Accounting was not set up to value intangibles. In addition, accounting values are only generally accepted changeable principles, not absolute truth. To measure intangibles, here are some things you should know:
Accounting is about tangible things that can be counted. It looks at the acquisition cost of the thing and applies a generally accepted methodology to forecast the future value of that thing. True future value is determined by the ultimate intangible, the marketplace. Future value is the result of the presumptions, beliefs and willingness of people to spend on a thing or a process.
Intangibles are about the results of processes. We rely on analytics to uncover relationships that may have value. In his book “Intangibles,” Baruch Lev states that “an intangible asset is a claim to future benefits that does not have a physical or financial embodiment.” Examples are brands, reputation and other forms of intellectual property. Add in the workforce’s knowledge and skills, although the organization does not legally own them. Analysis is the methodology wherein the elements of some tangible thing or things are pulled apart in hopes of finding a relationship.
The big mistake people make is trying to apply tangible measurement principles to intangibles. Early attempts to measure the intangible value of the workforce focused on treating people as things, but no one knows the economic value of a human being. Human value can appear via performance or productivity, however. It is relatively easy to measure physical output, but intellectual performance, leadership, engagement, employee development — these are more elusive challenges. Until human capital analytics emerged, few executives wanted to commit resources to measuring their human capital or its value.
The secret to measuring intangibles is to make them visible acts. Once something is visible, it can be measured. To measure the value of people is to turn their activity into tangible outcomes that can be assigned a value. This is relatively easy in a routine process such as assembly. However, complex concepts like professional performance or services need to be viewed as a collection of visible actions and the provable value of their corresponding results.
In leadership, for example, you express what you believe are the observable actions of a competent leader. These are the activities that appear on performance review forms and in assessment surveys.
Through observation of outcomes — employee responses and performance — management can calculate monetary values. Leadership is evaluated through the reactions of those being led. Analytics reveals the correlations or causes.This methodology can be applied to employee engagement: What do you see people doing differently when highly engaged, and what is the value of that? I knew a CEO who believed that for every five points that engagement scores rose, it led to an increase of $1 billion in revenue.
If you can only measure one value, select mission-critical turnover, or MCT. Sustainable success depends on retaining and developing the people occupying a limited number of positions. Every executive can tell you the small number of people who drive organizational performance. They include some managers, professional and technical experts, and even someone like the CEO’s secretary who knows how to get things done across the company. A relative value can be assigned to each position. As MCT is monitored, management can see which way the MCT index is moving and look for any corresponding changes in performance. Performance can be revenue, time to market, product quality or customer retention.
This is not a doctoral dissertation. There are many excuses for not measuring. What it comes down to is simply this: If value measurement of the organization’s only active asset — people — is important, then the analytic model I’ve outlined can be adapted to any entity. It is not perfect, but then neither is accounting, and we have been relying on it for more than 500 years.