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.