3 steps to realise and bring the value of “intangibles” to the bottom line

3 steps to realise and bring the value of “intangibles” to the bottom line

Given that people are bound up with intangibles, this is one domain in which HR could and should be the experts – and thereby add great value and leadership to business partners, writes Dave Hanna

Over the past 50 years a subtle revolution has been in motion that changes how we view corporate performance. Baruch Lev, a Professor of Finance and Accounting at New York University, first identified this revolution in his 2001 book, Intangibles.

The revolution is this: in the 1960s, 90 per cent of a company’s market capitalisation was due to tangibles (past results and hard assets). Today, with the increasing forces of globalisation, deregulation, and technological advancements changing how competitors operate, traditional tangible factors account for less than 40 per cent of market capitalisation. Over 60 per cent comes from what Lev calls intangible factors – the intangibles.

Why intangibles are important today
So, what is an intangible? It is a source of future benefits that doesn’t have a physical embodiment, such as these organisational capabilities:

LeadershipCollaborationTalentAccountability
EfficiencyInnovationSpeedCustomer trust
Quality mindsetLearningCommon strategyFunctional alignment

Most intangibles are people related, for people are the ones who breathe life into everything else via their creativity, motivation, and skills. State-of-the-art technology, natural resources, and corporate funds are either enhanced or diminished by the way people come together, make things happen, and deliver goods and services. These intangibles have much more influence on the bottom line now because stakeholders are more concerned with confidence in the future rather than in past accomplishments.

A case in point: in April 2010 a British Petroleum oil well exploded in the Gulf of Mexico and spewed forth more than 200 million gallons of crude oil into the Gulf. It took 87 days for BP to finally cap the well. BP’s stock plunged from $60.57 a share on 20 April to $29.20 on 9 June. When BP announced that Robert Dudley would replace Tony Hayward as BP’s CEO, the stock moved up for the first time in months to $37 a share. Then, when Robert officially took over on October 1, the stock went up again to $42 a share. No physical assets showed demonstrable change or improvements to spark the increases in share price. What changed was investor confidence that the new CEO would lead BP back from disaster. This is the intangible of leadership.

This example shows how one’s confidence in the future can be very emotional – and have significant bottom-line repercussions.

Employing intangibles to your advantage
Managers around the world, paradoxically, are trying to “come to grips” with intangibles. A 2010 McKinsey global survey of 1,440 executives reported that some countries were addressing intangibles more aggressively than others. Here are some examples:

Many managers have found it useful to incorporate intangibles into their strategic thinking. Here is an example from one of the many companies who have done this:

Step 1: Ask yourselves, “What should be our strategic deliverables? Will these truly give us a competitive advantage in the marketplace?”

The “Adelaide” Company had a high performing plant that, despite its good results, was not a natural choice for new production allocation because it was geographically far away from many population centres. A task force got feedback from its major stakeholders and concluded the only way to improve the situation was to become a trusted partner who would exceed expectations of its suppliers, customers, and corporate leaders.

Step 2: Choose three organisational capabilities that are essential to deliver your strategy.

The “Adelaide” team had a lengthy discussion and great difficulty in identifying only three organisational capabilities that were prerequisites for exceeding their stakeholders’ expectations. They finally chose:

  • Extraordinary people: not just a motivational label, but a performance description of the multiple skills, commitments, creativity, and leadership that everyone in the plant needed to develop.
  • Continuously improving processes: the plant was not yet the most reliable operation in the company, but the group made the commitment to earn their way to the top position.
  • Breakthrough performance: the group chose the word “performance” to describe this area of the results and culture to which they aspired. “Performance” became the shorthand label for not only leading in production results, but also responding to change, seizing new opportunities, continuously developing associates, and partnering with other functions to pioneer new products and organisational innovations.

Step 3: Design your organisation’s processes, systems, and culture to deliver these capabilities.

“Adelaide” invested much time and energy to make its strategic plan a reality. Process reliability became a plant-wide priority in word and deed. Associates started developing multi-skills so each could operate any part of the production line and also specialise in related tasks (lab, maintenance, administration). Team members began assuming some responsibilities formerly done only by supervisors. Supervisors began working on some systemic issues, like equipment improvements and alignment between departments.

What was the outcome of this “Adelaide” rebirth? It was chosen to be one of the start-up plants for a new product. The new start-up was very successful and demonstrated to all stakeholders that the plant was, indeed, a trusted partner.

Note to HR professionals: given that people are bound up with intangibles, this is one domain in which we could and should be the experts – and thereby add great value and leadership to our business partners.

Image source: Depositphotos