Wednesday, September 01, 2010

Book Review: Intangible Capital

Yesterday I used a small portion of Mary Adam's Intangible Capital to expound on the fact that innovation does not begin with idea generation.  And now, as Paul Harvey used to say, the rest of the story.

Intangible Capital is a book that seeks to create a new way of thinking about our businesses and how we operate them.  Traditionally our businesses and how we organize them, even how we measure and report on them, have been based on labor and tangible capital (property, plant and equipment).  That's because traditionally these were the motive forces behind how firms differentiated and made money.  Firms that managed their tangible assets and labor effectively made more money than those that didn't.  But what if the situation changed and tangible capital wasn't as important as intangibles.  Those intangibles might reflect the accumulated knowledge in the business, its strategies and recipes, its intellectual property and ideas.  What happens to how we structure an organization and how we value an organization if intangible capital becomes as important, or more important, than physical capital?

One could argue that in many businesses - software firms for example - intangible assets have far greater value than the tangible assets.  And software firms are probably just the leading indicator.  More and more as the US moves from a manufacturing economy to a services and intellectual capital economy, intangible assets will be what we use to derive value and differentiation.  And if that's so, everyone will need to read and reflect on the ideas in the book Intangible Capital.

Adams and Oleksak argue that there are four kinds of "structural" capital - culture, organizational knowledge, intellectual property and processes.  They begin the book by defining these kinds of intangible capital and why, increasingly, these are becoming ever more important.  The book mentions a presentation by Irving Wladawsky-Berger who argued that "future work will be in market-facing solutions where you are dealing with people and services (intangibles)...".  Adams and Oleksak go on to argue that intangible capital of these types is the "new" factory, and firms that hope to compete in this environment will need to create "knowledge factories" that are designed to create intangible capital.

The focus on intangible capital doesn't simply change the way you "produce" ideas and intellectual property.  It also changes how you organize.  Adams and Oleksak argue that "networks are the new organization charts" and begin the argument about the importance of social media.  I would have liked to see them take this further - since much intangible capital is created at the intersection of firms, or industries, or communities.  But their main point here is that a top-down, hierarchical organizational structure doesn't support the development of intellectual capital as well as a network.  Additionally, "managing" within this space is more about orchestrating and encouraging collaboration than directing and correcting.  Innovation isn't a "nice to have" in this worldview but is a requirement.  Firms that create the best ideas, and constantly create new ideas, have an advantage over those that don't create new intangible capital.

Toward the end of the book Adams and Oleksak look at how intangible capital is measured.  Intangible capital, while increasingly valuable, isn't adequately captured or reported in a balance sheet or an income statement, neither of which can sufficiently capture the value or report the impact of intangible capital and its role in value generation.

Every once in a while a book will pull back the covers and try to direct our vision and thinking toward what is likely to happen next.  This book is an attempt to introduce what's already happening, although many businesses still haven't recognized it yet.  Increasingly, intangible capital is far more important than tangible capital, and as that becomes more evident and more true over time, we have to adjust our businesses to that new reality. It impacts how we organize, how we manage, what we produce and what we report.   The creation of intangible capital will require different skills than we have in our organizations today, and different interactions with our customers and suppliers.  If you want to know what issues businesses will be grappling with in the next few years, read Intangible Capital and think about the possible impacts as, not if, the ideas presented in this book come to pass.
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posted by Jeffrey Phillips at 7:24 AM


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