FRAMINGHAM (02/28/2000) - Theoretically, the value of a company is the sum total of all the assets it carries on its books. So why is the total stock value of some companies - especially technology firms - as much as 50 or 100 times greater?
"That difference must be related to intangible assets," says David Larcker, professor of accounting at The Wharton School, the University of Pennsylvania's business school.
Assuming, as Larcker does, that the market is rational - rather than being in the midst of a speculative bubble right now - the stock market should value a company according to its current worth, plus the factors that could contribute to its success.
Value that's intangible, however, is also subjective. And subjective perceptions can stretch the value of a stock much higher - or much lower - than the fundamental financial picture of a company would indicate, say analysts.
Those fluctuations and the use of general accounting practices make it very difficult to calculate a company's true value. "People are starting to wonder if this accounting system that has served us well for 500 years has become obsolete," says Larcker. That's because traditional accounting is tied to bricks-and-mortar assets, to a "what happened?" mentality, he says. But in many newer companies, investors are interested more in people or ideas than previous performance.
It may be true that accounting "eventually accounts for everything," but Larcker says that notion applies more to long-term stewardship of a company's assets than to its current market value.
Financial analysts, the U.S. Securities and Exchange Commission, investors and many others, of course, would like to be able to better predict and measure a company's current worth. So they're studying a broad range of factors that could influence intangible assets, from business metrics such as customer loyalty to more New Age metrics like employee happiness.
Two examples illustrate intangible value. The first is Dell Computer Corp., which has "a superior logistical supply chain" and "a superior ability to get people to the Web site to order," says Larcker. Contrast Dell with Compaq Computer Corp. Compaq has much higher revenue than Dell, but it isn't as highly valued in the market, partly because it's still revamping its supply chain and Web-based ordering system. Clearly the innovation or intelligence - or however you characterize Dell's aforementioned aptitudes - would be an intangible asset, Larcker says.
Another example is Microsoft Corp. "The amount of knowledge they have generated has got to be a primary asset - it's in people's heads there," says Larcker.
But Microsoft corporate culture is also valuable. "They have figured out what kinds of people fit into that culture, and they have superior hiring practices," he says. That shows how aspects of a company that are often considered mundane, such as hiring practices, can impact a company's bottom line.
As Microsoft and Dell illustrate, even if leading companies don't use the terms "intangible assets" or "knowledge management," they manage thoseassets.
Besides striving to adopt hiring practices designed to boost the corporate culture or implement excellent supply chain logistics or customer-friendly Web order entry systems, many companies can begin managing intangible assets by documenting their processes. "It's not just a question of writing down what you know, but getting it built into the business processes," says Henry Morris, an analyst at International Data Corp. in Framingham, Mass.
Just studying - and of course, retaining - key employees is a start, says Morris.
For example, he says, ask yourself, "What does the top sales representative do after he lands a new account?" Gaining that knowledge and applying it to sales representatives who don't perform as well can help those salespeople discover previously unknown ways to boost their productivity - and perhaps their motivation and happiness levels.
Knowledge management software can help sustain a company's excellence. The term knowledge management can be applied to a range of systems. For example, it can be a system used to document employee best practices; it can be an online forum in which employees share tips and tricks and a system for subsequently indexing that forum and enabling other employees to search it; or it can be a database that lets researchers track discoveries their company has made so they can try to find new applications for those discoveries.
The knowledge and experience of an information technology department is an intangible asset in and of itself, but so is the way IT applies that knowledge to make other departments function more smoothly.
In situations where departments don't work well together, an IT department could press for standardization on fewer technologies, rather than waiting for businesspeople to come up with "airline magazine syndrome" projects that don't contribute to productivity. That approach likely would give the company a more stable technology infrastructure, says Ashim Pal, an analyst at Meta Group Inc. in Stamford, Conn. Even stability has an intangible value.
Yet the IT staffs at many companies would rather boost their skills on new products than stick to established ones, Pal says. "They want to do a Java project because it adds $30,000 to their [résumés] the next time around."