Intangible Asset Management ‘Blind Spots’: Intellectual, Relationship, and Structural Capital Walking Out The Door!
Michael D. Moberly June 14, 2012
The intent here is to present, what I believe is, an important, but often overlooked, or at least under-appreciated, perspective when companies elect to terminate (layoff) employees and shed entire departments generally rationalized by this extended economic downturn, aka recession, and now the looming (December) ‘fiscal cliff’ whereby companies in all sectors may be on the receiving end of another ‘haircut’.
I refer to this as a ‘management team blind spot’, that is when, not necessarily if, the above occur, the intangible assets these employees and departments have developed and amassed, will very likely walk out the front door with them. Once those ‘assets have left the building’ (ala Elvis Presley) don’t count on them returning anytime soon regardless of non-disclosure and/or confidentiality (employment) agreements that may exist.
Any aspirations emanating from company management teams that the contributory value of the intangible assets, i.e., intellectual, structural, and relationship capital that’s now suddenly and conspicuously absent will continue unabated is likely mistaken. The absence of these assets can, and probably will produce inefficiencies along with an assortment of other adverse effects, most of which cannot be as quickly or as easily mitigated because the intellectual capital to do so is no longer present.
For those still unconvinced, one only has to recall the ‘y2k’ phenomena in 1999. Many companies found themselves in the rather awkward position of having to literally ‘find’ former employees familiar with the company’s original IT systems and codes and pay them handily to return to work to help make the company ‘y2k’ compliant.
I want to acknowledge also, that I am a 20+ year proponent of identifying, unraveling, utilizing, and sustaining (protecting, preserving) control, use, ownership, and value of intangible assets. This is one reason I choose to frame the views being espoused here about intangible assets not so much through a Wall Street or Fortune 1000 lens, rather more through the lens of the 20+ million SME’s (small, medium enterprises) and SMM’s (small, medium multinationals) which I find are routinely, but proportionately rich in intangible assets.
Unfortunately, not wholly unlike their NYSE, CBT, and NASDAQ cousins, intangible assets embedded in SME’s and SMM’s, are, in many instances, un-acknowledged, under-valued, under-utilized, and certainly under-appreciated. And, here lies in my judgment, the heart of the problem, as well as the challenge!
I seek not to start with broad recommendations that are usually accompanied by high (bureaucratic, legislative, and regulatory agency) hurdles that necessitate massive restructuring of long-standing business practices, government policies and regulations that would take years to achieve, if at all.
Instead, I seek to start, as I often do, by delving into what I believe are some key, yet under-developed issues about intangible assets. For purposes of analogy, I use a west coast company which I am familiar, that decided to permanently off employees and literally dismantle a long standing and globally embedded (internal) service unit.
Since I am familiar with this company, I can say without reservation, a very significant percentage of the terminated employees from this dismantled service and support unit, possessed company specific (culture, operational) skills sets, i.e., specialized intellectual and relationship capital. A vast majority of those intangible assets were readily transferrable and could not be quickly, or readily for that matter, replicated at will when a management team recognizes it needs to re-establish those particular services.
While the global demand for this company’s primary product (and related support services) have continued, albeit at a slower pace, my question is, does the value of the company’s intangible assets decline proportionately when highly skilled employees are terminated along with their intellectual and relationship capital? I pose this question in the context that, as most readers already know, significant and increasing percentages (perhaps 65+%) of most company’s overall value, sources of revenue, and ‘building blocks’ for growth and foundations for wealth creation evolve directly from intangible assets! Of course, a portion of those intangible asset were in fact, developed, delivered, and now still possessed by a number of the employees in the discarded service unit.
For this particular company, and thousands of others like them, that have already executed or are facing similar challenges as a consequence of this extended economic downturn, I believe there is a substantial and underlying ‘intangible asset blind spot’. That is, management teams who make admittedly hard decisions that the elimination of certain internal (service) units will make the company leaner and thus, more financially stable, at least for near term survivability are sometimes ill-advised.
But, as we have come to know, shedding employees often represents management teams’ initial, perhaps reaction to a financial crisis. Obviously, a significant rationale for doing so lies in the view that fewer employees and departments can quickly translate as less payroll and overhead. In these instances, its’ likely management teams perceive employees as being more akin to tangible (fixed) assets, rather than not-easy-to-replace intangible assets. In my view, there is sufficient reason for company management teams to fully assess, in an intangible asset, contributory value, and business impact analysis context, employees and units targeted for elimination before execution!
I don’t seek to over dramatize or otherwise offer unsubstantiated embellishments to this issue. However, when intellectual and relationship capital intensive employees and/or units are terminated as a seemingly quick, but usually not permanent ‘patch’ to a fiscal challenge, it’s important to also recognize (factor) that valuable and often times irreplaceable, or, at least not readily replaceable, intangible assets will be ‘walking out the door’ as well.