Invisible Capital

Baldwin Louie — Mon, 10 Jul 2000 15:00:00 -0700

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).

For incumbents, investing in the startups is a sensible hedge, but why do the startups want the backing of these traditional players? Generally speaking, the incumbents are investing small amounts of money, so it isn't the capital that is valued. Clearly, it's the information assets: the brand, domain expertise, transaction volume, product catalogs and so on.

Many brick-and-mortar companies are finding that taking these assets out of their own organization and releasing them into the atmosphere of e-business unlocks enormous hidden value. When a small investment in a startup grows to millions of dollars at the time of an IPO, the market, in effect, is recognizing the unexploited potential of the investors' brands.

LEVERAGE TOMORROW: TRANSACTION ASSETS
Franchise assets are easy to leverage because many of them are, if underused, at least visible. The harder but ultimately more rewarding challenge is to find information assets hiding inside your day-to-day operations - in the flow of transactions that create your products or services.

Information about transactions, if captured, consolidated and repackaged for other uses, represents new value that will quickly eclipse the value of the transactions themselves.

In some cases, entire businesses have developed simply to capture this otherwise lost value. Companies like Nielsen Media Research (dossier), and more recently Media Metrix (JMXI), make money by keeping track of who is watching a TV program or Web site. The Zagat's guide collects customer reviews of more than 20,000 restaurants and publishes them in a variety of books and electronic formats. These are products and services derived from the very happening of a transaction.

As transactions become increasingly digital, so does the information about the transaction - who the buyer and the seller are; what is being bought or sold and when, for what price and under what terms; and how satisfied the parties were. In most complex transactions, the bulk of this information has never been collected, and the data that was captured was never available in a standard format that could be pasted together to represent the complete transaction, let alone consolidated with millions of related transactions.

Just adding bar codes to packaging for consumer products has revolutionized the grocery business and created tremendous new wealth for companies like Information Resources (IRIC), which collects scanner data from grocery stores and sells it back to the product companies. Yet this technology captures information about only a few links of the entire grocery value chain.

Now imagine if the data flow went all the way back to the ingredients and forward to the ultimate consumption of the products. Then imagine you had control over that flow of information.

If you're having trouble seeing what you could do with such data, consider transactions that already have their own private market, like the New York Stock Exchange (dossier), the Chicago Board of Trade and the Mercantile Exchange. The data flow for securities trades, currency, metals and other commodities is standard across most transactions, so the market makers can offer information products like options, futures, hedges and derivatives. That's the real value for the exchange.

The only difference between these markets and yours is the level of automation for the transaction data on an industrywide basis. And the e-business revolution is working away at that problem, right now, in your industry.

Transactional data, extended both in time and in volume, is the true source of new value for your e-business strategy. And it doesn't matter where you sit in today's transaction flow, or even if you are part of it. There's still time to offer the participants a superior platform for data exchange that saves them money by identifying waste and inefficiencies and, at the same time, builds an information asset.

GETTING STARTED
Here are four tasks you can do to capture and exploit the true value of your information assets:

Take an inventory of your current information assets. To do this, you may need to start by learning what intellectual property is all about.
Catalog the obstacles keeping you from extracting the full value of these assets and what you can do to get around them. In some cases, the obstacles might be the result of regulation. If so, start lobbying.
Identify potential partners who can make better use of these assets than you can. Consider licensing or franchising.
Review the information flow of your current transactions and look for breakdowns in the capture of valuable data. Figure out how you can become the market maker for data.

And do it before your business partners and competitors do.

Larry Downes is an e-business consultant and coauthor of Unleashing the Killer App: Digital Technologies for Market Dominance (Harvard Business School Press).

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Invisible Capital