Can someone do my Week 2 discussion in BUS 639 Technology & Innovation!?

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William Heitman

Intangible Assets: Theyʼre Not What You Think They Are Published July 19, 2016

By William Heitman

CFO Editorial Staff

For centuries, executives expertly managed the total productivity

of tangible assets, such as plants and equipment. They monitored

both efficiency and effectiveness because tangible assets, or

“things,” historically accounted for more than 80% of business

value.

But in the last 40 years, tangible

assets have declined to 15% of

business value, while intangible

assets now generate 85% of value.

These are the job activities, or

“tasks,” performed by knowledge

workers. Formerly known as white-

collar employees, these people now

comprise a majority of the U.S.

workforce. But accounting rules

require their activities to be recorded as expenses. And executives

currently manage those as costs to be contained and reduced.

Productivity measures of efficiency and effectiveness are rarely

applied.

That’s why the newest, most valuable business assets remain

underproductive, performing far below their potential.

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CFOs are ideally positioned to capitalize on this valuable

opportunity. They can lead the transition from managing the

productivity of “things” to managing the productivity of “tasks.”

White-Collar Assets: Underproductive “Competencies”

The composition of these intangible assets is not what you might

think. Executives perceive them to be mostly patents, trademarks,

and goodwill. But those are only 25% of the total. The other 75%

are the job activities that economists call “competencies,” which

generated more than 60% of S&P market value in 2015.

In business, competencies are concentrated in white-collar

functions, recorded as selling, general, and administrative (SG&A)

expense. Finance, R&D, and product engineering are

competencies, as are the relationships between customers and

suppliers (marketing/sales). Databases and information systems

are also included (IT).

At first glance, it’s tempting to think that managing the

productivity of intangible “competency organizations,” such as

marketing or finance, is fundamentally different and more difficult

than managing a conventional factory. But CFOs can adapt many

of the methods honed over the past century in the course of

successful tangible asset management. That’s because factories, as

well as intangible assets, are managed with budgets.

The major difference between intangible asset budgets and factory

budgets is that the latter are derived and evaluated with

quantitative productivity measures.

Inefficiency: Adopt Productivity-Based Budgets

Knowledge workers squander an average of 40% of their typical

work day performing avoidable tasks, such as error correction,

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rework, and over-service, our research shows. Without

productivity management, these inefficiencies pass unnoticed and

cause over-spending for costly knowledge work. This is how

Fortune 500 knowledge workers squander 15% of hard-won

earnings before they reach the bottom line, based on our

experience and calculations using public data.

For example, the world’s largest lightbulb maker manufactures

products in automated plants that are nearly labor-free. But when

the bulbs are sold through the world’s largest retailer, the invoices

are manually reconciled by knowledge workers, resembling a

modern-day Dickensian counting house. A group of 2,000

employees who process invoices is supported by a team of 600

lower-cost reconcilers. They correct inconsistencies, contact store

managers and vendors, and return goods. Vendors complain of

their high costs, delays, and the inconvenience related to invoice

processing.

Nobody at the retailer notices the wasteful rework, however,

because the invoice-processing organization routinely meets its

operating budget.

When CFOs help develop operating budgets for executives who

manage tangible assets, such as factories, they begin with forecasts

of productivity. Output volumes are estimated and applied to

productivity metrics: cost per unit, labor efficiency factors for

tasks, and cycle times for processes. Starting with productivity

performance goals, they work backward to generate budget line

items and totals. These are productivity-based budgets.

Consequently, many CFO organizations already possess the

capability to manage the productivity of the intangible assets

known as competencies. They can introduce productivity-based

budgets to these knowledge work organizations at the simplest

level. In the example above, the invoice-processing organization

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can be budgeted and managed starting with only two metrics:

invoices processed and invoices that arrive “not-in-good-order”

(NIGO).

Ineffectiveness: Manage the Root Causes of Results

It is impossible to reliably estimate the business value lost to

ineffective knowledge work, but the results often appear as

unintended consequences (direct losses) and opportunity costs

(indirect losses). Most knowledge-work organizations incur both

types of value losses.

The good news is that CFOs can adapt “root cause analysis” from

their manufacturing colleagues to better manage the results of

unintended consequences.

Consider a global credit card issuer that maintains an average

backlog of more than 50,000 consumer claims. The company’s

contact centers are flooded with customer demands for unfulfilled

marketing campaign promises: bonus points, rebates, free gift

offers. Most result from the marketing organization’s failure to

coordinate the details of well-intentioned consumer campaigns

with the company’s fulfillment operations capabilities and the

requirements of its regulatory compliance organizations.

These are unintended consequences that generate substantial,

direct costs of remediation. In fact, the high costs of remediation

render more than 10% of the campaigns “business value negative”

at the design stage, based on our analysis. These should never be

launched. But because such costs fall in organizations other than

marketing, such as customer contact centers, visibility is low and

it’s considered business as usual.

However, the loss of business value is not limited to remediation

costs. It includes greater losses of value, such as the continuous

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drag on marketing effectiveness and the ongoing erosion of the

global brand.

Eliminate the remediation costs, and you also eliminate the brand

erosion.

In the factory, industrial engineers document each step of

production. They analyze the “root causes” and the

interdependencies that result in consequences, both intentional

and unintended. It is a ceaseless effort.

The CFO: Industrial Engineer of Intangible Value

Now that knowledge workers comprise the majority of employees

in advanced economies, their costly, inefficient tasks are

increasingly subject to external scrutiny. Activist investors have

caught on. They want to simply downsize knowledge workers. And

digital upstarts want to disruptively automate them away. But

businesses and CFOs remain best positioned to capitalize on this

growing class of undermanaged, intangible assets.

CFOs might even take a page from Henry Ford, a century ago, as

the moving assembly line was being born. Keenly aware that the

most valuable asset in the newly emerging plant was know-how,

the company immediately built a dedicated office on the factory

floor. It was devoted to documenting, standardizing, and

distributing the rapidly growing body of knowledge — the

competencies — essential for productively managing the massive

investment in the tangible assets of automated plant and

equipment. Those working in that office on the factory floor were

the industrial engineers for tangible asset value.

Knowledge work today represents a similarly massive investment

in intangible assets. CFOs should begin to think of their finance

organizations as the industrial engineers of intangible asset value.

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William Heitman is managing director at The Lab Consulting,

which has been implementing non-technology business

improvements since 1993.