Where Value Really Resides for a Company
I recently received an e-mail regarding columns I wrote for the Interface Tech News. (The columns were from November and December 2001 and the e-mail came from a doctoral candidate in the Institute of Intellectual Property of Huazhong University of Science and Technology - which shows the pervasiveness and persistence of Internet content, but the magazine itself is no longer available.)
Given the changes to the economy and the intellectual property landscape since 2001, the question asked about the importance of looking past audits of only the research and development departments or information technology departments of a business and add additional focus on the rest of the enterprise. For companies hoping to build value using a strong "reintermediation strategy," valuing the enterprise IP or intellectual capital becomes essential. Many categories of intellectual capital are undervalued. Among these are: (i) internal modifications to purchased software [basis of the recent Oracle acquisition of Sun]; (ii) the copyrights, trademarks and trade secrets generated in the marketing department; (iii) the knowledge base created within customer service; (iv) the scope of the company’s social media network (e.g. its footprint on Facebook, MySpace, YouTube, etc.); (v) the algorithms or other metrics used to predict customer and market trends; (vi) exclusive contracts for publicity rights, trademark licenses and other promotions. I am sure there are many, many others. Privacy and data security are equally important, but compliance for those often is stated as a question of meeting minimum standards as much as creating additional value.
The problem with all of these measures stems from the lack of balance sheet relevance. None of this is shown on a corporate balance sheet, except to the extent that it is lumped into a broad category called ‘good will.’ And yet client retention rates (churn rates or customer renewals, etc.) are perhaps the best summative measure of success. A company with the lowest cancellation rate will outperform its competitors, all other factors being equal. This applies to cell phone companies, subscription services, universities (e.g. graduation rates), sports and arts franchises (season ticket subscriptions), and many other businesses. Combined with 'yield' - the percentage of new leads that ultimately become customers.
But the yield and churn rates detail how the company is performing, not which factors are causing that performance. The intellectual capital audit catalogs the tools used to understand which tools the company owns that affect these measures. They do not replace the accounting tools, but in today's business dealings, they must be used in combination of the accounting audits, if a company hopes to understand the real nature of its business.
So even though I last wrote about IP audits in 2001, the issues remain as important as ever.
