Originally published on March 6, 2017
Valuation: quantifying the value of knowledge assets, reuse, and innovation so they can be fully appreciated by the organization, including customer pricing, cost benefit analysis, and project justification
Assigning a value to your organization’s intellectual assets can help realize incremental revenue from sales to customers, support investments in knowledge creation and capture, and justify investments in your knowledge management program.
Explicitly defining the value of the reusable component of what you are selling to a customer allows you to use this value for competitive pricing, for additional profit margin, or to be set aside to fund additional knowledge creation and capture. To identify the value of reusable intellectual capital, ask the providing source for a suggested price, estimate the time and effort it would take to create from scratch, and the research the market value of the asset. Combine this information into an overall estimated value, and use this to set the price. Whenever the price is higher than it would have been without adding the value of reuse, this incremental amount should be recorded and compiled as one source of the financial impact of the KM program.
Many organizations require cost benefit analysis before approving new investments and development projects. This is often true of the Information Technology function, which is faced with a multitude of requests for new systems or enhancements to existing systems. If investments involve intangible assets, it is difficult to use traditional methods to determine the projected return on investment. Using the techniques described in the resources listed below can help in providing the requested cost benefit analysis.
1. Methods for Measuring Intangible Assets by Karl-Erik Sveiby
Rarely is the question asked, why measure intangibles? The answer is not self-evident. Intangibles are difficult and expensive to measure and the results are so uncertain, so the reason had better be a good one.
The main problem with measurement systems is that it is not possible to measure social phenomena with anything close to scientific accuracy. All measurement systems, including traditional accounting, have to rely on proxies, such as dollars, euros, and indicators that are far removed from the actual event or action that caused the phenomenon. This creates a basic inconsistency between managers’ expectations, the promises made by the method developers and what the systems can actually achieve and makes all these systems very fragile and open to manipulation.
The first question for any one embarking on a measurement initiative must be: What is the purpose of our measuring initiative?
- Management Control purpose — Don’t!
- PR purpose — Watch out!
- Learning Motive — Why so few?
The Four Approaches for Measuring Intangibles
- Direct Intellectual Capital methods (DIC)
- Market Capitalization Methods (MCM)
- Return on Assets methods (ROA)
- Scorecard Methods (SC)
I propose a Value Chain Blueprint, which brings all of these concepts together into a system that enables one to present more clearly the value-creation activities of a company. The Value Chain Blueprint, which applies to the creation of tangible as well as intangible assets, shows how to measure the success of value-creation projects from the early stages of development through commercialization.
3. The IC Valuation Models & Risk Assessment by Robert K. Su, Jie-Huan Lee, and Li-Ling Wang
There are seven intellectual capital valuation models:
- Tobin’s Q Ratio
- Market-to-book ratio (M/B ratio)
- Economic Value Added (EVA™)
- Calculated Intangible value (CIV)
- Knowledge Capital Earnings (KCE)
- Value Added Intellectual Coefficient (VAIC™)
- Financial Method of Intangible Assets Measuring (FiMIAM)
- What is the relationship between structural capital and knowledge management?
- KM’s not dead, but talking about its ROI should be
- Leif Edvinsson: Profiles in Knowledge
- Intellectual Capital Reading List
- The value of intellectual capital
- Measuring knowledge capital by Chetan Parikh
- Intellectual Capital Valuation: Methods and Their Classification by Agnė Ramanauskaitė and Kristina Rudžionienė
- Intellectual capital ROI: a causal map of human capital antecedents and consequents by Nick Bontis
- Additional Nick Bontis articles
- Measuring Knowledge and Intellectual Capital by David Skyrme
- Measuring the Unmeasurable — Part 1, Part 2, and Part 3 by Bill Kaplan
- The world of intangible asset valuation and Rethinking ROI: The Metrics of Intangible Assets by Art Murray
- What’s It Worth? Measuring the Value of Knowledge: Slides and Recording by Rob Usher and Marti Callahan
- Nick Milton articles and Knowledge Management Valuation Service from Knoco
- Why the concept of “valuing” knowledge and information can be misleading by Patrick Lambe
- The economics of reuse by Johannes Brodwall
- An overall index of intellectual capital by Livio Cricelli, Marco Greco, and Michele Grimaldi
- Value Added Intellectual Coefficient (VAIC): a critical analysis by Pirjo Ståhle, Sten Ståhle, and Samuli Aho
- Areopa Group — knowledge provider in Intellectual Capital Management and Accounting
- Knowing in Firms: Understanding, Managing and Measuring Knowledge edited by Georg von Krogh Johan Roos, and Dirk Kleine
- Intellectual Capital: Navigating in the New Business Landscape by Johan Roos, Goran Roos, Nicola Carlo Dragonetti, and Leif Edvinsson
- Intellectual Capital: Realizing Your Company’s True Value by Finding Its Hidden Brainpower by Leif Edvinsson and Michael S. Malone
- Intellectual Capital: The new wealth of organization by Thomas A. Stewart
- Intangibles: Management, Measurement, and Reporting by Baruch Lev
- Valuing Intangible Assets by Robert F. Reilly
- Guide to Intangible Asset Valuation by by Robert F. Reilly and Robert P. Schweihs
- Intangible Assets by John Hand
- Intangible Assets: Valuation and Economic Benefit by Jeffrey Cohen
- Measuring Intellectual Capital by Patricia Pulliam Phillips
- Fundamentals of Intellectual Property Valuation: A Primer for Identifying and Determining Value by Wes Anson and Donna Suchy
- Valuation of Intellectual Property and Intangible Assets by Gordon V. Smith and Russell L. Parr
- BVR’s Guide to Intellectual Property Valuation by Michael Pellegrino
- Knowledge Assets: Securing Competitive Advantage in the Information Economy by Max Boisot