The Intangible Investment Gap

High-growth companies invest more in intangibles – but use that investment to build a wide mix of capabilities

A new report from McKinsey & Company on company investment in intangible assets (Why intangibles are the key to faster growth in Europe) shows a wide gap between leading and lagging companies, especially in Europe. Globally high-growth companies invest 2.6 times more in intangibles that low-growth companies (4.4% of revenues in high-growth firms versus 1.7% of revenues in low-growth firms). The gap between high-growth companies and low-growth in firms in Europe is greater than the global average as high-growth European firms invest more than the global average (6.2% of revenues for European high-growth firms) and low-growth European firms invest less than the global average (1.4% of revenues for European low-growth firms). North American high-growth firms invest 6.5% of revenues in intangibles while North American low-growth firms invest 2.9%. This indicates that there may be ways of helping lagging companies improve their performance through increasing their investments in intangibles.

But before business leaders and policymakers rush to embrace higher levels of company investment in intangibles as the silver-bullet for economic growth, there are some complicating factors. As the report notes, “the most robust growth occurs when companies invest in different categories of intangibles simultaneously. Even among companies in the top quartile for growth, those investing in five intangible categories grew twice as fast as those investing in two or less.” And “the optimal mix varies depending on the company, sector, and competition.” In other words, the return on the investment in intangibles is highly context specific.

Along those lines, I found one part of the report particularly striking. According to survey results, there is a wide range of capabilities that companies seek to develop using intangibles – and the absolute lack of consensus about their importance. Only on area (“Personized customer experiences”) came even close to a majority of executives in agreement.

% Of Executive Who Strongly Agree In High-Growth Companies Strongly Agreeing That This Was An Important Capability (order based on ranking of gap between high-growth and low-growth firms, from Exhibit 5 of the report)

  • Personalized customer experiences: 50%
  • Unique value proposition attracts and retains talent: 35%
  • Search of disruptive innovation opportunities: 35%
  • Real time marketing spend allocation: 33%
  • Personalization at granular level: 33%
  • Disruptive innovation opportunities: 42%
  • Performance measures: 42%
  • Brand positioning: 37%
  • Relevant content for customers: 37%
  • Optimization of customer journey: 43%
  • Value proposition: 40%
  • Clear purpose and mission statement: 37%

Now, this may just be an artifact of the survey (where it seems that the questions were designed to probe the differences between high-growth and low-growth companies, not the differences among the important of the capabilities). But they do raise questions. For example, I would have thought that a clear purpose and mission statement, articulating the value proposition, and having performance measure would be universal among high-growth companies. At least that is want we hear repeatedly from the management gurus.

In any event, these results underscore the report’s narrative of results being context specific. Understanding the nuances of this context-specific characteristic will be key as we move forward to craft both public policies and business actions aimed at fostering the use of intangible for economic growth.

For more see the earlier McKinsey discussion paper Getting tangible about intangibles: The future of growth and productivity?

Follow up on World Intellectual Property Organization conference on IP Finance

Earlier this month the World Intellectual Property Organization (WIPO) held a “High Level Conversation on Unlocking Intangible Asset Finance” as part of their work on the role of intangibles in financing. A large part of the focus was on using intellectual property (IP) as collateral to backstop debt financing. The video of the meeting in now available here and a short news release summarizing the discussions is available here.

At that meeting, WIPO unveiled its Action Plan – WIPO and Intangible Asset Finance: Moving Intangible Asset Finance from the Margins to the Mainstream. This Action Plan lays out a three-pronged approach:

“Raise the profile of intangible asset finance,” including establishing expert consultative groups (ECGs) to look more closely at the barriers to IP finance and make recommendations.

“Reveal what is happening on the ground” through a series of report describing what countries and companies are doing and highlight good practices.

“Equip participants in the intangible asset finance and valuation ecosystems” starting with building a toolkit for lenders and borrowers to help create a mutual understanding of their intangible assets.

While I applaud WIPO’s efforts, I can’t help but wonder if we have made any substantial progress since my report back in 2008 on Intangible Asset Monetization: The Promise and the Reality.

We know the basic barriers to collateralization: difficulty and cost of valuation, thinness of secondary markets, and a reluctance of lenders to issue loans outside of their understanding. What has been the problem is the lack of scalable ways to overcome these barriers. Yes, there are cases where IP has been used as collateral. But these are closer to one-off deals (and often contain an already established revenue stream). What we lack is a standardized process that would make IP-backed loans routine.

That is not to say that IP-backed loans will ever be a large part of lending, or even a large part of business debt financing. But it would be a boost to the intangible economy if IP-backed lending was an established tool in the toolbox.

However, the nature of IP may prevent it from becoming a factor in lending. As Martin Brassell, CEO of Inngot, was quoted in the summary of the WIPO High Level Conversation, “What’s hard for lenders, who regulation encourages to attach more value to tangible assets to understand, is that the value of IP is in its uniqueness, not in the fact that it’s a commodity that’s easy to dispose of.” If that is true, then maybe the best we can do is make IP-backed lending just a little easier.

I wish WIPO the best in its effort to do so.

Learning from Twitter?

It seems like we are daily (even hourly) hearing stories about the turmoil at Twitter. As I write this, one of the more recent (and revealing) stories is about workers being fired via tweet. I have to admit that I don’t know all the details but this sounds like a classic example of what we used to call “the low-road strategy.” (The low-road strategy sees workers as a cost to be managed; the so-call “high road” strategy treats workers as an asset to be cultivated. For an example of a company taking the “low road,” see my old posting on Circuit City.)

The downside of such a strategy should be obvious. As a commentator in a recent story on NPR noted:

“Creating an environment where workers are afraid to flag problems with the product for fear that they’ll be fired by tweet in the middle of night is not going to encourage people to want to work there,” Catherine Fisk, a law professor at the U.C. Berkeley School of Law, said. “It’s not going to encourage those who are there to want to give their all to the job or to raise questions about whether there’s a better way that something could be done.”

In other words, it is directly opposite the way that a dynamic, resilient company should be run (for example Toyota). As I noted in an earlier posting, the top-down command-and-control model of management is firmly engrained in the U.S. economy. The debate over Theory X (top-down control) versus Theory Y (worker engagement) is many decades old, as are descriptions of high-performance work organizations. It seems to me that the best we can do is continue to point out a simple truth: workers matter.

Interesting, just last week articles in two major business/management publications have addressed the issue. In his article in the Harvard Business Review “CEOs Have Lost Touch with Frontline Workers,” Bill George (former CEO of Medtronic) calls for increased CEO contact with front-line workers. He notes that such contacts help both the CEO and the workers:

“First, because paying more attention to frontline workers brings critical motivational benefits. In Medtronic’s R&D labs I got many valuable ideas for new products and new medical therapies. In visits to its factories I realized that it was the assembly workers — not the quality department — who made the difference in the quality of our products. Second, my time with customers taught me about the company’s product challenges and demonstrated the value of our frontline technical sales and service people.

That time helped me be a better CEO, both because I learned what I needed to do to support our employees and because my decision-making was infused with firsthand understanding of our customers and operations.”

He argues that the payoff to the company’s bottom-line is clear: “Companies can benefit through improved employee engagement, reduced turnover, and increased customer satisfaction — which in turn will power revenue growth and higher levels of profit.”

The second article is from INSEAD Knowledge: “The Really Simple Steps to Creating an Innovation Engine.” INSEAD Professor Ben Bebsaou argues that frontline workers are a key source of innovation as they are in the best position to listen to customers and non-customers. This is especially important in listening to silent customers – those who are not telling you what is wrong or how to make things better.

It is clear that a couple of articles by academics isn’t going to light a fire under the seats of those in the C-Suites. But watching the turmoil at Twitter may give some business executives an incentive to see if there isn’t a better way. In looking around, they may just find that there are ways they can make that old trope “our people are our most important asset” a reality rather than simply rhetoric.

Intangible Trade Surplus Up in September 2022

While the goods deficit was up and services surplus down, the surplus in intangible continued to grow along historic trendlines

The US trade deficit increased in September, according to the Bureau of Economic Analysis (BEA), as exports declined and imports rose. And for the second month in a row, the overall services surplus declined. However, the surplus in intangibles rose slightly with exports increasing more than imports.

The trade surplus in intangibles has grown steadily since the beginning of the year. And, as the chart below shows (and as I have noted before), intangibles exports, imports and trade balance were basically on the historical trend line. In general, this most recent data is in line with my earlier analysis that the pandemic is not having a game-changing impact on trade in intangible.

Amid Questions About GDP Growth, Knowledge-Related Investment is Strong

Economists are warning everyone to take today’s GDP numbers with a grain of salt. According to BEA’s Advanced Estimate, GDP grew by an annual rate of 2.6% in 3Q 2022. That is a healthy rate of growth and a turnaround from the declines in two quarters. But much of that growth was due to a smaller trade deficit and an increase in business investment in transportation equipment. Overall business (non-residential fixed) investment was up slightly, even though business investment in structures was down. Investment in knowledge-related areas [information processing equipment, software, and R&D] continued strong growth, up by 7.4%.

Obviously, those knowledge-related sectors make up only a small fraction of our $25 trillion economy. But the willingness of businesses to continue to increase their investments in knowledge-related areas is a strong indicator of future economic growth.

[Note: I define knowledge-related investment as the combination of investment in Information Processing Equipment, R&D, and Software. The first of these three categories is reported in the GDP data as a subcategory of Non-residential Fixed Investment: Equipment. The latter two are reported as subcategories of Non-residential Fixed Investment: Intellectual Property Products.]

Intangible Trade August 2022

Intangibles trade surplus continues to grow along historic trendlines

This morning’s trade date from the Bureau of Economic Analysis (BEA) shows an improvement in the U.S. trade deficit in August as imports declined more that exports. Imports were down by $3.7 billion from July; exports declined by a mere $0.7 billion. BEA also notes that the overall services surplus declined by $0.4 billion. However, the surplus in intangibles rose slightly with exports increasing more than imports. The difference is mainly due to an almost $0.6 billion decrease in the trade surplus in travel as American’s increased their foreign travel. [Note: I categorize travel as a tangible service.]

The trade surplus in intangibles has grown steadily since the beginning of the year. And, as the chart below shows (and as I have noted before), intangibles exports, imports and trade balance were basically on the historical trend line. This is also true for the various categories of intangibles. Even Financial Services, where the surplus rose dramatically in the first part of the pandemic due to a surge in exports, seems to have returned to the trend line.

In general, this most recent data is in line with my earlier analysis that the pandemic is not having a game-changing impact on trade in intangible.

August employment numbers: Next versus, same as the last verse

Employment in intangible producing industries and tangible producing industries continues trend from previous months.

August’s jobs data from the Bureau of Labor Statistics shows an overall continuing trend from previous months. Payroll employment was up by 315,000. And although there was some volatility in employment within individual industries, employment in intangible producing industries and tangible producing industries continue to track one another. This is a structural change from the pre-2010 period when employment in intangible producing industries grew as a percentage of total employment while employment in tangible producing industries declined.

For more on the categories, see my explanation of the methodology in an earlier posting.

Improving Job Quality

New Job Quality Toolkit looks to create “good jobs” but needs to do more on worker empowerment

Earlier this month, the Commerce Department launched its Job Quality Toolkit to help companies create and retain a high-quality workforce. The Toolkit is part of the Biden Administration’s joint Commerce-Labor Departments’ Good Jobs Initiative.

Although worker wages are at the forefront of the Initiative, much of the Toolkit focuses on improving the employee experience as key to a better workforce. As the report states, “Pay and benefits matter, and so do a multitude of other factors like workplace safety and health, a voice, scheduling predictability, skills building, and advancement.” The Toolkit identifies 8 drivers of job quality:

  • Recruitment & Hiring: Actively recruit a diverse pool of applicants. Implement skills-based hiring that only requires the education, credentials, and experience needed to do the job. Be intentional about onboarding and retaining workers.
  • Benefits: Seek workers’ input on needed and desired benefits, such as paid leave, health insurance, and a retirement plan. Provide them and encourage their use.
  • Diversity, Equity, Inclusion, & Accessibility (DEIA): Make equal opportunity a core value and practiced norm. Foster systems where all workers feel respected and empowered in the workplace. Identify and remove systemic barriers to DEIA.
  • Empowerment & Representation: Ensure that workers have a meaningful voice, without fear of retaliation. Enable workers to contribute to decisions about their work, how it is performed, and organizational direction.
  • Job Security & Working Conditions: Ensure a safe, healthy, and accessible workplace and offer job security. Minimize temporary or contractor labor solutions, using such workers mainly to adjust for short-term needs. Assess and schedule hours that are adequate and predictable.
  • Organizational Culture: Demonstrate through explicit behaviors and norms of leadership that all workers belong, are valued, and contribute meaningfully to the organization. Assess workers’ engagement and feelings of respect.
  • Pay: Provide an equitable living wage to all workers and ensure fair compensation practices.
  • Skills & Career Advancement: Provide opportunities and tools for workers’ self-realization and advancement in their current jobs, within the organization, and outside it.

The benefits of this approach are multifaceted. According to the report, “Identifying and improving the drivers most valued by workers can significantly increase their satisfaction and engagement, resulting in increased enthusiasm for their work, lower absenteeism, lower turnover, higher retention, better team performance, increased productivity, improved products and services for customers, higher customer satisfaction, and increased revenues.”

Thus, the Job Quality Toolkit is part of the call for companies to adopt a “high road” strategy (see Administration’s background paper). Such a strategy views workers as key assets to be nurtured as opposed to the view that sees workers an expense to be minimized. (For an example of a company taking the “low road,” see my old posting on Circuit City.)

I have long argued that in order to prosper in the intangible economy, companies need to adopt a “high road” strategy and become high performance work organizations. (See “Time to Get Serious About Workplace Change” in Issues in Science and Technology, Summer 1997 and this subsequent Washington Post story.)

This Toolkit is a step in that direction. But I am concerned that the Good Jobs Initiative and the Job Quality Toolkit leave out a key element of a high-road strategy: organizational structure and competency.

The strategy needs to go beyond the “happy workers are productive workers” to embrace organizational empowerment. Note that worker engagement and empowerment are not the same thing. Empowered employees are more engaged (and satisfied) but actions that increase satisfaction (such as pay and benefits) and/or increase engagement (such as listening sessions) do not necessarily empower workers. Empowerment means creating systems that utilize all the skills and knowledge of the workers. It means giving workers greater control and responsibility.

The Tool Kit does address worker empowerment and representation, but stops short. But it appears to still be embedded in a framework of top-down management. For example, the Tool Kit recommends:

“Develop regular, repeatable processes for communicating, conversing, actively listening, and providing feedback on worker inputs.”

“Create systems that receive and implement worker input on process improvements and innovation. Inform workers how their input was used.”

My concern is that these activities would not rise above a “suggestion box” approach.  What is needed are work systems that taps into workers knowledge and enables them to participate directly in the decision-making process..

Unfortunately, some companies seem to be going in the opposite directions. A recent article in the New York Times, “The Rise of the Worker Productivity Score” documents how workers are increasingly being monitored to reach certain productivity goals. These productivity goals are often times exceeding narrow, for example counting keystrokes or measuring only time actively spent interacting with the computer. In one example, “social workers were marked idle for lack of keyboard activity while counseling patients in drug treatment facilities.”

In these cases, workers clearly have had little input into, and control over, what defines productivity in their jobs.

The Quality Jobs Toolkit and the Good Jobs Initiative needs to address this trend. But only have limited tools. As the NY Times article points out, the use of such “performance management” software tools continues to grow. One way may be to highlight the negative case and positive cases of the use of the technology: how to do it right versus doing it wrong.

In end, the task is one of changing minds. The top-down command-and-control model of management is firmly engrained in the U.S. economy. The debate over Theory X (top-down control) versus Theory Y (worker engagement) is many decades old, as are descriptions of high-performance work organizations. It seems to me that the best w can do is continue to point out a simple truth: workers matter.

[a side note on the measurement of intangibles: company purchases of “performance management” software and consulting services are counted as a positive investment in intangibles – even though they may have negative impacts]

Employment growth continues in both intangible producing industries and tangible producing industries

July’s employment data shows a return to equal growth in both intangible and tangible producing industries.

The US employment growth machine continued in July with the Bureau of Labor Statistics reporting an unexpectedly high increase in jobs of 528,000. The biggest gains in intangible-producing industries were in Professional and Business Services (up 82,100), Educational & Health Services (up 103,800), and Government (excluding Postal Service) (up 54,800). For tangible-producing industries, the higher level of employment was due primarily to increases in Accommodation & Food Services (up 73,900) and Trade, Transportation & Utilities (up 54,000). Construction & Mining (up 39,000) and Manufacturing (up 30,000) also contributed to the growth.

A couple of months ago I reported that the May data showed a large difference in employment in tangible-producing industries versus intangible-producing industries. That was a change from the previous trend where the two parts of the economy have grown (or declined) at pretty much the same rate (see chart below). The July data shows only a slightly faster employment growth in the intangible-producing industries compared to tangible producing industries. Thus, it looks like the trend of relatively equal growth started at the end of the Great Recession will continue. That being said, we continue to see employment volatility within specific industries.

For more on the categories, see my explanation of the methodology in an earlier posting



GDP bright spot: Knowledge-related business investment in software and R&D

While overall GDP declined slightly in 2Q 2022, knowledge-related business investment in software and R&D continued strong growth. But investment in information processing equipment was lower.

There is (and will be) considerable discussion of this morning’s numbers for US GDP for the 2nd quarter of 2022. BEA’s “Advanced Estimate” shows GDP dropped by 0.2% compared to the first quarter (a decline of 0.9% at an annual rate) – triggering a debate about whether the US is in recession (a two quarter drop in GDP is used by many as the definition of a recession whereas economist use a broader set of indicators).

Contributing to this weakness was the fact that business (non-residential fixed) investment was essentially flat. And investment in information processing equipment (a key knowledge-related sector) declined at an annual rate of 6.4%.

One bright spot: the other knowledge-related areas continued strong growth. Investment in software was up by an annual rate of 8.9% and R&D spending up by 7.5%.

Obviously those two sectors make up only a small fraction of our $25 trillion economy. But the willingness of businesses to continue to increase their investments in software and R&D bodes well for future economic growth.

[Note: I define knowledge-related investment as the combination of investment in Information Processing Equipment, R&D, and Software. The first of these three categories is reported in the GDP data as a subcategory of Non-residential Fixed Investment: Equipment. The latter two are reported as subcategories of Non-residential Fixed Investment: Intellectual Property Products.]