Intangible Investments: A Pathway to Profitability and Growth

One major informational gap, from an internal decision support point of view, with typical financial accounting and reporting information is insight into Intangible Investments, they are typically lost in the operating budget and expenses. Today the capital market value of companies across the market as a whole is 10 times their capital asset value. This is because of 2 primary factors: future expectations of growth and income, and the investment in capabilities and assets that are not on the balance sheet, that is intangible. PACE thinks Intangible investments merit much more attention and to support better internal decision making.

According to a McKinsey and Company’s article from their Our Insights publication titled “Getting-Tangible About Intangibles: The Future Of Growth And Productivity” top performers across all industries invested in intangibles at a rate 2.6 times more than their competitors. McKinsey categorized Intangible investments in 4 categories:

1. Brand capital – creating and maintaining brands customers have confidence in

2. Human capital – recruiting and retaining personnel and processes to grow their capability and creativity

3. Innovation capital – Research and development, process improvement, market/customer research, intellectual property

4. Data and Analytics capital – digital strategy on how to incorporate these capitals into corporate/organizational capability, proprietary data, flexible architecture, rapid/adaptive implementation

One significant difference frequently noted about investments in intangible capital is that they often appreciate in value over time if properly managed, nurtured, and cultivated while physical assets depreciate. Many forms of intangible capital build on each other and grow in capability when used frequently. Even failures are often looked at as an investment in organizational learning and a foundation for future innovation.

Organizations have long had operating budgets and capital budgets, but today’s economy calls for more refined planning. Investment strategy still needs to consider traditional capital investment needs, but must also consider investments in brand, human capability investment, innovation, data/analytics investment, and any other capabilities needed by your organization. Articulating these specific categories of investments helps leaders and managers think of the capabilities they need to develop to plan and achieve the organization’s strategies and goals. Thinking of intangible capital as investments rather than operating expenditures often promotes more open and innovative discussion.

The Profitability Analytics Center of Excellence is drafting a document on developing an Investment Strategy, Validating the strategy, Modeling investments for internal decision making, and managing/executing investment strategy. It fully incorporates Intangible investments as an important element of internal decision support and planning for improved profitability.