prowess, but, relatively few can answer substantive questions about the management of their IP, (and, I might add, probably their intangible assets, as well) e.g.,

• does your company maintain an inventory of its patents?
• which patents (IP in general) are core to business operations and strategic plan?
• is your company exploiting its IP and other intangible assets to generate the greatest possible value?

Colleagues (in the IP and intangible asset arena) point to numerous management teams, c-suites, and boards who have achieved very impressive (national, international) reputations (credit for) being the originator, facilitator, and/or enabler related to the creation and use of new ideas, which in numerous instances, eventually become issued intellectual property  

Respectfully, I’m sure, Mr. Jain reports that a percentage of these individuals are not always inclined to exercise either a willingness or ability to accept (assume) a personal (hands on) role in the management (stewardship, oversight) of those new ideas. Instead, it’s reported that numerous company leaders will delegate the responsibility for stewarding and overseeing the development of new ideas to either legal counsel or the CTO side of their business. 

One possible explanation for such reluctance, Jain explains, is that the technical and legal units of a company are frequently portrayed as and/or assumed to be ‘cost centers, not profit centers’.  Such ‘cost center’ characterizations tend to give credence to the view that there is less (insufficient) interest among management teams and boards regarding the business (return on investment) aspects of utilizing – exploiting IP and intangible assets.

Jain’s report also suggests, very unfortunately, I might add, that a probably large (but unknown) percentage of companies…

• literally give away or perhaps worse, inadvertently relinquish valuable IP and intangible assets without realizing it.
• do not use their IP or intangible assets as effectively, offensively, or defensively as they could to block competitors, generate new sources of revenue, or favorably leverage the assets to benefit their stakeholders or supply (value) chain.

Question; do these presumably unfavorable perspectives constitute a crisis relative to current practices in the management, stewardship, and oversight of company’s IP and intangible assets? 

Quite possibly it does in my view, inasmuch as it represents another example of management teams, c-suites, and boards not taking their (fiduciary) responsibilities for managing their company’s IP and intangible assets as seriously as they should, especially when looking at it through a business – return on investment lens.

Being a strong advocate of utilizing – exploiting intangibles as I am, yes, I do believe company management teams need to engage  their intangible assets and IP in a more business-like manner and not consider those increasingly valuable and strategic assets as merely sandboxes in which a little H2O can be periodically added to enable the erection of temporary (sand) castles whose value and relevance will quickly crumble and dissolve into indistinguishable (non-value, non-revenue producing) forms as the moisture evaporates or the tide changes.   

This scenario is particularly relevant today, when so many businesses are, quite literally on the leading edge of the knowledge (intangible) asset based global economy, wherein intangibles comprise increasingly higher percentages of company value, sources of revenue, and foundations for growth.  Bottom line; management teams and boards need to recognize, if they don’t already, how their company’s intangibles can be effectively applied and exploited.  This includes not overlooking the nuanced ways of using (leveraging, positioning, bundling) these assets as strategic weapons. 

Interestingly, this all can occur, sometimes very simply, by ensuring the right parties, with the right expertise (intangible asset specialists) are not just ‘at the table’, but there is an attitude of receptivity for what they say. This means includes seeking practitioners that possess not merely legal – technical expertise about intangibles, but also specific business acumen to…

• practice consistent and effective stewardship, oversight, and management of the key assets, and
• sustain control, use, ownership, and monitor asset value and materiality

In other words, the ability to make those assets execute, i.e., produce the value and revenue opportunities which, in most instances, they’re capable.  So to, should new product development and design meetings include specialists on sustaining control, use, ownership, and monitoring the value and materiality of key intellectual capital assets.

The end game, of course, is to ensure that a company’s investments in and/or acquisition of intangible assets, IP, and R&D, blend effectively with a company’s strategic and market planning. 

To be sure, there is a growing number of management teams and boards who not only ’get it’, but are ‘getting it right’, and that’s a good thing!

Often though, ‘getting it right’ has been preceded by some missteps, miscues, and missed opportunities most of which are not irreversible. However, it remains quite evident in some businesses that intangible assets and IP are presumed to be strictly legal – technical functions absent recognition for the (business) fiduciary responsibilities related to asset management, stewardship, and oversight.  This, of course, underlies the reason why such large percentages of IP and intangible assets are ‘non-practiced’.  In other words, the valuable and competitive advantage creating intangible assets a company produces often go one way, while the R&D, CTO, legal counsel, marketing and new product design groups go another way, and never the ‘tween shall meet’.

One result of this of course, is that a significant percentage of companies leave valuable intangible assets ‘on the table’, i.e., either unrecognized, under-utilized, un-valued, or unused.  That’s why I often remark to business leaders, there remains a significant number of ‘Rembrandt’s accessible, available, and useable, but they’re not all stored in a company’s attic, rather, they’re right in front of us.  They merely need to be identified, unraveled, assessed, and put to work!

(This post was inspired and adapted by Michael D. Moberly from article in Chief Executive.Net, titled ‘Taking Intellectual Property Seriously’.)  Reference to book authored by Kevin G. Rivetter and David Kline titled ‘Rembrandt’s In The Attic: Unlocking The Hidden Value of Patents’.

The term ‘systemic risk’ has a relatively long history.  Its revival, in terms of becoming the presumably focus-grouped explanation for the calamities of the financial services sector beginning in early Fall, 2008 has now come to be embedded in business lexicon to represent a broad cross-section of risk.

The subsequent wide spread use of ‘systemic risk’ in legislative (House, Senate) committee hearings wherein testifying cabinet secretaries, legislators, regulatory agency heads, and financial service c-suites routinely evoked the term (systemic risk) as part of their narrative for explaining (a.) how – why financial institutions and the financial services sector were literally unraveling, (b.) the intertwined elements of the now globalized financial system, and (c.) the underlying rationale for the notion of ’too big to fail’ which eventually prompted the TARP (bailout) provisions.

One of the better understood definitions of systemic risk, in my view, is one provided by Steven Schwarcz of Duke University School of Law wherein he described it (systemic risk) as ’the probability that cumulative losses will occur from an event that ignites a series of successive losses along a chain of (financial) institutions or markets comprising a system’.

Another, but, admittedly, cherry picked definition of systemic risk is provided by BusinessDictionary.com wherein it defines systemic risk as ’the probability of loss common to all businesses, and inherent in all dealings’.  In other words risk that cannot be circumvented or totally eliminated. 

A commonality embedded throughout the various definitions of systemic risk is the concept of a (preceding) ‘triggering event’.  A triggering event is one that causes (internal, external domino or cascading types of) consequences, usually adverse, e.g., loss or undermining of a company’s competitive advantages, asset value, market position, reputation, brand, image, goodwill, supply chain, stakeholders, etc. 

In the case of companies with fairly intensive portfolios of intellectual property and other forms of intangible assets, triggering events could include (a.) theft, misappropriation, infringement, and/or premature leakage of key assets, e.g., plans, intentions, capabilities, etc., and/or (b.) significant counterfeiting or product piracy operations against company produced assets.  Should anyone of these ’triggering events’ occur, it would collectively undermine or stifle asset value, competitive position, sources of revenue, and future growth opportunities, etc.

Outside the financial services sector, insofar as IP and other intangible assets are concerned, systemic risks would represent those assets cumulative risk, i.e., the vulnerability, probability, and criticality associated with, for example, theft, misappropriation, infringement, compromise, and/or premature leakage of IP and its underlying intellectual capital.  Of course, loss and/or compromise of those assets are generally less containable and can rapidly and adversely cascade –  ripple throughout a company and its entire chain of stakeholders.

Such adverse affects, are in my view, on the same or comparable plain as the much touted term ‘systemic risk’ and the accompanying market shocks experienced globally by the financial services sector in 2008, i.e., in the form of defaults, bankruptcies, employee layoffs, loss of markets and market share, and competitive advantages,

Several fine studies report that systemic risks (threats) to a company’s intellectual property and other forms of intangible (knowledge-based) assets lies largely with ’insiders’ along with the proliferation of extraordinarily sophisticated and predatorial data mining, information brokering, infringement, misappropriation, and counterfeiting operations that function profitably on a global scale. 

The risks (threats) presented by these entities and the subsequent asset compromises that occur are persistent, asymmetric, and frequently devastating to company’s profitability, competitive advantages, and reputation, etc.  Multiple respected studies consistently report that U.S. company losses of IP (largely attributed to insiders, infringement, theft, and misappropriation, etc.) range from $45 to $200+ billion annually.

True enough, the adverse affects/consequences of IP – intangible asset losses and/or compromises incurred by small, medium enterprises (SME’s) or small, medium multinationals (SMM’s), may not rise to the same ’systemic risk level’ as experienced by the likes of AIG, Lehman Brothers, or Bank of America, etc., but, they do carry adverse cascading (systemic) affects that are often equally devastating.

Collectively then, this constitutes a fairly strong rationale why company’s should engage in routine monitoring, valuation, and ’stress tests’ regarding their IP and intangible assets.  The purpose of these activities if of course, to objectively and proactively determine if any (asset) materiality changes, value erosion, and/or undermining, etc., are occurring and determine if further asset hemorrhaging can be mitigated.  Such exercises are now being recognized by management teams, boards, and c-suites alike, as useful and necessary ingredients to (a.) the effective stewardship, oversight, and management of their companies’ intangible assets, and (b.) avoiding costly and often times irreversible surprise will occur.

The inspiration for this post was sparked by (1.) ‘Allegiance in a Time of Globalization’ (Defense Personnel Security Research Center, Technical Report 08-10, December, 2008)  and (2.) ‘Technological, Social, and Economic Trends That Are Increasing U.S. Vulnerability To Insider Espionage’ Defense Personnel Security Research Center Lisa A. Kramer, Richards J. Heuer, Jr., Kent S. Crawford Technical Report 05-10 May, 2005 International Journal of Intelligence and Counterintelligence as ‘America’s Increased Vulnerability to Insider Espionage’ (20: 50-64, 2007)

Let’s get serious about defining and explaining what intangible assets are. Unfortunately however, there remain some challenges throughout much of the business community insofar as defining and explaining precisely what intangible assets are, how and by whom are they’re produced, and how they contribute to a company’s value, etc.

Even with more experienced, astute and successful business management teams the words intangible assets are seldom part of their discourse, and certainly not part of their regular business lexicon.  The reason for this varies, along a continuum of…

• not fully understanding or appreciating what intangible assets actually are
• being unaccustomed to identifying, assessing, or exploiting intangible assets
• erroneously assuming intangible assets are the (exclusive) domain of accountants and/or intellectual property (legal) counsel
• dismissing intangible assets because they’re not characterized as standalone assets, reported on company balance sheets or financial statements, instead they’re often ‘lumped together’ as goodwill.

Thus, recognizing the necessity to engage and exploit their intangible assets or determine – measure their contributory value and performance is perceived as being un-justifiable even though today 65+% of most company’s value, sources of revenue and building blocks to achieve growth, greater wealth creation, and sustainability evolve directly from intangible assets.

Too, intangible assets are often mistakenly characterized more aligned with business and accounting theoretical concepts best espoused in university lecture halls rather than boardrooms, c-suites, or shop floors.

This challenge of defining and explaining intangible assets also evolves from the reality that intangible assets are just that, they’re intangible!  They lack a conventional sense of physicality. But, even though management teams are unable to necessarily see or touch these assets, intuitively they ‘feel’ their presence and certainly, their absence through, for example, declines  and/or erosion of a company’s reputation, image, goodwill, intellectual capital, value, market space, competitive advantages, etc.  So, regardless whether they’re called assets or not, it often boils down to management teams’ inclination and ability to  identify, assess, manage, and measure these increasingly important, valuable, and strategic assets.

Interestingly though, conversations with countless business owners and managers, they can routinely distinguish companies that effectively capture and exploit their intangible assets over those that don’t, even though it’s quite unlikely the terms intangible assets will be used in their critique.

Thus, for all of the above reasons, intangible asset specialists who conduct briefings, awareness training, and consult with companies about their intangible assets should always be prepared to field an array of skeptical and even critical questions, particularly with respect to asset valuation and/or contributory value.

A responsibility intangible asset specialists must assume today with respect to defining and explaining what intangible asset are is through articulating and demonstrating smarter and more effective techniques and rationales for companies to capture, utilize, manage, and monetize their intangible assets. This includes clearly distinguishing:

• what intangible assets are
• what they’re not
• the various forms they take
• how they originate, and equally important
• how and when intangibles can be effectively and profitably applied as ‘building blocks’ to enhance a company’s value and create sources of revenue  and competitive advantage.

Ironically, at least in my view, in the midst of this extended economic downturn, conventional wisdom would suggest that company management teams and boards would be looking for and be receptive to applying alternative and proven strategies to engage and exploit their company’s intangible assets particularly as they endeavor to weather this lingering recession.

The bottom line though is, some management teams, c-suites, and boards find it professionally challenging to step outside their comfort zones to engage concepts and strategies which (a.) they have not personally tested, (b.) significantly depart from their past practice, and (c.) are well under conventional ‘mba radar’.

Successful companies are typically ran by successful management teams.  For the most part, those management teams are realists and pragmatic risk takers.  Therefore, quite understandably, they may express some well-intended skepticism about intangible assets for all the reasons cited above.

However, when such skepticism translates into companies being restrictively tied to practices and strategies of a tangible (physical) asset based economy versus a knowledge-intangible asset based global economy, they’re not likely to experience the growth which they are probably capable!

I start with the premise that management teams and boards have a fiduciary responsibility to routinely and objectively ask…is our company properly positioned, insofar as possessing the expertise and skill sets, to identify, unravel, develop, bundle, utilize, and  extract as much value as possible from its intangible assets while simultaneously protecting and monitoring risks to those assets’ value, sustainability and materiality’?

As noted numerous times in this blog, the key requisite to managing and overseeing a company’s intangibles, in my judgment, is the ability to sustain control, use, ownership, and monitor the assets’ value and materiality. In many instances, if a company is either unable or unwilling to do this, or fails, little else matters, because asset value can quickly ‘go to zero’!

An intangible asset specialist can therefore benefit a company by…

1. Providing on-going guidance to business units and management teams about managing intangibles, i.e., monitoring and extracting value, delivering competitive advantages, and developing useable methods for measuring asset performance, monitoring risks and materiality.

2. Adding predictability to business transaction outcomes by assessing – monitoring the stability, defensibility, value, and sustainability of the intangible assets in play.

3. Conducting periodic intangible asset assessments to monitor competitive advantages and ensure asset synergies and efficiencies are being effectively utilized.

4. Reducing the probability that the momentum of a project, transaction, or deal will be stifled or undermined by identifying and mitigating circumstances (risks) that can (a.) ensnare and/or entangle the assets in costly and time consuming legal challenges, (b.) erode asset performance and value.

5. Improving the valuation, reporting, and accounting of intangibles and integrating same in (a.) asset development, (b.) company governance processes, and (c.) specialized asset management initiatives, i.e., knowledge management and balanced scorecard.

6. Building an intangible asset focused ‘company culture’ that’s aligned – converged with a company’s mission and business objectives.

7. Designing an organizational resilience (continuity, contingency) plan that encompasses mission essential intangible assets to provide quicker recovery following a significant business disruption or natural disaster.

8. Monitoring intangible asset value chains, i.e., the inter-connectedness between the production, acquisition, and utilization of intangibles relative to their contributions to company value, revenue, and creating and sustaining competitive advantages.