Invisible Capital

How do you find the information assets trapped in your balance sheet, and, more important, how do you rescue them? Last month, I described a class of "intangible" assets that don't appear on any balance sheet but are often more valuable than all of your capital assets combined ["The Secret Balance Sheet," June 5, 2000].

These assets are based on information, a class of property with strange and wondrous abilities that few economists and almost no accountants understand.

And yet they are the basis of the information economy, which, it should be clear by now, is rapidly becoming the economy. No wonder economics is known as "the dismal science."

If executives took off their blinders and went trawling through their companies looking for information assets, what would they find? And what could they do differently with these treasures if they brought them out of storage and into the light?

LEVERAGE TODAY: FRANCHISE ASSETS
The most visible information asset a company has is its intellectual capital, which includes brands, customer lists, expertise and know-how, and recognized "intellectual property" such as copyrights, trademarks, patents and trade secrets.

If that list sounds familiar, it's because at some point in your career you've probably signed agreements with an employer or business partner swearing to protect these assets or even to refrain from disclosing their existence.

As a sometime lawyer, I know that most people sign these documents without knowing what these items are, let alone what it is they are agreeing to do (or not do) with them. I cringe when I see senior executives nod in agreement when their CEO makes statements like "We own that idea" (no, you don't) or "We can copyright that slogan" (again, sorry).

If money is the blood supply of an organization, intellectual capital is its nervous system - a separate set of essential connections that together form the brains of the company. To make better use of these assets, you first need to understand how they work.

Take the most obvious example: your brand. How is it created? How do you extend it? How do you derive monetary value from it?

Your brand is shorthand for what your organization is. You build it by creating various symbols that represent you (your trademarks) and then connect those marks to your products and services. Brand, like other information assets, increases in value the more it is used; it appreciates, that is, by being spread around as freely as possible, whether through marketing, public relations, golf tournaments or T-shirts.

A strong brand is valuable even for companies that do not sell goods directly to consumers. Buyers and suppliers recognize that a strong brand stands for a stable business partner, and financial markets reward brands with better terms for raising or borrowing money. Damage to the brand (a product recall, for example, or consistently bad customer service) is swiftly and painfully reflected in your stock price.

Henry Silverman, the CEO of Cendant (CD), is a master of leveraging brand value. Prior to the merger that created Cendant, he was chairman of HFS, a company that collected brands the way kids collect Pokemon toys. Through the 1990s, Silverman bought up distressed companies like Avis, Century 21, Coldwell Banker, Howard Johnson and Ramada Inn.

Silverman set aside the information assets and sold everything else, often through a public offering. He kept the brands - the reservation systems and the customer data, in other words - and sold the hotels, cars and offices. Then he franchised the information assets back to the new owners of the physical assets. The result was the creation of a $10 billion company that owned almost nothing.

Leveraging a brand in digital space is even easier. Many of the best-known Internet companies, such as eBay (EBAY), Excite and Yahoo (YHOO), have few physical assets. Their stock prices reflect the market's faith in their ability to leverage the brand. As Amazon.com (AMZN) diversified from books to, well, everything, it became clear that the company wasn't a bookstore - it was an expert in online retailing. That, in other words, is what the brand stands for.

Brick-and-mortar players are also learning that their brands - even nonconsumer ones - can be licensed or franchised as part of an e-business strategy. Look at the investor lists of most startups whose mission is to remake the value chain for a mature industry, and you will see the names of established players in those same industries. ChemConnect, for example, has BP Amoco, Chemical Week magazine, Eastman Chemical (EMN) and PPG Industries (PPG) investing alongside Goldman Sachs and Institutional Venture Partners (dossier).